Trapped in commoditization: How hotels can charge a premium rate
29 August 2023
Hoteliers proudly talk about providing unique guest experiences that will make guests happy and more than satisfied with their hotel stays. At the same time, they employ revenue management and pricing systems that have no clue about what the guest wants and needs besides generic overnight accommodation. Focusing on delivering a unique experience and using automated pricing is not a good combination.
In the highly competitive hotel market, automated pricing systems have involuntarily joined forces with the OTAs to drive down the price, leading to the commoditization of overnight accommodation.
What is a commodity?
The term "commodity" can refer to a good or service that is essentially interchangeable with another similar type and quality. In economic terms, commodities are often raw materials like oil and natural gas or agricultural products like wheat and corn. However, the concept can be extended to virtually any product or service that has become standardized and undifferentiated in the eyes of consumers.
In a commoditized market, competition is primarily based on price rather than unique features, quality, or branding. This is because consumers see little or no difference between brands or versions of the product. Thus, they're likely to opt for the least expensive option, assuming all other factors—like convenience and availability—are equal. Commoditization can occur in nearly any industry, and when it does, it tends to drive down prices, narrow profit margins, and stifle innovation to some extent.
Applying this concept to the overnight accommodation or hotel sector, the commoditization of hotel rooms would imply that consumers increasingly perceive all hotel rooms as interchangeable. In such a scenario, the key factors influencing a booking decision would likely be price and perhaps location rather than brand reputation, amenities, or unique experiences offered. This could result from various factors including, but not limited to, technology platforms that make price comparison easier, standardization of services and facilities, or the rise of alternative accommodation options like Airbnb that blur traditional differentiators.
Understanding the commoditization of hotel rooms can provide critical insights for stakeholders in the industry to adapt and innovate in ways that differentiate their offerings from a sea of increasingly similar options.
How pricing systems contribute to commoditization
Automated pricing systems can significantly contribute to the commoditization of the hotel industry. These systems, sometimes known as dynamic pricing or revenue management systems, automatically adjust room prices in real-time based on various factors such as demand, time of booking, and even competitor pricing. Here's how these systems drive commoditization.
Price as the Primary Differentiator
Automated pricing systems can quickly respond to market conditions, making it easier for hotels to compete on price. As more hotels adopt these systems, the competition increasingly shifts towards offering the lowest price rather than the best experience, amenities, or service. This emphasis on price as the primary factor for consumer choice moves the industry closer to a commoditized market.
Loss of Brand Value
When price becomes the most critical factor, brand value diminishes. Customers may no longer be willing to pay a premium for a well-known or luxury hotel room if they can get a similar room at a lower price elsewhere. This erodes the traditional differentiators that brands have invested heavily in establishing. Guests have difficulty distinguishing between Marriott, Hilton, or other mega brands.
Standardization of Experience
Hotels start to cut costs by standardizing rooms and reducing amenities or services to remain competitive in a price-sensitive market. This can lead to a homogeneous experience across different hotels, further reinforcing the perception of hotel rooms as commodities. This happened to the airline industry, which experienced fierce competition and started to compete on price. Lower margins led to a reduction in services. Travelers do not see any difference between airlines for a generic short-haul flight.
Transparency and Price Comparison
Another driver of commoditization is the OTAs, where their digital platforms act as aggregators and make it easy for consumers to instantly compare prices across multiple hotels. This transparency further encourages competition based on price rather than other differentiators, as consumers can easily see the cheapest hotel anytime.
Downward Pressure on Profit Margins
In a race to the bottom on prices, profit margins inevitably suffer. Lower margins can lead to cost-cutting measures that may further standardize the experience and reduce quality. This cycle can perpetuate the commoditization process. This is an endless negative downward spiral. An even lower price means the hotel must reduce costs and cannot deliver the same experience.
Limited Scope for Innovation
With thinning profit margins, there's less capital available for innovation and improvement. Focusing on price competition leads to underinvestment in new features, amenities, or services that could otherwise differentiate a hotel from its competitors. Technology investments have two possibilities: One is to reduce costs so the prices can be kept competitive, and the other is to improve the guest experience.
Alternative Models and Market Response
It's worth noting that not all players in the hotel industry will necessarily follow the path toward commoditization. Niche hotels, boutique experiences, and luxury brands may focus on factors other than price to attract a different set of consumers. Similarly, customer loyalty programs can offer unique benefits that may help counteract commoditization's effects.
How to avoid commoditization
Avoiding commoditization in the hotel industry involves a multi-faceted approach that goes beyond merely competing on price. Targeting the right audience is a foundational step in avoiding commoditization. Understanding who your ideal guests are helps you tailor your offerings and market more effectively, ensuring that the features and services you invest in resonate with the people most likely to stay at your hotel. Here's how to focus on an audience that aligns with your hotel's unique offerings.
Define Your Audience
By starting with the reason for travel, you can more precisely define your ideal guest, allowing you to effectively tailor your amenities, services, and marketing strategies. This nuanced understanding of your audience becomes crucial in differentiating your hotel and avoiding the trap of commoditization. Here are a few things to consider.
- Travel Reason: Understand the primary motivations behind your guests' travel. Are they coming for business, leisure, special occasions, adventure, culture, or wellness? This will guide you in tailoring your services and amenities.
- Demographics: Identify the age group, income level, and other demographic factors of guests who would most appreciate your hotel's concept and offerings.
- Psychographics: Look beyond basic demographics to consider lifestyle, values, and attitudes. Is your hotel more suited for adventure seekers, business travelers, families, or romantic getaways?
- Geographics: Consider where your potential guests are coming from. Are you targeting local staycationers, international tourists, or people from a specific region?
Tailor Your Offerings and Elevate the Guest Experience
- Location: Ensure your hotel's location is convenient for your target audience. Business travelers may prioritize proximity to airports or business districts, while leisure travelers might look for easy access to tourist attractions.
- Concept and Design: Once you know your audience, ensure your hotel's concept resonates with them. For instance, a youthful, tech-savvy crowd might appreciate a modern, minimalist design and smart rooms, while an older, more affluent demographic might prefer classic luxury.
- Unique Facilities: The type and quality of facilities should align with your target audience's needs and expectations. Offer facilities unique to your hotel or location, whether a rooftop garden, an exceptional spa, a state-of-the-art gym, or a one-of-a-kind dining experience. Business travelers might value a well-equipped business center, while families prioritize a pool and recreational activities.
- Amenities and Services: Offer amenities and services that cater to your audience. Use data analytics to better understand your guests and offer a personalized experience that can't easily be replicated.
- Leverage Technology: Offer mobile solutions for a smooth, contactless experience. Enable potential guests to take a virtual tour of your property, helping them see the value you offer over competitors. Create an app for room service, reservations, or even to control the room's environment (lights, temperature, etc.).
- Guest Engagement: Engage guests before, during, and after their stay through personalized messages, feedback surveys, and tailored recommendations.
Marketing and Communication
By aligning your hotel's concept, facilities, star rating, amenities, services, and location with a well-defined target audience, you lay the groundwork for a more focused and effective marketing strategy that moves away from commoditization. This approach enables you to build a strong brand that resonates with guests explicitly looking for what you offer rather than just a place to sleep. Here are a few ideas on positioning and marketing a hotel differently.
- Positioning: Clearly articulate what sets your hotel apart in terms that your target audience will understand and appreciate.
- Focus on Branding: Determine what makes your hotel unique and communicate that clearly in your marketing. Leverage storytelling to connect emotionally with guests. This could be the history of your hotel, the story behind the art in the rooms, or the journey of how the hotel came to be.
- Channels: Use marketing channels that are most effective for reaching your target audience, whether social media advertising, partnerships with niche influencers, or targeted email campaigns.
- Custom Packages: Create packages or promotions based on the reason for travel and tailored to the interests and needs of your target audience. For instance, offer a "Family Fun Package" with tickets to a nearby attraction or a "Business Bundle" that includes airport transfers and late check-out.
- Feedback Loop: Regularly solicit and analyze feedback to ensure that you're meeting or exceeding the expectations of your target audience, and be willing to make adjustments as needed.
Diversifying the revenue streams
Diversifying the revenue streams focuses on adding value rather than reducing prices, and hotels can increase the average revenue per guest without diluting their brand or compromising their positioning. It's all about enhancing the guest experience so that spending more feels like a natural choice rather than an imposed upsell. Maximizing the average revenue per guest while maintaining the integrity of your pricing strategy requires a focus on offering additional value through ancillary services and experiences. Here are ways a hotel can use its facilities and service concepts to sell more to each guest without resorting to price reduction:
Upselling & Cross-Selling
- Room Upgrades: During the booking process or check-in, offer the guest the option to upgrade to a higher-tier room or suite for an additional cost. Highlight the added amenities and square footage as benefits.
- Dining Options: Encourage guests to dine at your in-house restaurant by offering a special deal for a tasting menu, breakfast package, or a limited-time promotional offer.
- Activity Bundles: If your hotel offers on-site activities like water sports, yoga sessions, or cooking classes, consider bundling them at a discounted rate when booked together.
- Themed Packages: Create various packages tailored to specific travel reasons or interests. For instance, a "Romantic Getaway" package could include a room upgrade, a special dinner, and a spa treatment.
- Local Experiences: Partner with local businesses to offer exclusive experiences. Think beyond typical tourist attractions and offer something unique, like a guided food tour, a photography workshop, or a sunset boat ride.
- Family Packages: Include options for family activities like guided tours, museum tickets, or experiences within the hotel, like a movie night or cooking class designed for families.
- Airport Transfers: Offer airport pickup and drop-off services as an add-on during the booking process.
- In-Room Amenities: Offer additional in-room amenities for purchase, such as premium snacks, beverage packages, or even a choice of pillows and bedding materials.
- Express Services: For a fee, offer express check-in and check-out services or even an option for late check-out for guests who wish to extend their stay for a few more hours.
Maintaining a high-quality standard is crucial for differentiating a hotel and commanding premium prices. Let's elaborate on some key aspects of quality maintenance:
- Exceptional Service: Well-trained staff can significantly enhance the guest experience. Whether it's the concierge who goes above and beyond to recommend personalized activities or the room service that delivers promptly and courteously, exceptional service makes guests feel valued and taken care of.
- Alignment: Training should also strongly focus on the hotel's mission, vision, and values. When staff are aligned with the hotel brand, they can serve guests in a way consistent with the overall hotel experience you aim to offer.
- Problem-Solving: Staff should be empowered and trained to handle difficult situations or complaints effectively. The goal should be to resolve issues to satisfy the guests and enhance their perception of the hotel's commitment to customer satisfaction.
- Cultural Sensitivity and Inclusivity: Hotels often serve a diverse clientele. Staff should be trained to be culturally sensitive and inclusive, ensuring all guests feel welcome and respected.
- Facility Maintenance: Neglecting the upkeep of facilities can quickly lead to a drop in perceived value. Regular maintenance checks and prompt repairs are essential for preserving the quality and functionality of the hotel's physical spaces.
- Aesthetic Refresh: Trends in interior design and amenities change over time. Periodic updates to room decor, communal spaces, and even the exterior of the building can keep the hotel looking contemporary and inviting.
- Technology: Hotels must keep up with technological advances. This includes everything from high-speed Wi-Fi and smart room controls to seamless online booking experiences. Outdated tech can frustrate guests and reduce the hotel's competitive edge.
- Sustainability: As more travelers seek eco-friendly options, upgrading to sustainable practices can be a form of quality improvement that also commands a premium. This could include energy-efficient lighting, waste management systems, and sourcing local, organic products for dining facilities.
- Amenities: Keep up-to-date with what amenities are considered standard or premium in your hotel category and ensure you offer them. This could be as simple as high-quality toiletries or as complex as an in-house wellness center.
By maintaining high quality in service and facilities, a hotel solidifies its value proposition, making it easier to charge premium prices and avoid commoditization. Quality is the foundation upon which all other strategies, marketing, revenue diversification, or guest personalization, are built. A commitment to quality ensures that when guests opt for a more expensive stay at your establishment, they feel that the experience was worth every penny, encouraging repeat business and positive word-of-mouth—two vital elements for long-term success.
Profit-Oriented Total Revenue Management
In today's increasingly competitive landscape, shifting from traditional revenue management to a more comprehensive, Profit-Oriented Total Revenue Management approach can make a critical difference for hotels. This advanced model helps prevent commoditization and expands the focus beyond mere room sales to look at the broader picture of what drives revenue and profit.
By incorporating a Profit-Oriented Total Revenue Management strategy, hotels can better shield themselves from the risks associated with commoditization. The approach enables hotels to tailor their services and pricing to align with their unique value proposition, thereby preserving brand integrity and allowing for premium pricing based on value, not just availability.
Maximizing Average Revenue Per Guest
By targeting the right audience with tailored experiences and value-added services, hotels can increase room revenue and revenue from ancillary services like dining, activities, and spa treatments. The idea is to sell a room and maximize each guest's total revenue during their stay, thereby optimizing Average Revenue Per Guest (ARPG).
Understanding Profitability Across Services
Traditional revenue management may neglect the cost structures of various products and services. In contrast, Profit-Oriented Total Revenue Management fully analyzes the profitability of each revenue stream. By doing so, hotels can make more informed decisions about which services to promote and how to price them to achieve a healthy profit margin.
Demand Calendar: A Key Tool for Profit Optimization
Incorporating Demand Calendar serves as a linchpin in this strategy. This system allows hotels to forecast room demand and all services and amenities offered. By understanding fluctuations in demand throughout the year, hotels can better tailor their marketing and pricing strategies. This will help hotels optimize their revenue mix to generate revenue and maximize profitability.
By embracing a Profit-Oriented Total Revenue Management approach and using tools like the Demand Calendar, hotels can develop a more nuanced, effective strategy. This approach will help hotels differentiate themselves in a crowded market, charge premium prices, and maintain high quality, all while steering clear of the pitfalls of commoditization.
In an era where automated pricing systems and Online Travel Agencies (OTAs) pose the threat of commoditizing the hotel industry, differentiation remains the linchpin of long-term success. Hotels must not only understand their target audience and craft uniquely appealing experiences but also manage their revenue streams in a way that goes beyond traditional models.
Introducing Profit-Oriented Total Revenue Management is a game-changing strategy to protect hotels from commoditization risks. This comprehensive approach aims to maximize Average Revenue Per Guest by targeting the right audience with tailored experiences and scrutinizing the profitability of all products and services offered. Tools like Demand Calendar further equip hotels to optimize their revenue mix, ensuring they can make data-backed decisions to maximize revenue and profitability.
By combining a deep understanding of their audience with diversified offerings, a relentless focus on maintaining quality, and a profit-oriented approach to revenue management, hotels can survive and thrive in today's competitive landscape. This allows them to command premium prices and uphold brand value, effectively sidestepping the destructive race to the bottom that commoditization entails.
This more nuanced approach to revenue and profit management empowers hotels to build a sustainable business model that attracts and retains a loyal customer base, making them resilient against the downward pressures of commoditization.