Pricing Behavior on the Web. Luxury Hotels in Germany

Table of Contents

Abstract

Kurzfassung

Table of Contents

List of Figures

List of Tables

List of Abbreviations

Preface.

1. INTRODUCTION AND INITIAL SITUATION
1.1 Research Motivation and Problem Depiction
1.2 Significance of the Research and Background of the Research Problem
1.3 Study Objectives and Research Questions
1.4 Outline of the Thesis

2. THEORETICAL AND EMPIRICAL BACKGROUND
2.1 Special Characteristics of Hotel Marketing
2.2 Distribution Channels of Hotel Rooms
2.2.1 Historical Perspective on Electronic Hotel Distribution
2.2.2 The Arrival of the Web Commerce
2.2.3 Hotel Rooms Distribution on the Web (IDS)
2.2.4 Typology of the Internet Distribution System
2.2.5 Channels Connectivity and Data Exchange
2.2.6 Cost of Distribution on the Web
2.3 Pricing of Hotel Rooms
2.3.1 Fundamentals of Pricing and Its Levels of Implementation
2.3.2 The Financial Power of Pricing
2.3.3 Pricing tactics and Practices
2.3.4 Controversial Concepts in the World of Hotel-Room Pricing
2.4 Revenue Management

3. RESEARCH METHODOLOGY
3.1 Research Design
3.1.1 Overview of the Research Design and Philosophy
3.1.2 Sample Selection
3.2 Data Collection
3.2.1 Online Observation and Tracking of Room Rates
3.2.2 Interviewing
3.2.3 Data Analysis

4. RESEARCH FINDINGS AND DISCUSSION
4.1 Channel Used and Availability Patterns
4.1.1 Room Types Availability across Channels
4.2 Room Rates and Pricing Patterns across Channels
4.2.1 Rates Portfolio Offered
4.2.2 Variable Pricing Behavior
4.2.3 Price Comparison across channels
4.2.4 The Myth of Best-Rate Guarantee
4.2.5 Terms and Conditions
4.2.6 The Dilemma of Multiple-Night Stay Pricing
4.3 Findings Outside the Scope of the Study
4.4 Summary of the Expert Interviews
4.4.1 Interview with the Revenue Management Expert
4.4.2 Interview with the e-Commerce Expert

5.CONCLUSIONS
5.1 Conclusion
5.2 Implication and Recommendations
5.3 Limitations of the Study and Avenues for Further Research

Appendixes

Glossary of Terms

References

Abstract

The prominence of the web as a distribution channel for hotel rooms as well as its transparency and ease for price comparison create a need for the hoteliers to think strategically in terms of rate setting and pricing practices on numerous web-based distribution channels. The overarching purpose of this exploratory study is to investigate the current online pricing practices of luxury hotels in Germany and to explore potential challenges that they face in distributing their rooms on the web. The data covering 29 hotels in the top 4 primary cities in Germany was collected from 11 B2C, web-based distribution channels over a 26-day period at 6 separate points in time leading up to predetermined arrival date. These channels, including the hotels' own websites along with 10 indirect channels, represent various types of operation. The data were analyzed by means of descriptive statistics. Personal interviews with the regional director of revenue management and the regional web & e-commerce executive of an international hotel company were conducted to support the findings and to gain supplemental insights into the relevant issues. Key findings of this study were that a complete rate consistency did not exist across the utilized channels, and that a customer who surfs the web for a particular hotel may find better rates and conditions than those offered by the hotels' own websites, which negates the best-rate guarantee that is claimed by many hotels. The reselling of net rates to the end-customer on the web was identified as a crucial challenge faced by the hoteliers, which leads to the loss of a hotel's control over pricing. Furthermore, the findings suggest that in many instances, the hoteliers neither applied logical pricing practices nor ensured an adequate presence on the web. Logical pricing practices aim to optimize revenue, while ensuring customer satisfaction. This paper is meant to be a starting point for hoteliers who are interesting in better understanding the power of online pricing and its impact on hotel profitability, and to reevaluate their prices and presence across the various web-based distribution channels. Shifting away from complex revenue management systems, this study outlines some recommendations that could be useful for hoteliers in their effort to maximize their revenues and profit, while keeping the focus on the customer as a focal point.

Kurzfassung

Die zunehmende Bedeutung des Webs als Vertriebskanal für Hotelzimmer, sowie seine Transparenz und Leichtigkeit für den Preisvergleich schaffen den Bedarf für Hoteliers, in Bezug auf ihre Rateneinstellung und Preispraktiken in den zahlreichen webbasierten Vertriebskanälen strategisch zu denken. Das übergeordnete Ziel dieser explorativen Studie ist es, die aktuellen Online-Preispraktiken von Luxushotels in Deutschland zu untersuchen und mögliche Herausforderungen zu erkunden, mit denen die Hoteliers konfrontiert sind, wenn sie ihre Zimmer im Web vertreiben. Die Daten von 29 Hotels, in den Top 4 Primärstandorten, wurden an sechs Zeitpunkten im Laufe einer Zeitspanne von 26-Tagen durch 11 webbasierte Kanäle gesammelt. Diese Kanäle stellen verschiedene Geschäftsmodelle dar, einschließlich direkter und indirekter Kanäle. Die Daten wurden mit Hilfe der deskriptiven Statistik analysiert. Persönliche Interviews mit regionalem „Direktor Revenue Management“ und regionaler „Web & e-Commerce Executive“ eines Hotelunternehmens wurden durchgeführt, um die Forschungsergebnisse zu unterstützen und zusätzliche Einblicke in die damit verbundenen Fragen zu gewinnen. Die wichtigsten Ergebnisse dieser Studie lassen darauf schließen, dass eine vollständige Ratenparität nicht über die verwendeten Kanäle vorhanden ist und, dass die Gäste die Möglichkeit haben bessere Raten und Konditionen zu finden als diese, die auf der hoteleignen Webseite angeboten. Damit negieren die Ergebnisse die Bestrategarantie, die von vielen Hotels versprochen ist. Der Weiterverkauf von Nettoraten an den Endkunden über das Web wurde als kritische Herausforderung identifiziert, mit der die Hoteliers konfrontiert sind und die verursacht, dass sie die Kontrolle über ihre Preise verlieren. Darüber hinaus deuten die Ergebnisse darauf hin, dass in vielen Fällen weder logische Preispraktiken noch angemessene Präsenz der Hotels im Web eingehalten wurden. Eine logische Preispraktik muss darauf abzielen, die Revenue zu optimieren, aber gleichzeitig die Kundenzufriedenheit sicherzustellen. Diese Arbeit soll ein Ausgangpunkt für die Hoteliers sein, die das Interesse an besserem Verständnis vom Online-Pricing und seine Wichtigkeit als Instrument für die Profitabilität ihrer Hotels haben. Außerdem sollte sie den Hoteliers helfen, ihre Preise und Präsenz im Web neu zu bewerten. Abgesehen von den komplizierten Revenue Management Systeme lieferte diese Studie einige praxisbezogene Empfehlungen, die für die Hoteliers nützlich sein sollten, um eine Balance zwischen Umsatzoptimierung und Kundenzufriedenheit zu finden.

List of Figures

Figure 1: Process flow of the thesis

Figure 2: Traditional path of electronic hotel reservation

Figure 3: An illustration of hotel electronic-distribution channels and potential routes and connectivity between hotel and TPIs.

Figure 4: The harmful impact of discounting on RevPAR

Figure 5: The economic principle of differential pricing

Figure 6: Factors impacting differential pricing

Figure 7: Pricing and capacity controls as RM tools and its objectives

Figure 8: Percentage of hotels' booking availability over time and across channels

Figure 9: Price change activity of the hotels over time by cities

Figure 10: Price comparison between the hotels' websites and TPIs

Figure 11: Best-rate guarantee fulfillment by booking date

Figure 12: Comparison of Terms & Conditions between the Hotels' websites and the TPIs

List of Tables

Table 1: German luxury hotels Occupancy, ADR and RevPAR Performance 2008–2013

Table 2: Breakdown of online bookings in Germany in 2011/2013 and share of total bookings

Table 3: Distribution cost and net booking value yields comparison by channel

Table 4: Overall breakdown of the hotel samples

Table 5: Number of room types offered to the customer by channels

Table 6: Number of rates offered to the customer per channels

List of Abbreviations

Abbildung in dieser Leseprobe nicht enthalten

Preface

“Pricing is the moment of truth–all of marketing comes to focus in the pricing decision.” (Raymond Corey, Harvard Business School) This research was completed in December 2014 and submitted to Munich University of Applied Sciences as partial fulfillment of the requirements for a Master of Art degree in Hospitality Management.

The initial inspiration for the topic of this paper grew out of the seminar “Aktuelle Forschungsfragen des Hospitality Managements” taught by Prof. Dr. Thomas Bausch at the Munich University of Applied Sciences and was developed by me together with my supervisor Prof. Dr. Robert Goecke.

The text of this thesis is the culmination of roughly six months of research, and is the product of the study of hundreds of articles and books. Throughout this time, the emotional support, precious time, guidance, shaping of interest and ideas shared by many people made the work more promising.

Firstly, I would like to express my gratitude to my supervisor Prof. Dr. Robert Goecke for all his guidance, valuable ideas and helpful suggestions during my research. I am grateful to all the professors and tutors from the faculty of tourism for the exceptional and valuable courses that I had with them during my master's program.

A special gratitude should also be expressed to my interviewees, who gave me their precious time and let me share their own knowledge and practices.

Finally, I highly appreciate the continuous support and motivation of my family and friends during my career, study and life. Words are not enough to express my thanks.

Last but not least, this thesis is dedicated to my mother who gave me her love, patience and encouragement during my life, and for my father who bequeathed his love and passion for this industry to me.

Ashraf Abueed

1. INTRODUCTION AND INITIAL SITUATION

The growing popularity of the Internet has affected all aspects of the marketing mix in a wide variety of industries. Tourist services are considered one of the most suitable products or services to be marketed via the Internet.¹Therefore, it has been acknowledged as a powerful tool in terms of the whole marketing mix in tourism.²Particularly, hotel rooms as the main component of the hospitality industry and major sector of the travel and tourism industry have been largely integrated into the Internet.³ According to the Consortium of Online Research (AGOF), hotels for leisure and business was the fourth most popular product or service category researched online by Internet users in Germany in 2012.⁴In the second quarter of 2012, Germany was ranked seventh, with around 67.5 million Internet users, in a ranking of the countries with the highest number of Internet users worldwide. Overall, the source estimated the global online population to amount to more than 2.4 billion users, which corresponds to 34.3 percent of the world's population.⁵

In the lodging sector the Internet presents hotel marketers with profound opportunities, including reduced costs, development of customer relation management strategies, access to new market segments, and the ability to provide information worldwide on a continuous basis.⁶However, web commerce introduces potentially significant challenges. TheInternet distribution systemis perhaps the most recent concern of hotel companies, as it has brought on clear complications to their pricing strategies, chiefly because of the increase in the number of booking channels that are directly accessible to their consumers.⁷

1.1 Research Motivation and Problem Depiction

The luxury hotel sector in Germany consists of 246 properties with more than 41,200 rooms, which generated approximately 1.5 billion euros in room revenues in 2013.⁸According to TOPHOTELPROJECTS, within the next three years as of 2014 there will be 43 luxury hotels projects throughout Germany with more than 6,000 rooms.⁹But as a result of the decline of room demand caused by the global economic crisis in 2009, coupled with a growing room supply, statistics show that German luxury hotels were among the great losers of this crisis.¹⁰As table 1 shows, statistics reported by Smith Travel Report indicate thatrevenue per available room(RevPAR)¹¹fell from €88 in 2008 to €75 in 2009.¹²In 2010 RevPAR began to recover, reaching €100 in 2013.¹³The RevPAR statistics reflect a falling annualaverage daily rate(ADR), which reached €124 in 2009, before it began to recover in 2010, reaching €145 in 2013.¹⁴Although the occupancy rate declined sharply during the 2009 recession, German luxury hotels were able to recover quickly in 2010, reaching 68.9 in 2013.¹⁵However, three observations are important here: First, despite the rapid recovery in occupancy, there was no correspondingly large increase in RevPAR. This was due to the slow recovery of ADRs. As the supply grew, the luxury market experienced cutthroat competition, and in order to enter the market and gain the needed market share, some hotels offered their services at very low prices.¹⁶Second, the comparatively higher ADR in 2010 was favored by the reduction of value-added tax from 19 percent to 7 percent starting in January 2010.¹⁷Third, the performance of German luxury hotels in terms of ADR in an international comparison is low.¹⁸

Table 1: German luxury hotels¹⁹Occupancy, ADR and RevPAR Performance 2008–2013

Abbildung in dieser Leseprobe nicht enthalten

In any event, the imperative is for hoteliers to reexamine their online distribution strategies, with an eye to maximizing profits by managing room occupancy and yield within an environment of excess capacity of a highly perishable product.²⁰According to an international study conducted in 2010 by the Centre for Hospitality Research at Cornell University which directly asked nearly 500 hotels and revenue management professional for their thought on the future of revenue management, pricing is most likely to be used as a tool for revenue management in the future. When asked about the factors that would drive change in revenue management practices, the respondents mentioned the Internet as one of the most important common factors driving changes in RM practices, after sophisticated technology, economy and detailed market segmentation.²¹As was indicated in another previous study conducted in 2003, control over price and availability was one of the major challenges that hotel properties face in Internet-based distribution.²²

The importance of Internet distribution systems in selling hotel inventory in Germany has grown substantially in recent years. According to an online survey conducted by the Institute of Tourism at the University of Applied Science of Western Switzerland – Valais, in cooperation with the German Hotel Association, room booking using traditional booking channels, such as telephone, letter or fax, as well as sales using tourism partners, such as traditional travel agencies and tourism boards, have seen a more than 30 percent decrease over the last 10 years.²³The source indicated that, overall, more than one out of four bookings was generated through online channels in the D-A-CH region in 2011.²⁴While the total share of bookings through IDS²⁵reached more than 30 percent in Germany in 2011, the proportion of direct booking through hotel websites reached only 5.9 percent, which is low compared with an amount of 19.5 percent for the online intermediaries²⁶.²⁷Table 2 shows a detailed breakdown of the total share of rooms booked through IDS in 2011 compared to intermediate data for 2013, collected up to 28 February 2014.²⁸

While the growth of online bookings has driven up the profits and market share of online intermediaries, the increasing use of the Internet by consumers as a booking tool through third-party intermediaries has not necessarily had a similar positive impact on profitability for hotels properties in Germany. The above-mentioned statistics and table 1 illustrate that online intermediaries are clearly dominant as the most important online booking tool and that they are the second most important overall, after the telephone, for consumers in Germany. Moreover, this underscores the dependence of many hotels on those players. Research estimated that in 2011, online distribution channels (GDS, OTAs and the hotel's homepage booking engine) generated a turnover of more than 5 billion euros in the German hotel sector, thereof 575 million euros was paid as a commission for online channels, of which an estimated lion's share of 421 million euros was won by OTAs.²⁹

Table 2: Breakdown of online bookings in Germany in 2011/2013 and share of total bookings

Abbildung in dieser Leseprobe nicht enthalten

Many studies have argued that much of the increasing use of Internet distribution systems, in general, and online intermediaries, in particular, by customers can be attributed to price.³⁰However, the reasons behind the customers' use of the Internet to seek bargains or to obtain better deals within their desired market segment are many. First, savvy customers believe that good deals or lower prices can be obtained from online distribution channels since they share the expectation that web-based distribution costs are lower than those of other channels.³¹Second, the Internet encourages greater price scrutiny since it allows for quick price comparisons with decreased search costs and effort.³²Third, many researchers claimed that across many industries online competition often does drive prices down,³³since the same rate transparency leads to greater rate competitiveness.³⁴Fourth, many hotels use the web to promote theirdistressed inventoryin the form of last-minute deals or packages at relatively low prices but with short lead times. While such promotions can help clear unsold inventory, they have also resulted in the consumers' associating rooms sold over the Internet with lower prices.³⁵Finally, what makes matters worse is the increasing success and power of third-party online intermediaries in terms of price competition and Internet readiness. This success was achieved by using several models of operation and smarter business practices related to pricing such as the merchant model, opaque model, auction websites and flash-sales³⁶. At the same, poor management and lack of understanding of online pricing on the part of the hotels allowed the online intermediaries to prosper.³⁷The emergence of such business models has attracted customers' attention, helped develop their reputation as the place to book,³⁸and augmented the perception that low prices can be found on the Internet.³⁹Moreover, some third-party websites promote themselves as the channel that delivers the lowest rates for hotel products or services.⁴⁰A typical case would be that of Secretesescapes.de, which promotes itself to its customers as follows: “Secret Escapes is looking for its members exclusive offers for handpicked hotels and travel in Germany and abroad with up to 70% discount on the price you would pay for a booking elsewhere. How do we do that? Well, even the most luxurious hotels do not want any empty room...”.⁴¹

[...]

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¹ Cf. O’Connor, 2003, p. 88; Stiakakis; Georgiadis, 2011, p. 150; Toh et al., 2011, p. 388.

² Cf. Buhalis, 2003, p. 16.

³ Cf. Law et al., 2007, p. 495.

⁴ Cf. http://www.statista.com/statistics/247380/most-popular-product-categories-researched-by-german-internet-users [11.07.2014].

⁵ Cf. http://www.internetworldstats.com/top20.htm [12.07.2014].

⁶ Cf. Thakran; Verma, 2013, p. 241; O’Connor; Piccoli, 2003, p. 108 f.

⁷ Cf. Green; Lomanno, 2012, p. v.; Thompson; Failmezger, 2005, p. 6.

⁸ Cf. TOPHOTELPROJECT GmbH, 2014, cited in IHA, 2014, p. 130; The total in room revenues are self-calculated by the author based on the room numbers, occupancy rate and ADR that provided by IHA from the year of 2013.

⁹ Cf. Ibid.

¹⁰ Cf. IHA, 2014, p. 128 f.

¹¹ Excluding value-added tax and without breakfast.

¹² Cf. STR Global, cited in IHA, 2013, p. 28.

¹³ Cf. STR Global, cited in IHA, 2014, p. 28.

¹⁴ Cf. Ibid.

¹⁵ Cf. STR Global, cited in IHA, 2013, p. 28.; IHA, 2014, p. 28.

¹⁶ Cf. Fidlschuster; Mayer, 2012, p. 286.

¹⁷ Cf. IHA, 2014, p. 24.

¹⁸ Cf. IHA, 2014, p. 128.

¹⁹ i.e. Five star and five star superior hotels in Germany.

²⁰ i.e. Hotelvertrieb 2014; Der Top–Jahreskongress für Hoteldistribution in Deutschland, 07.04.2014 in Wiesbaden; Deutscher Hotelkongress 2014, 27–28.01.2014 in Berlin; ITB 2013, 06–10.03.2013 in Berlin.

²¹ Cf. Kimes, 2010, p. 6 ff.

²² Cf. Caroll; Siguaw, 2003, p. 46.

²³ Cf. Schegg; Fux, 2012, p. 4.

²⁴ Ibid., p. 5.

²⁵ The source used the term IDS for the online intermediaries only, while the term here used by the author as collective term for the whole internet-enabled bookings systems. (Real-time booking through the hotel’s own website, online intermediaries, hotel chain and cooperation sites with CRS, Social media and GDS).

²⁶ Also known as online travel agents (OTAs) and online third-party websites.

²⁷ Cf. Ibid., p. 20 ff.

²⁸ Cf. IHA, 2014, p. 224.

²⁹ Cf. Schegg; Fux, 2012, p. 51.

³⁰ i.e. Toh et al., 2011, p. 182; O'Connor; Piccoli, 2003, p. 109; Thakran; Verma, 2013, P. 242.

³¹ Cf. Toh et al., 2011, p. 182.

³² Cf. Abrate et al., 2012, p. 160.

³³ i.e. Koch, Cebula, 2002, p. 25; Vulkan, 2003, p. 32.

³⁴ Cf. Caroll; Siguaw, 2003, p. 46.

³⁵ Cf. O'connor, 2003, p. 90.

³⁶ Cf. O'connor; Piccoli, 2003, p. 109.

³⁷ Cf. Enz, 2003, p. 4.

³⁸ Cf. O'connor; Piccoli, 2003, p. 109.

³⁹ Cf. Toh et al., 2011, p. 182

⁴⁰ Cf. Tso, Law, 2005, p. 329.

⁴¹ Cf. http://www.secretescapes.de/ueber-uns [23.07.2014].