Olympics 2012: London Hoteliers Go For The Gold
Many industries have times when supply and demand get severely out of whack. Case in point: if a bad thunderstorm knocks down trees in your neighborhood, good luck finding a chainsaw. You’ll pay an exorbitant price if you can find one at all. While not unexpected like a thunderstorm, the Olympics is a perfect storm that pummels one lucky city with demand every four years. Good luck finding a hotel room, if you can find one at all!
Not surprisingly, the Olympic-sized spike in demand brings a corresponding spike in hotel rates – largely to the consternation of would-be travelers and local press. It has been reported that with more than 900,000 visitors heading to London for the Olympics and only 110,000 hotel rooms in the area, most properties are already fully booked from mid-July to mid-August. Those with vacancies now charge anything from double to four times more than their normal rates. According to a recent article in Huffington Post, room prices at the Travelodge in Stratford have gone from £50 ($80) per night to £274 ($436) in late July.
I recently spoke with Frederic Deschamps, vice president of global revenue optimization at Carlson Rezidor Hotel Group — which operates Radisson Edwardian branded hotels in London — about how the London Olympics have affected hotel pricing. As the head of pricing and revenue management at Carlson Rezidor Hotel Group, Frederic is uniquely qualified to talk about his company’s efforts to position its hotels with the right price ahead of the spike in demand, to avoid the appearance of price gouging or worse — a last minute price war.
How do major events like the Olympics impact hotel room pricing?
Major events are a mixed bag in terms of pricing — on the one hand they create demand in excess of capacity so average daily rates get a boost as a result; on the other hand they compress demand during the event and create a trough in demand around the event peak. Depending on their timing, they can also displace recurrent demand — like business travel — which can have the effect of loosening loyalty ties.
Overall, events like the Olympics could help in re-setting reference prices at a higher level because consumers see higher prices across an entire market. But from a total revenue standpoint, the benefit depends on the timing and underlying demand. Major events are not a substitute for a viable steady-state pricing strategy based on demand and pricing elasticity.
What are you experiencing in terms of demand/pricing around the upcoming London Olympics?
We’re seeing demand that will exceed capacity in certain parts of London and hotels are setting premium pricing accordingly. However, demand is neither strong nor more price-sensitive, so we’re paying a lot of attention to promotional opportunities and competitive activity.
What advice would you give to hoteliers post-Olympics regarding their ongoing pricing strategies?
Post-Olympics and into the end of summer, I would expect that the price elasticity of leisure demand will increase for some time, we just don’t know how long. So having an elasticity-based pricing model and strategy will be instrumental in quickly catching on to this and also to spotting the point where elasticity returns to a more sustainable level.
How much additional revenue has Carlson Rezidor Hotel Group been able to generate as a result of taking a much more proactive and dynamic approach to pricing and revenue management?
We’ve publicly stated that as a result of switching to a price elasticity-based revenue management approach, we are seeing an increase of 2 -4 percent in unit revenue for hotels that consistently follow the rate recommendations.
Do you think as an industry, hotels need to do more to avoid costly price wars?
The impact of price wars depends on what they are based on. From time to time they serve as a mechanism to correct prices that have strayed out of balance with supply and demand, but these occurrences are few and far between.
We advise our hotels to be very selective in using price discounts to optimize revenues and to base their decisions on price elasticity, cross-elasticity and break-even analysis. We don’t think that price wars are a good substitute for a steady, reasonable and price elasticity-based approach that provides customers with sensible price fluctuations and a reasonable return to the hotels.
Major events like the upcoming London 2012 Olympics are clearly among the biggest pricing challenges, but also likely the biggest opportunity a hotel may ever face. Fortunately, unlike with sudden disasters, the Olympics agenda is planned years in advance, so hoteliers have had plenty of time to prepare. In the case of Carlson Rezidor Hotel Group, the combination of a long-term view of the market, combined with technology that brings price elasticity into focus helps us identify the right price levels to bring home Olympic gold.
With that in mind, what events, comparable to the Olympics, have put your pricing and revenue management strategies to the test? How have you managed spikes in supply and demand so as to seize the opportunity to generate revenue, while still retaining customer loyalty and keeping their best interests in mind?