Marketing & Revenue Management: Understanding What Customers Value
Understanding value and then marketing and pricing hotel products and services based on value delivered gives a property the means to stop selling on price only. And while the goal of both revenue managers and marketers is to maximize hotel revenues – profits - by creating conditions that both attract customers and facilitate an exchange relationship, it's a tough slough when there is pressure to compete strictly on price. Whether a property is a simple, functional roadside motel with a vending machine or some sophisticated 5 Diamond Resort with Michelin Star restaurants, every customers' estimate of the potential product and service benefits is judged against the actual capacity to deliver satisfaction against the customers' specific wants and needs, ultimately determining the value that he or she will attach to the property.
So, how do you define value? What are the benefits of a hotel's products or services – which are mostly intangible – actually worth to prospective customers? I don't think that I am alone in struggling to find answers to these questions. And yet, as I watch members of my competitive set cannibalize the market, the ability to understand the value of a product or services, particularly in regard to maintaining profitable pricing while increasing occupancy, has never been more important.
Both revenue managers and marketers can agree that value is a function. We maintain a narrow focus on selling the right product to the right customer, at the right time for the right price. But this commonly accepted statement means different things to different people. Think of it this way, customers make purchase decisions only after comparing alternative products, brands, locations and prices, then choosing the option that they think provides the most need-satisfying benefit for their dollar. They aren't always following our carefully thought out strategic and tactical plans.
Potential and even brand loyal customers alike are increasing turning to Online Travel Agencies (OTA's) such as Expedia, TripAdvisor, Priceline and Hotel Planner to satisfy their needs for shelter, while saving money and inadvertently pressuring hotels to discount rates. To persuade customers to focus on value rather than simply a low price requires that both marketing and revenue management have a common understanding of what customers value and would value.
Put yourself, for a moment, in the role of a road warrior – a frequent business traveller with a per diem budget - looking for a clean and comfortable hotel room for the night. Two economy service hotels – Hotel A and Hotel B are trying to sell her a standard room with two queen beds; in room amenities include WIFI, a mini-refrigerator, and a coffee maker and both properties offer a similar complimentary breakfast. While Hotel A offers beds with standard spring coil mattresses and 180 thread count cotton/polyester sheets, Hotel B offers pillow-top mattresses with 200 thread count cotton sheets. Hotel A has positioned its messaging to tell the guest: "Stay with us, our beds are comfortable, our rooms are clean and with our low prices, you'll get a great value for the money." Hotel B says: "Our pillow top mattresses, luxurious sheets and choice of pillows will help you get the best sleep of your life," and has posted a series of glowing video testimonials and guest reviews on their website. Which proposition do you find more convincing? Now what if Hotel B's ADR was forty dollars more a night than Hotel A?
Every day, customers find themselves a similar situation having to decide between hotels and while they may need "just a bed, a shower and a TV" – it's a fair assumption that customers do not necessarily know what fulfilling their basic requirements is worth to them. Ever deal with a blisteringly negative Net Promoter or Guest Service Score or online review questioning the hotel's value for price? Than you know what I am talking about. This lack of understanding is a golden opportunity to demonstrate persuasively the value of what our property or services provide and help the customers make smarter purchase decisions that benefit them, and us.
Developing A Common Definition of Value
It's not like we don't have plenty of data, marketers and revenue managers are drowning in data. The cruces are being able to understand what customers value, and potentially would value, while leveraging this information to gain market share and pricing advantage over less knowledgeable competitors. Three preeminent pricing experts at McKinsey & Company, Baker, Marn and Zawada in their 2010 book, The Price Advantage, 2nd edition advocate that the "perceived benefits" minus the "perceived price" of a product or service gives a hotel the value of that product or service.(1) By increasing the perceived value and/or decreasing perceived price, a hotel is more likely to increase their number of customers. Of course, if you have ever experienced market cannibalization, you understand that the hotel facing imminent foreclosure is not trying to increase their perceived value.
While it is easy to think that a customer finds value in a property's waterslide, concierge service, or complimentary breakfast, in practice, it is crucial that marketing and revenue management have a shared understanding of exactly what value is, say for a standard hotel room and each feature. Value, regardless of type, style, size or location of the accommodation, is the worth in monetary terms of the benefits a customer receives in exchange for the price he or she pays for that standard hotel room. Value is measured and expressed in strictly monetary terms, such as dollars per hour. For example, if check-in is at 15h00 and check-out is at 12h00, a $100 per night room rate is worth $4.76 per hour.
The value of expressing worth in monetary terms makes cents as time can be converted into money as can benefits. Benefits, by which we mean net benefits – or what's in it for the customer – should also be converted into monetary terms. For example, the benefit of in-room wireless internet is convenience but the net benefit for having lighting fast access to the outside world averages $24.93 per day in Las Vegas.
Regardless of whether we geek out about Average Daily Rate or Revenue Per Available Room or blab on about Unique Selling Proposition or Market Segmentation, from both a marketing and revenue management perspective, value is what a customer gets in exchange for the price they pay. In essence, a guest room has two elemental characteristics; its value and its price. Raising or lowering the price of a guest room does not change the value the room provides to a guest. It only changes the customers incentive to purchase.
And without demonstrating value, many hotels find themselves locked in a race to the bottom by constantly lowering prices to raise the incentive to purchase. What OTA's have done so well is force individual properties to focus on price, not value. For those hotels, mine included, where OTA business is a significant source of revenue, it's not so easy to shut off the discount codes. But developing customer value models - data-driven representations of the worth, in monetary terms - of what the hotel is doing or could do for its customers is useful in defining and measuring value for customers.
Any discussion of value also needs to take place within some context. Even a cheap and cheerful roadside motel with no other competitors for a hundred miles has to deal with the competitive alternatives. If the customer's incentive to purchase a hotel room is greater than the customer's perception of the functionality, performance and worth of the hotel property and services, guests will evaluate their next best alternative such as roadside pull outs, campgrounds and the motel parking lot.
For many guests the perceived quality of a hotel affects their purchasing decisions far more than any other element, having slept in more than my fair share of gas station and motel parking lots, it's not an understatement that some elements of a property matter more than others. When customers evaluate a hotel's product and service, they weigh its perceived value against the asking price. That's why factors such as the perceived quality, whether or not the property looks attractive or smells musty, and the overall property design all play a role in creating value. On the flipside of the coin, each factor can and does influence revenue managers and marketer's ability to attract customers and manage the price side of the equation, since raising prices can immediately boost profits. Depending on the flag, new properties are easier to sell and command a premium price against an aging competitive set.
What customers truly value, however can be difficult to pin down and psychologically complicated. For example, how much is a complimentary breakfast worth to a business traveller versus a youth sports team? While we instinctively know that our food costs are significantly increased with group bookings, we also understand that group bookings generally require discounted pricing but if we are dynamically pricing and costing this offering, what is the value to each customer segment?
Most hotel managers rely solely on measures of guest satisfaction instead of assessing the value of their products and services. They do this because Net Promoter Scores identify a guests' expectations and how well the property lives up to them, and as such serve a valuable yet occasionally frustrating function. But Intent to Recommend scores can be misleading and depend exclusively on subjective measures, instead of measuring the value of products and services. For example, customers are understandably happier when they receive amenities such as parking, wireless internet and breakfast for free than when they have to pay for them. While giving away an ever-greater number of services will undoubtable attract more room nights and a better Guest Service Score, it will also cause costs to soar and profits to shrink.
Recognizing that when there is market pressure on price, a common definition of value can help marketing, revenue management and property leadership teams actively manage value or devise more ways to deliver more of it by demonstrating that the property has something different to offer – something that will provide the potential guest superior value.