The Hospitality Industry & AI Environment: An outlook next 5 years

Carrington Junior
Feb 12, 2020
5 min read

Updated: Feb 24, 2020

AI and Machine learning have been impacting high volume industries for a decade. Why hasn't it become more prevalent in the Hospitality industry? More specifically property management companies where the amount of units owned becomes cumbersome for Ops, Revenue Management, Accounting, and Sales.

The game of chess that is Revenue Management: But who is playing?

The Pricing analytics dashboard from our ©RevDriver Software simply shows that the vast majority of our sample Hawaii segment use flat pricing or seasonal flat pricing strategies. These are simple base rates throughout the year or base rates with some seasonality response to demand. Some others use a intuitive pricing strategy, these display with more peaks and valleys but have a jagged structure. Then there are a select few that are listed with smooth curves essentially having more increments of change. The more increments of change in a pricing strategy, the more complex the strategy.

For the time being simply striving to actively adjust each night to market as daily changes occur can put you ahead of the competition. Not for long though, as the technology becomes more accepted, more and more PMS solutions are propping up a quick and dirty solution mostly playing to market price with automated updates to daily rates. Yes of course this is more effective than the flat for seasonal rates you were using previous, but how long will it last as pricing solutions spread through the industry? The Nokia example comes to mind, where industry titans who were late or non adopters of new technology took crippling or in this example fatal hits to the bottom line.

ECON 101 recap:

Are Tastes and Preferences or T&P of the consumer static? Subsequently is demand static? The inevitable answer is no; T&P's of consumers are always changing therefore demand as a derivative of T&P's is dynamic as well, in every case the Quantity demanded for each day will be different than the last or any to come. So why are 80% of the owners & managers in the market using archaic pricing strategies that miss play demand on a daily basis? Where a flat pricing strategy may only really hit the Equilibrium point a couple of times a year by a mixture of industry experience and luck. After all if a flat or seasonal strategy stays static above the market equilibrium point then the Q demanded will decrease for your product. Inversely if the static strategy falls below the equilibrium price Q demanded with increase but leave you selling out at a lower ADR. Theory of the Firm tells us that the firm will profit maximize in the the long run. The question then becomes when, not if.

How will Equilibrium price change as a greater market share prices toward the same point? I would submit a Nash Equilibrium would emerge, slightly altering the target but no race to the bottom problem. That's the first step, science can tell us with some simple tools and a'lot of data where the optimum equilibrium point is. Each PMS system can attack this in its own "secret sauce" way but fundamentally everyone is attacking the same point. If everyone is making the same chess moves the art becomes derivative strategies. Enter Ai....

Quickly what does dynamic pricing do?

Dynamic pricing fundamentally seeks to maximize the quantity of units sold and the ADR for each Night 365 days a year. This is done with information about the market and information about the supplier ability to produce units for sale.

The state of the union:

There are a couple of operational reasons that management companies go with flat or seasonal flat strategies. The first and foremost is that's just the way its been done and I hear "if its not broke don't fix it" often. The second is a revenue management team doesn't have the resources to alter rates 365 days a year for each unit. Lastly, people are fearful that they will be replaced by "machines".

To address each individually:

1. Just the way it is: If most of your competitors move toward dynamic pricing strategies over the next 5 years, flat and seasonal systems will suffer drastic losses as they are essentially standing by while others in industry compete actively without them. Dynamic pricing has proven to increase room night revenue 10% - 40% YOY holding the units and nights offered constant. Given that hospitality is a grab game seeking to expand units under ownership and maximize market share; not using a competitive pricing strategy is equivalent to walking a marathon where the other runners average pace is constantly increasing, compounding losses.

2. Lack of resources: The ops move to this point has mostly been to up-staff the revenue team and sink resources into wages & time. No longer is this necessary as a integrated pricing solution can do a weeks worth of work for a team of 10 in one evening of processing. With static investments in pricing software, 2-3 people can manage an entire portfolio of 1000's of units comfortably.

3.Fear the Machines!!!.... No, pricing solutions aren't taking any revenue manager jobs any time soon. Yes these tools are powerful but they need checks and balances. I find that directly integrated pricing solutions overstep their potential. A hybrid approach gives a much more harmonious result where long standing industry professionals interpret the price they have listed, the price suggested by AI, and then ultimately check yes or no for changes. The lack of human checks lends a "Race to the Bottom" problem, leaving owners & customers weary of your brand.

How will pricing strategies compete?

Before jumping on a blanket pricing strategy platform, consider asking them this question:

How will two similar units on your platform, one mine and one a competitor be priced? Will they be priced equally? Then wait for them to walk around an answer.

If the answer is yes, then the strategy is built to not compete with itself. So consider that as more units are on that platform it will essentially add you to a club who has inadvertently decided to not compete directly with each other.

NEVER forget to ask:

How your data will be used or sold into a databases used or computed by competitors on the same platform.

How to: Implement sophisticated pricing strategies.

Custom Solutions: Find a tool that brings years of development to the table but also allows your people to remain agile on the margin. This will only be capable with tools that actively allow you to visualize competitor strategies by your own grouping, neighborhoods, or markets. As is often mentioned the tool is only as good as the data so why not tap into your PMS, POS systems to get data directly form the most reliable source you know; yourself. The best way to compete your way is to build a custom strategy, Lets talk about building your custom solution today!

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