All industries have moments when supply and demand suffer. Case of point: if a thunderstorm knocks down trees in your town, good luck finding a chainsaw, and should you find one at all, you'll pay a steep price. While expected, unlike a thunderstorm, the Olympics are a blizzard that hits one lucky city with demand every four years.
Unsurprisingly, this Olympic demand also reflects the price of hotel rooms. It has been reported that with more than 900,000 visitors expected at the games and only 110,000 hotel rooms are available - most properties are already reserved from mid-July to mid-August. Those vacant now charge anything from double to four times more than their standard rates. According the Huffington Post, rooms at the Travelodge in Stratford have risen from £50 ($80) per night to £274 ($436) for late July.
I recently spoke with Frederic Deschamps, VP of global revenue optimization at Carlson Rezidor Hotel Group — which run the Radisson Edwardian chain in London — about how the games are affecting hotel pricing. Frederic talked about his company's efforts to price hotel rooms effectively ahead of the demand spike in order to avoid the impression of price gouging or starting price wars. Here's what he reported.
How do major events like the Olympics impact hotel room pricing?
Major events are a mixed bag in terms of pricing — on one hand they create demand in excess of capacity; on the other hand they compress demand, creating troughs around event peaks. Depending on timing, they can also displace recurrent demand from loyal business travellers, which can hurt long standing relations.
Events like the Olympics can reset prices at higher levels, as consumers adjust to higher prices overall. But from a revenue standpoint, the benefit depends on timing and underlying demand. Major events are no substitute for steady-state pricing strategy based on demand and pricing elasticity.
What are you experiencing in terms of demand/pricing around the upcoming London Olympics?
Demand is likely to exceed capacity in 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 on-going pricing strategies?
Post-Olympics and towards 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. By implementing an elasticity-based pricing model and strategy, hoteliers can catch on to this and spot when pricing returns to back to sustainable levels.
How much additional revenue has Carlson Rezidor Hotel Group been able to generate as a result of taking a dynamic approach to pricing and revenue management?
As a result of switching to a price elasticity-based revenue management approach, we have seen an increase of 2-4% in unit revenue for hotels that 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. At times, they serve as a mechanism to aid price correction, but these occurrences are few and far between.
Our hotels are selective in using price discounts to optimise revenues. We base decisions on price elasticity, cross-elasticity and break-even analysis and advocate price wars as a substitute for steady, reasonable and price elasticity-based approaches. This provides customers with sensible price fluctuations and a fair return to hotels.
Major events like the Olympics clearly set the biggest pricing challenges, but they are also the best opportunities a hotel will face. Fortunately, unlike sudden disasters, the Olympics agenda is planned in advance, so hoteliers have sufficient time to prepare.