By Tammy Farley
While many hoteliers have downplayed the sharing economy’s rising competition in previous years, the increasing market penetration of Airbnb, and others like it, has steadily risen and is now expanding outside of the large, metropolitan markets it was once contained to. This more agile and unpredictable competitive set has the potential to cause a seismic shift in the traditional methods of setting room rates and creating pricing strategies, undermining hoteliers’ ability to retain guests and market share.
In fact, HVS Consulting & Valuation conducted a recent study on the financial effect Airbnb has had on the hotel industry, focusing on New York City, and found that hotels have been losing around $450 million in direct revenues to Airbnb each year. Further data from the study found that in a single year’s time, Airbnb saw 2.8 million room nights booked versus 480,000 hotel room nights booked. This is reason enough for hoteliers to pay closer attention to what’s happening in this space, as it shows a clear and steady path of growth in cities and moving out into medium and smaller-sized markets, as demand increases.
To mitigate potential losses, hotel revenue managers would be wise to thoroughly assess the saturation of alternative accommodations in their respective markets, understand what is happening with supply and demand, and move past rate shopping to incorporate data analytics on the specific supply of alternative accommodations into their strategies.
Assessing the effects of market penetration
Whether hoteliers see a large amount of market penetration or not from alternative accommodations in a specific area, they will most likely have an impact on revenues in some capacity. Hotel revenue managers should turn an eye towards the amount of penetration from the Airbnbs of the world in order to fully understand what is happening in their particular market, how this could affect bookings and profits over time, and assess what needs to be done to adapt to these industry changes.
In order to do this, revenue management professionals need access to granular data that provides a full picture of how much alternative accommodations have penetrated the market, and how they are accomplishing this. Rate-shopping tools play a key role in providing this visibility, as well as the comprehensive intel and insights needed to gain a broad view of pricing, occupancy and demand forecasting. Revenue managers should also be using these specific data sets to pinpoint where the demand is coming from and the impact it’s having on performance.
Always consider supply and demand
Recent studies have shown that Airbnb and other alternative accommodations have far fewer restrictions than traditional hotels as they can more quickly and easily add units to their offerings with minimal to no marginal costs. This allows these companies to scale supply more seamlessly, where hotels cannot. The sharing economy is able to grow quickly, because it uses what is already there, eliminating the need to build a new location or expand an existing one. The numbers show that this inherent ability to increase inventory in order to meet demand is causing hotels to lose a measurable amount of business to this market segment.
Major events like the Superbowl, Mardi Gras, or visits from political or religious figures also cause spikes in demand for accommodations in specific areas. Even if a hotel operates in a market that has not yet seen significant penetration from alternative accommodations, revenue managers should keep a close eye on events that could impact lodging demand in their area. A recent CBRE Hotels report found that since alternative accommodation companies can be more adaptive and reactive to increased demand, they have more opportunity to effectively gain bookings than hotels by easily adding more supply to their inventory.
Additionally, with variations in supply and demand comes upturns and downturns in any market. For traditional hotels, rate discipline is a well-known and widely used practice in the ups and downs of the market. What hoteliers should remember, however, is that alternative accommodation owners are not always educated on this, and don’t have revenue managers or systems in place to help regulate pricing strategies. For example, in a downturn, an Airbnb owner might be quick to decrease their rates just to get the units rented, since, for many of these owners, this is the difference between 100 percent occupancy or zero. It’s important to watch and understand how these independent owners and operators react as demand fluctuates.
It’s time to start supply shopping
Alternative accommodations are a completely different kind of animal than any the hotel industry has seen before. Therefore, revenue managers need to move beyond traditional rate shopping and begin supply shopping. Some alternative accommodation listings may still be online, even if they are not being offered any longer, but these rates, since they are inactive, will not have an effect on a hotel’s current pricing strategies.
Additionally, portions of an alternative accommodation’s inventory, such as multi-bedroom homes, don’t correlate to the hotel industry. Revenue managers need the ability to access data and analytics that are comparable to their product and show active supply in the set. This is key to showing revenue managers what they are competing with from day to day, so they can plan their strategies to better address specific changes.
Moving forward: Be prepared for what’s to come
At the very least, hotels and their revenue managers need to gain a comprehensive understanding of the amount of market penetration and saturation that exists, what this means for supply and demand, and how supply shopping should play into their strategy. Even if a specific hotel or group caters to a different segment of the market than Airbnb or HomeAway, the accelerated growth and popularity of these sites still has potential to cause real and lasting change.
The sharing economy is clearly a market competitor that is here to stay. As such it demands regular attention. The good news is that the traditional hotel market can implement advanced revenue management strategies, leveraging deep data analytics to maintain and even grow its share of the half-a-trillion-dollar industry, while continuing to thrive and peacefully coexist with the sharing economy. ■
Tammy Farley is co-founder and president of The Rainmaker Group, a leader in profit optimization solutions serving hotel, casino hotel, resort and multifamily housing operators. Farley spearheads all sales, marketing and customer-related operations for the organization, which is has been among the Inc. 5000 fastest-growing private companies for five consecutive years. A widely acknowledged expert in revenue management technologies, Farley is a frequent speaker at industry and academic conferences. To learn more, visit www.letitrain.com.