By Dr. Gabor Forgacs
This abrupt halt in travel caused by the current pandemic is not going to last forever but it will last long enough to shake the foundations of the global accommodation industry. The unprecedented loss of revenue will not return instantly to pre-pandemic levels to hotels. It would be a mistake to think that the sudden stop in revenue flow will one day suddenly restart and go full tilt again. Revenue professionals who focus mostly on tactical price control will have to broaden their horizon in the future when travel resumes as business may not be as usual once the COVID-19 pandemic gets behind us.
After the economy gets gradually humming again a lot of the booking decisions will depend on much more than just price points and value perception for customer. Warren Buffett famously said, “Price is what you pay, value is what you get.” With that in mind, it is fair to say that attractive price points have a role to play in appealing to travelers. However, there will be a lot more to consider than the price sensitivity of future guests once the customer starts booking rooms again. Room rates are just too important to be the first thing to start changing around. They should be the last thing to adjust especially when the loss of business was never caused by pricing ourselves out of the market.
Customer reaction to price changes has been measured, tracked and benchmarked over the years by market segment, demography and seasonality and all. That intimate, data-driven understanding of price sensitivity offered crucial insight for pricing strategy formulation. The time has come for revenue professionals to start thinking beyond price elasticity measures and learn about the larger framework of decision drivers in play for those future travelers who don’t necessarily find the posted room rates too high but are still hesitant to book.
If the price points seem reasonable to the traveler what can be the problem then? Let’s take a brief look at the leisure traveler first, followed by the business segment.
Leisure travelers spend discretionary income on travel. Their financial source will be severely eroded by the unfolding mass unemployment. The level of sudden job losses triggered by the virus pandemic related restrictions is beyond anything we have seen in a generation or two. Those who have no steady jobs, have uncertain contracts, got only empty promises for paid gigs or have unstable employers, etc. will be very hesitant to spend on leisure travel even if the quoted room rates seem fine. The decision influencer for not booking will not be price resistance: it will be the lack of financial security.
The analysis of Price Elasticity metrics will not reveal the reason for resisting even an appealing bundle. What needs to be quantified is Income Elasticity. We need to figure it out how a given percentage change in income or in consumer confidence would affect demand or the propensity to booking accommodation.
Those of us who ever experienced involuntary job loss know it well that the decision to take a vacation trip takes a lot more than just a fleeting glance at our account balance or credit card limit. Even with the money available we need a certain time to feel confident again to afford a vacation. The sour taste of having lost paychecks and the anxiety of running dollar figures constantly in our mind before grabbing anything off a store shelf stays with us for a while. The conclusion that we as customers are both able and willing to take a leisure trip is not an taken lightly after money was tight for a while. Many customers may agree how great it would be to get away, but many will say “this may not be the right
time”. Customer intention to take a leisure trip is not like a switch that can be flipped on and off. As uncertainty and anxiety lingers it takes time for households to get back to pre-pandemic leisure traveler spending levels. Revenue professionals of hotels and resorts will have to consider that as well.
Price Elasticity calculations tend to show a different price sensitivity for the business segment than for leisure. The business traveler must get on the road for obvious business reasons plus the cost of a business trip is a legitimate entry on the cost-side of the ledger. It is fair to conclude that the business traveler traditionally demonstrated a lot lower lever of price sensitivity than the leisure customer for comparable room rate fluctuations. However, for the post-pandemic era the business traveler may be entertaining a different decision influencer: trip validation. Can that face-to-face meeting be justified? Do we really need to shake hands in person? Are the signals from body language and other non-verbal clues that can’t be seen on a screen so critical for closing that deal without leaving money on the table?
As millions of people are getting comfortable with working remotely using virtual meetings, web-conferencing, latest generation messaging platforms (the use of these tools is spiking and multiplying as we read this) the need to travel for the purpose of discussing, informing, demonstrating and negotiating is going to be considered differently. Why is business travel going to be impacted differently now than after the last economic recession of 2008-2009, after which business travel recovered handsomely? On the one hand, this recession will cause a lot more severe financial pain and for much more businesses than the previous one. On the other hand, the arsenal of tech-tools to replace physical presence have improved significantly. The ubiquity and the quality of portable devices, the seamless connectivity coupled with picture and sound quality improvements in addition to feature-rich online conferencing solutions are not in the same league as web-conferencing was even a decade ago. The option to turn to online meetings is much more tempting than before.
The calculation in the mind of the future business traveler is not necessarily centered on price points of room nights only. It is not only the cost of travel any more that may drive a booking decision. It might be the difference in outcome between going there in person or using an online meeting solution. How much more can we get out of this opportunity through personal presence versus screen time? If the quantifiable differential would validate the trip, rooms will be booked. Hoteliers would like to know the cross-elasticity index for comparing the upside or surplus in profitability and its effect on demand (occupancy). In other words: how much more profit potential would be a strong enough decision influencer for a business trip to happen? This mindset is not new for business travelers but the data-driven arguments for taking a trip will have to be much more convincing now, in light of the alternative options.
These are not easy years to come for hotel revenue professionals as the traditional market metrics that indicated consumer behavior need more than just a reset. It is necessary to think beyond pricing and gain a more nuanced understanding of consumer decision drivers. Anxiety and financial security for leisure travelers, trip justification rationale for business travelers will play increasing roles in travel intentions. The understanding of the evolving dynamics that will drive the changes for future hotel demand are important first steps on the road to recovery
