Pricing: Going backwards with reverse auctions

The Wall Street Journal reports that analyst reaction to Priceline's profit surge ranges from using words like "impressive" to a state of astonishment. While the news is a shot in the arm for Priceline it is one in the head for most hotels given the implication for their bottom line.

Most hotels participating in the lemming like rush to discounting entailed in a reverse auction (which is esentially what priceline's business model is based on) are foregoing most, if not all, profits in trying to meet the marginal cost of a room with many debasing their brand and, thereby, making it significantly harder to raise prices whenever the recovery begins to trend upwards.The latter is why, in another piece, the WSJ quotes an analyst on Disney as saying that "If they don't raise admissions prices at all now and an economic
recovery comes later this year, they could find themselves in a
position next year where they would have to raise prices at a
surprisingly higher rate to keep pace with overall market growth." It goes on to note that "Disney's willingness to raise prices and whittle back some promotions
suggests that Disney is expecting an economic recovery as the stock
market rebounds and economists find signs of a turnaround in some
economic indicators."

No pricing model can be successful unless both buyer and seller derive value. One reason priceline has endured while some others that tried to enter the field in the early years of the dot com boom have failed is that sellers (hotels and airlines) have found value in it even if in the long run, it is nearly certain to be detrimental to them. It also helps that priceline has a number of ancillary websites that contribute to its sustenance and even dominance. These include Bookings.com, Travelweb.com, Lowestfare.com, RentalCars.com and BreezeNet.com.
Priceline.com also has a personal finance service that offers home
mortgages, refinancing and home equity loans through an independent
licensee. Priceline also licenses its business model to independent
licensees, including priceline mortgage and certain international licensees.

Hotels could and should, instead, do what they have already done well which is adopt a dynamic and granular pricing policy by segment and time across distribution channels. In the latter case, as is well known, every customer has a unique set of criteria that defines their willingness and ability to pay. While pricing power remains weak over the near term, hotels should set prices keeping pricing risk in mind where the latter takes into account what is at stake
for each segment of the market.

Published by

Vijay Dandapani

Co-founder and president of a New York based hotel company for 24 years. Grew the firm to five hotels in Manhattan and also developed a greenfield project at MacArthur airport, New York. Speaker at numerous prestigious forums including Economy Hotels World Asia, Lodging Conference, NYU, Columbia University Real Estate Roundtable, Baruch College's Zicklin School and ALIS. President and ceo of New York City Hotel Association since January 2017.

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