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With new system, InterContinental takes the guesswork out of hotel pricing

With new system, InterContinental takes the guesswork out of hotel pricing

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InterContinental's new system allows it to forecast demand for rooms in 4,400 hotels across the globe -- and price them accordingly. Here's how.

The price of a hotel room is always a game of cat and mouse -- a minute-by-minute game of roulette based on several factors.

How many rooms have been sold?

Is it high or low season?

Are there any unusual events in town?

What's the vacancy rate for the hotel down the block?

In February, the InterContinental Hotels Group attempted to take the guesswork out of hotel room prices by launching a new system that allows it to forecast global demand and conduct price sensitivity modeling.

Called a "price optimization module," the system is the secret sauce behind the prices of IHG's more than 4,400 hotels across the globe, from its namesake chain to Crowne Plaza, Holiday Inn and Candlewood Suites hotels.

Instead of using demand predictions, the proprietary module's modeling process allows it to continuously balance rates, occupancy and guest pricing preferences. It was developed with the help of revenue management expert Bob Cross of Revenue Analytics.

I spoke with IHG chief marketing officer Eric Pearson and revenue and core development director Peter Tyrell to see how the new system, now rolling out to the company's hotels, will stabilize the market and help the company's bottom line.

SP: Price management: how hard is it?

EP: At the end of the day, rooms are perishable. How do you set the right price for the right customer at the right time in the right channel? It's important to optimize that price for that customer. That room might be priced differently.

PERFORM, our revenue management system, allows our hotels to make sure that they're maximizing that price for that day for that customer.

The hotel industry in general has not been as progressive as other industries -- including retail -- in terms of sophistication and pricing. They do a lot of trial-and-error. The advent of the Internet has created incredible transparency, which has created a lot more challenge. In the old days, you could have different prices in a magazine and a newspaper. Now, you publicly show your rates. Having sensible and rational rates is more important.

So now, if you're willing to pay in advance, we may offer a discount, because you're giving something up. The old days was very much call around, trial-and-error.

In today's world, it's all about leveraging technology. Leveraging all the historical information about the booking behavior of that hotel. It's all about understanding what's on the books -- we call it the pace -- and that goes into algorithms and calculates on the fly whether you should be selling at a discount or not. We call it yield management, and it's a constant game of trying to optimize what rates are showing.

The problem has been that up until last year, the actual price itself was largely arbitrarily set by the property -- garbage in, garbage out. We embarked on a multi-year project that literally recommends the actual price that the hotel should be setting. It, on a real-time basis, takes all the historical information, future booking information, daily competitive information, the sensitivity for that location at that time of year and spits out a recommendation for that particular hotel for that particular day.

We began rolling it out in September of last year. Six hundred hotels worldwide are on board with another 2,000 this year, at a rate of about 200 per month.

SP: How does the economic downturn factor into pricing?

EP: Hotels are making better pricing decisions based on the stabilized [economic climate]. The key thing is now, you start seeing the benefit of the system -- the system is averaging anywhere from a two to three percent improvement. It's all about managing the demand.

You're talking tens of millions of dollars of benefit. And it's not just the rate, either -- it may be getting more people staying, perhaps because you were pricing too high for an event.

It's a good benefit for franchisees because they're managing their revenue directly. It's good for customers because they have better tools.

We're the largest hotel company in the world -- over 4,400 around the world, with 600,000 rooms in the system. Obviously you have scale benefits. We do in-source a lot, and we do outsource. We've had a lot of industry firsts -- the whole platform is very proprietary, it's our secret sauce.

I would imagine that our competitors are probably going to do similar things. But we're already working on the next enhancement.

SP: Peter, what are the challenges on the back end?

PT: We very much pride ourselves on doing things in-house, with thought leadership [in the industry]. We built it with a core team of 30 developers and resources working together over a two-year period. Big Java developers, back-end and front-end Oracle. Just a massive amount of information. Over half a million rate changes every day.

We had to make a system to use in all of our [operating] countries in 80 languages around the world, with all of their bandwidth problems. On the front end? Flex-flash technologies, very visual, very graphical.

When they apply a change, that information is passed along to the system -- it's all integrated.

SP: How does that affect the user experience?

EP: We sell up to eleven months in advance. It's 500,000 rate changes daily, because the system is changing every day. It's real-time calculating the impact of an event, in the future. The system is dynamically optimizing real time across our portfolio of hotels.

It's all about trying to simplify what is very complex modeling out back. It's not one-size-fits-all. By and large, we're getting really good adoption on our recommendation. You have to have pretty good telecommunications because you're sending and receiving data real-time.

Pricing optimization is just a module on the platform.

In our industry, you can now get publicly-available data feeds. The systems that a travel agent would use, those companies have access to every single hotel's retail rates.

In our business, you have two large types of travelers: business and leisure. Transient or people that come in a group, like a wedding or event. Most of our action happens in transient right now.

SP: What kind of infrastructure handles all that action?

PT: We actually have multiple data centers. We have a data center here in Atlanta with big racks of EMC systems.

EP: We have a call center call coming in Japan, and we could re-route that to an agent's desk anywhere in the world in real-time, say, Salt Lake City. Multiple live, hot centers balance the traffic load. We can dynamically route traffic.

PT: You make a call from anywhere in the world, a 1-800 number, we pick that traffic right out of the cloud, and depending on who you are, where you are and where it needs to go, we'll take that traffic and send it to the call center, and add information you've provided in the call to it.

EP: We use Genesis and our partner is AT&T in that. We have a database of our agents, what languages they know, etc. So if you call from France, we can route you to an agent in Salt Lake City who happens to be a BYU student who's French.

SP: It's fascinating how you're leveraging your global footprint to meet technical challenges.

EP: What's interesting about the travel agency is that it's global -- global local.

It's all our ability for us to target you. Gone are the days of one-size-fits-all. It's all about precision marketing -- delivering the right message at the right time and now, at the right price.

How do you stretch your dollars further, driving revenue and performance?

The ROI on marketing has gone up tenfold by being specific and precise. It's about having the right insight on a real-time basis, all driven by our CRM platforms and our revenue-management platforms.

We measure success by the return on our marketing dollars and by new demand.

I think the hotel industry is not nearly as mature as in other industries, in sharing and making our offers more personalized to our guests.

Think about Amazon -- when you're on Amazon's site, you have an incredible, specific experience. They've done a brilliant job of harnessing this massive data and provide real-time dynamic offers that don't feel like they're pushing that in my face. You could see that cascade to mobile devices and in-room experiences. It's not invasive or intrusive.

The hotel industry is in its infancy in terms of really getting to that level: the hotel of the future.

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Andrew Nusca

Editor Emeritus

Andrew Nusca is editor of SmartPlanet and an associate editor for ZDNet. Previously, he worked at Money, Men's Vogue and Popular Mechanics magazines. He holds degrees from the Columbia University Graduate School of Journalism and New York University. He is based in New York but resides in Philadelphia. Follow him on Twitter. Disclosure