How to define the Hotel Competitor and the market it belongs to

In any economy, be it goods or services, the market is created by the intersection of supply and demand.

With this premise, we shift our attention to the offer and more specifically to the analysis of the competitive set. There are various analyzes to be carried out to establish a real positioning in the market from the customer's point of view.

Actually, i competitive set – all resulting analyzes and final positioning – should be more than one.

Each market has its own demand but, if necessary, it would be useful to have various comp sets: one for the Business Groups (if you had meeting rooms), one for the "Public Unqualified" demand (incorrectly "the unknown", generally the Leisure market) , one for any other Unique Selling Points (e.g. hotel with swimming pool, hotel with restaurant, etc.). Many, among the 3, define the "true competitive set", "ambitious" and "conference".

Given that segmentation is one of the key principles of Revenue Management, even our analysis of competitor hotels cannot ignore this.

We will focus on a tactical part (quantitative/qualitative analysis) and on a strategic part (choice of competitors, understanding of behaviors, positioning and benchmarking).

We begin our research by putting ourselves in the shoes of our "best" customers - reading the data we should find 3 main segments, for example, in terms of production - and trying to understand their needs (collaboration with the marketing manager is essential). Based on these, what are, for example, the filters you would set on Booking/Trivago/Expedia/Tripadvisor/etc.? Geographic location? Services (restaurant, swimming pool, etc.)? Bed type? Stars? Minimum score? What results would this research yield?

We narrow the list depending on the objective of the analysis, remembering: different segments, different needs.

Let's focus on 6 choices - maximum 10 - to try to have a more targeted vision and avoid overly generic analyzes that would give us too much data influenced by "false" competitor hotels.

We could also decide to set a "bottom" and a "top": a competitor that is decidedly poorer than us, as a reference for our minimum price; a much better one, reference for the maximum price. 

Selling a room does not involve a physical sale but simply rental. What characterizes this sale is the service. The service should also differentiate the sale of the hotel room from the sale of the apartment. 

Said differently, if my hotel's competitor is the guest house, perhaps there is something else to work on before establishing a correct competitive set.

Maintenance, breakfast, room cleaning, reception and a thousand other features do not make the guest house a substitute but complementary to the hotel room. In some particular periods where demand is needed we could steal market share from that market but probably the right one revenue & marketing strategy (distribution, segmentation, promotion, etc.) could have solved the problem.

How is the analysis developed?

Given the continuous evolution of the industry, the competitive set should be reviewed at least once a year to ensure the relevance of the data.

Important factors to consider when defining a Hotel Competitor set are:

• Fair Share Market (capacity share) in terms of quantity of rooms available. It would be illogical for two hotels with very similar services but very different numbers of rooms to target the same customer. A 15-room boutique hotel with pool and restaurant should target a different customer than the one a 150-room hotel with pool and restaurant is aiming for. Likewise, their pricing strategy may not be comparable.
• Services/product features. If the target to be monitored is the business customer and they are in the suburbs, having parking or being outside the limited traffic areas is a great advantage. If I monitor the leisure customer, obviously, geographic location may not be our greatest strength. 

That said, if I were looking for my hotel's competitor with golf courses, I would probably have to look for them outside the region.

[nextpage title=”Once the competitors have been determined, we proceed with the customer-centric qualitative analysis.”]

How our hotels are perceived competitor? What are the scores for each characteristic recognized by the question?

The following table can help you understand how to identify a Competitor Hotel

The number of reviews helps us understand how consolidated the position of each competitor is in the market.

To complete the qualitative analysis, we must proceed with the SWOT Analysis. It consists of determining for each competitor: strengths, weaknesses, opportunities and threats.

By reading customer reviews we could highlight, for example:

strengths (e.g. particularly friendly waiter, excellent view, comfortable beds)

points of weakness (e.g. swimming pool open only during short hours, high parking costs, noisy rooms)

opportunity (e.g. new stadium opening nearby, meeting rooms after recent renovation)

threats (e.g. opening similar hotel in the area, removal of flights from China, price war between competing hotels)

[nextpage title=”Let's now try to understand the attitude of our competitors”]

 The classic prisoner's dilemma... for those who don't know it: two criminals are accused of having committed a crime. The investigators arrest them both and lock them in two different cells, preventing them from communicating (important). Each of them is given two choices: collaborate with justice or not collaborate.

It is also explained to them that:

1. if only one of the two cooperates, he avoids punishment; the other, however, was sentenced to 7 years in prison.
2. if both collaborate (accusing each other), they are both sentenced to 6 years.
3. 3. if neither of them cooperates, both are sentenced to 1 year, because they are already guilty of illegal possession of weapons.

   Summarized in this matrix

   		Criminal 1
   		collaborates	does not cooperate
   Criminal 2	collaborates	6,6	7,0
   	does not cooperate	0,7	1,1

   With the best choice for the criminals (read offer), one of the Pareto optima is obtained: the lesser of evils for both, the two criminals do not collaborate with justice (allying) and do not accuse each other.

   Nobel Prize winner John Nash - the film about his life "A Beautiful Mind" was beautiful - however, realized that the economic market is often "competitive": my life, your death. This balance, in addition to triggering a devaluation of the product/service placed on the market, triggers logical conclusions.

   Let's put ourselves in the position of criminal 2, in red.

   If the other collaborates we have two choices: collaborate (6), not collaborate (7)... two unfortunate choices but the first is better.

   If the other does not collaborate we have two choices: collaborate (0), not collaborate (1)...two excellent choices but the first is better.

   With this short-sighted vision, both would arrive at the unfortunate choice of accusing each other (6,6).

   “Coopetition” – the fusion of competition and collaboration – is increasingly important today and in some sectors determines a real barrier to entry.

   [nextpage title=”Data Analysis “]
   After the first strategic part, we can focus on the more tactical part, the operational part of the data analysis which will lead us to the definition of the market positioning to conclude again on the strategic analysis of benchmarking.

   With the help of tools such as rate shoppers, which help us find information on the sales price, we could easily fill in the following table.

   

    

   Important note: we could concentrate on the analysis of specific days, events for example, or concentrate on our positioning on Mondays in May or, recommended but depends on the final objective, understand our positioning in the long term by defining 2/3 splits (high seasonality/ medium/low; week/weekend; etc.).

   We could do it for single occupancy or double occupancy, both for the minimum rate or we could want to determine only the positioning of the Suites with the BAR rate (Best Available Rate, by convention the best rate with minimum restrictions and cancellation conditions) – in this case we should ensure that the choice of competitors is consistent with our objective.

   Additional note: in some cases and for some segments, such as Business Group or FIT, the data should be found in a different way, for example mystery calls, convention bureaus, etc.

   Once the research and data collection is finished, after having put them into a graphic system, we can move on to reading the data.

   [nextpage title=”Hotel Competitor: quality score”]

    

    

    

In this example on the x-axis we have the quality score, on the ordinates the average price – of a period, for a particular day or any time interval depending on the objective of the analysis.

Furthermore there is the average (between quality and price, indicated with the red cross in the centre) and the median (the blue straight line).

Starting from the left we can see how Hotel B, with a lower quality and a higher price than Hotel C, is potentially excluded given the lower quality/price ratio. The same goes for A with respect to E.

F has the best rapporto qualità / prezzo (high quality/low price) but this index is often influenced by low price alone. 

Ex: (quality 8 / price €100) * 100 = ratio 8; (quality 8 / price €80) * 100 = ratio 10;

F, in reality, is losing many revenue opportunities: given its quality it would probably be chosen over D, B, C and G - cut off from the market - even if the price were higher. Similar speech between A and E.

The best positioning is G – but not because it is closer to the average, red cross.

For each competing hotel, the importance of this graph lies in the distance from the median. This in fact indicates, with the right price/quality ratio, the surplus to be paid for each perceived quality point.

Ex: quality 48, the market considers it ideally correct to pay a price of around €95; quality 52, the price becomes €115.

A is close to that line, its positioning is correct. B, C and D are above the median, their ratio is too low (high price compared to quality).

E and G the opposite: too high quality/price ratio (too low price).

With this new reading, C, for example, could try to increase the perceived quality (perhaps in services and comfort, its weak points in the qualitative analysis) while keeping the price constant. However, it is difficult to travel in just one direction, the advice is to do both steps: slightly lower prices which, together with efforts to increase quality, will increase the relationship. In this case, we move from price €100, quality 46 to price €90, quality 47. 

 Once you reach the point on the median, raise prices and quality accordingly following the median.

It is important to remember, in this context, that the loyal customer he's not the one looking for the low price; that is the customer of whoever gives him that price. The loyal customer is the one who would be willing to pay more while benefiting and recognizing the greater value of our services.

In this other graph there would be dozens more analyzes that could be done but it is important to note how, compared to the previous one, the median is less inclined than in the previous graph.

In this competitive set, an additional quality point requires a lower financial outlay.

In this case, you could go from quality 48, price €70 to quality 52, price €85.

The lower gap - in this case 4 points €15 (85-70), in the previous case 4 points €20 (115-95) - makes this question more rigid or inelastic than the previous flexible and elastic one.

Examining how the elasticity of demand changes and the positioning in the market - of all competitors in the most profitable segments - should be done on a quarterly/semi-annual basis.

Furthermore, through benchmarking tools, which provide us with aggregate data on competitor hotels determined by us, we should constantly monitor 3 simple indices:

• Market Share Index: if I have 30 rooms and the total rooms in the competitive set are 300, I have a Fair Share Market of 10%; if one day I sell 20 and the total sales of the competitive set are 100, I have achieved a better Market Share than the Fair Share - I have sold significantly more quantities than the average, acquiring a greater share of the market than I should (+10%).
• Revenue Generation Index (RGI) or Revenue Penetration Index (RPI): my revpar /revpar competitive set. If less than 1, we performed worse. Ex: my revpar €95 / competitive set revpar €100 = 0,95, in this case we performed 5% less.
• Growth index: the comparison of growth compared to the same month last year, for everyone, makes us understand whether our growth is due to our Revenue strategies or to the different impact of demand generators (events, different destination appeal, weather, etc...). I may have grown by 5% but if the others have grown by 10%, I can consider my result positive but not satisfactory. If I am the market leader, however, my growth rate is limited by the smaller margin of potentially achievable growth.

In the long term, by making decisions consistent with the evolution of the market we will not only optimize our sales product but, by collaborating in a healthy way with our competitors, we will also be able to put an end to the battle on price and the commoditisation of the sector.

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