What do we really mean by “price leader” versus a “price follower”? Does being a price leader mean being the highest priced property in my market? Let’s talk about what these two concepts really mean.
Traditionally, pricing strategies for public rates were developed by defining a competitor set and obtaining their rates through rate shopping tools. With this secondary data from competitors, properties are priced according to where they want to sit in their Comp Set.
Price changes in the Comp Set prices are disclosed once a day through a shopping report, and properties may respond by changing their rates accordingly. Sound familiar?
So what is the pitfall with this approach to pricing?
The problem with the secondary data approach lies in the fact that you become the follower of someone else’s decisions. Using this process to develop your pricing strategy is a form of Catch-22. You are chasing the competitor and they are chasing you, but no one is truly trying to understand what guests are actually willing to pay. Additionally, the reaction time through this approach is slow; changing rates once a day when reservations are happening in real-time is similar to trying to keep up with a Formula 1 racing car using your common road car.
What if you allowed yourself for a moment to think that your property could be a “price leader” and not a ”price follower”? What if you could allow your property’s primary data (reservation data) to drive the decisions for the pricing? After all, you are using your primary data to make decisions on forecasting, so why not allow it to drive the pricing decisions as well?
Comparing primary data and secondary data
At Pace, we have spent years researching the relative value of primary versus secondary data. This research has demonstrated that basing your pricing decision on primary data is a superior strategy for our customers. It enables them to react faster to future trends by selling at the right prices at the right time.
You could almost imagine using primary data as noise cancelling headphones and eliminating the noise from competitor pricing. Ultimately, the real beauty of using primary data is that you become the leader and decision-maker for your pricing, rather than a follower of someone else’s strategy.
Now, at this point you might be thinking - this is all good and well, if your property is the only one in the market and the customer does not pay attention to your competitors’ pricing. Have you ever considered that this static, predefined Comp Set may not be the competitors that your potential guest are actually comparing you to? Or could they be comparing you to Airbnb or some other kind of accommodations?
What should I do?
In today’s fast-paced landscape, the only thing that we can be certain of is that the customers have more choice than ever before. Therefore, the most effective way to know how guests respond to your pricing or the market is to analyse and react to your primary data (the gold mine you’re sitting on). This gem of information captures both your customers’ responses to your pricing as well as their responses to market prices.
I would like to leave you with one final thought on the power of primary data. If you think of today’s most successful companies in other industries - such as Amazon and Uber - do you think they are following their competitors or focusing on reacting uber-fast to their own primary data?