We’ve all witnessed the rapid erosion of our economy and the impact it has had on the car rental industry. Total industry bookings were down 1.9 percent last year over 2007. The majors have all made deep cuts in their workforces in recent months. Consumers are choosing less expensive ways to spend their vacation time. The continued credit crunch is having an adverse effect on corporate business as companies reconsider their travel decisions. With bookings down, competition for reservations has become more and more fierce.
In this economic climate, there is even more of a need to focus on driving top-line revenue dollars and to minimize costs. However, focusing too much on cost-cutting often results in “penny wise and pound foolish” decisions. Driving additional revenue can have a more significant impact on the bottom line.
Proper revenue management strategies can result in increased revenue, even in a tough economy—the issue is how to achieve it. Simply put, how do you “get all the juice from the orange?”
Here are some key principles that are integral to effective revenue management strategies:
Know Your Place
The initial task is to ask the questions that will determine your pricing strategy. Who are your potential customers? What contributes to their decision to rent? What are the seasonal trends? Is the reservation decision based on value, convenience or prestige? Considering today’s economy, more often than not it is value.
Regardless, you need to decide which of your competitors you need to compete against in order to get the reservation.
Key principle: Know your customers and competitors.
Arm Yourself for Battle
Today’s competitive technological environment requires that you keep up with revenue management even though it may seem like a lot of work. Depending on what systems you have in place, it certainly may be. This is especially true as many consider cost control measures and possible reductions in workforce. Here’s where the “penny wise and pound foolish” adage may come into play: The last thing you should do is cut back on revenue management tools.
In this age of advanced technology, most of your competitors utilize automated revenue management systems that greatly reduce the need for manual analysis. Today’s market pricing can change by the day, hour or minute. Furthermore, simply researching your competitors’ daily and weekly rate is not enough anymore, as pricing most likely varies depending on the length of rental in your market. Even then, pricing for the same rental can, in some cases, vary based on the Web site or booking channel.
In order to effectively compete, you need to be aware of these factors, as well as the frequency of pricing fluctuation and trends in your market as a whole. Competitive analysis, seasonal demand projections and implementation of pricing in an ever-changing market can easily become more than a full-time job for one or more employees.
In order to achieve your revenue goals and maximize your booking opportunities, you must identify the systems you have in place in order to achieve your revenue goals. The expense invested to implement and maintain a system that will keep your pricing in line with the market—if used correctly—should be offset by gains in revenue earned and payroll expenses.
Key principle: Ensure that your system will keep you in a competitive position in your market. If you do not have an effective system to do so, invest in one.
Forecast Market Demand
Once you’ve identified your target market and which competitors you are going to directly compete with, forecasting comes into play. The better you can predict your market demand, the better you can forecast your expected reservation build. The general rule of thumb is that for a standard fleet, you should average more than 80 percent overall fleet utilization. Pricing strategy decisions should be made with this goal in mind. (See pricing strategy sidebar below.)
The key here is to know your market well enough so you can price position yourself correctly in order to gain a desired base level of reservation bookings. Ideally, you are able to make reasoned decisions based on historical data. If you do not have the data available on your market, begin compiling it.
Key principle: Do what it takes to build your advance reservations.
Capitalize on Your Advance Build
As soon as you have achieved your desired advance reservation build, you can begin to adjust your rates higher (possibly higher than some or all of your competitors) so that although your new reservation bookings may slow down, you gain additional reservations at higher rates and realize better overall average reservation rate revenue (pricing strategy 4).
The key is not to book out your entire rental fleet at base rates, but to monitor your advance build. Once you are confident that even with higher rates you will achieve your desired fleet utilization, you can raise rates accordingly. And, if you adjust your pricing higher, your competitors may follow.
Key principle: Adhere to your market strategy until you position yourself to where you do not have to. Then raise your rates and capitalize on your advance build.
Evaluate. Adjust. Evaluate.
Your strategy has been implemented. Now it is important that you continually monitor and evaluate your results. Markets are ever changing. Competitors will change their strategies in order to achieve their internal revenue goals. Your competitors’ fleet levels will fluctuate and their strategies will reflect that in their efforts to maximize their utilization.
Demand will also fluctuate and have a direct effect on pricing. If you are not monitoring your market closely, you will miss out on booking opportunities as well as potential opportunities to raise your rates and gain additional revenue.
Whatever revenue management system you employ, make sure it is set up to recognize changes and adjust accordingly in line with market pricing and demand. With the system, strategy and procedures in place, you have positioned your organization for success and will more consistently achieve your revenue goals.
Key principle: Commit yourself to always evaluate your results and make the necessary adjustments to achieve your revenue goals.
SETTING AND APPLYING PRICING STRATEGY
There are many ways to set your pricing strategy. It is imperative that you understand your market and implement your rate strategy accordingly. The following are examples of four main pricing strategies:
1) Economic / competitive: This is a “no-frills” low-price strategy dictated by a low-price-driven competitive market. 2) Penetration / volume: The rental price charged is set artificially low in order to gain market share. Theoretically, once this is achieved, the price is increased. In reality however, this is not always the case.
3) Premium pricing: A high price is set in which there is uniqueness in the product or services. This approach is used where a substantial competitive advantage exists. 4) Position pricing: A higher rate is charged because you have either a competitive advantage or you have positioned yourself to a point where you can raise your rates above your competitors and still achieve your desired utilization and revenue goals.
Although in some markets we are seeing some positive rate trends, many competitive markets still offer very low rates (pricing strategy 1 or 2). In order to achieve your desired utilization, you may have to accept some reservations at less than desirable rates until you have reached your advance booking goals. Therefore, you need to identify a minimum rate that you will accept.
In the event you have a unique product or service, you may be able to control the market rates. For example, if you are the only location in a market that offers 12 or 15 passenger vans, then you set the market rate for those units. If your operation is more conveniently located than your competitors, you may have an opportunity to demand premium pricing (pricing strategy 3).
Steven Neudorff has more than 12 years of car and truck rental franchise operations experience. He has served as a Rent A Wreck car rental and Ryder Truck rental franchise operator in Southern California and Las Vegas before converting those 10 locations to the Thrifty Car Rental franchise system. After two years with U-Save Car & Truck Rental as a director, Neudorff joined Rate Highway as vice president of consulting & sales.
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