Strategy is an integral part of succeeding in business. There’s far more to running a hotel than simply owning the property and having rooms for hire.
You must understand who your guests are and how to attract them, their likes and dislikes, who your competition is and what they offer.
Knowing this information shapes the decisions you make and the actions you take.
But today, some businesses use a more complex way of thinking to predict outcomes and gain a strategic edge.
The process is called Game Theory and has been applied in a modern setting for over 70 years.
Applying this system before you make future decisions could grant a hefty strategic leverage and greater payoffs.
In broad terms, game theory starts with a set of players. All players have access to a set of strategies and work towards understanding all possible payoffs for acting on each strategy.
Each player uses strategic decision making to predict outcomes, analysing both the positive and negative payoffs for each of their actions.
When making decisions, each player must also consider the potential choices and payoffs of other players. At the same time, being aware that other players will likely take their own strategy into account.
This act of anticipating all available payoffs for each player means you form the best possible strategy to achieve the best possible outcome.
A well-known example of game theory is explained through the prisoner’s dilemma scenario.
In a hospitality setting, you and your competitors are the players. Your hotel is faced with various strategic choices which directly impacts your ability to achieve a desired payoff.
Whether that outcome is to increase revenue, outrank a competitor, reduce risk to your hotel, or achieve greater market share.
Hoteliers should have a deep understanding of their competition, and anticipate the reactions their competitors, guests and employees will have to a particular decision.
For a hotel to achieve a strategic advantage, they must consider numerous variables before taking action.
Generally speaking, the variables to think about could be, how your competition attracts guests, their annual revenue, where they stand in the market place, how their guests rate them, or how they price their rooms.
In order for hotels to attract more guests, we can explore three core strategy scenarios where game theory can be applied.
Every hotel has the difficult decision of setting room prices. And the question will always remain — do you raise, reduce or keep your rates the same?
Here we can apply game theory to calculate the different payoffs between two hotels.
Your payoff is wholly dependant on the behaviour of your competitors.
If both hotels agree to set the same high prices, they will both achieve above average profits. But if one hotel cuts below the other, they’ll attract more guests away from their competitor and gain even better profits. If both try to undercut each other and set a low price, both hotel’s profits are reduced.
Game theory suggests the best strategy long-term is cooperation from both sides. But naturally in a competitive hospitality environment, this is not always the case.
If you both agree to set a high price you’ll both receive higher profits. If you set your prices lower than your rivals you’ll receive a greater payoff, but how long will it last? That’s often the point when hotels become embroiled in manic pricing wars and plummeting rates become increasingly difficult to sustain.
In the end, everyone loses.
The same theory can be applied to how you market your hotel. Consider whether you should be spending more, less or the same on advertising based on what your competition is doing and how much you can feasibly budget.
Let’s take advertising with Google’s PPC scheme as an example.
If you both choose to pay Google more to appear higher in the results for your area, you could both expect to achieve better than average bookings.
If one of you paid more for better results, that hotel would take bookings away from the competitor. If you both stuck with organic listings, you’d both receive a lower number of bookings.
In this case if you’re monetarily able and all other variables add up, logic suggests you should take your chances with Google’s PPC advertising.
In another scenario, game theory could conclude whether maintenance and upgrades at your hotel are worth the payoff. Not only for attracting guests but for improving guest satisfaction.
Before you decide to carry out maintenance or upgrades, you must first explore what the market offers and how competitors could react to your actions. Competitor considerations could include the level of standard at other properties, the facilities they offer, how satisfied their guests are, and the costs involved.
By raising standards or developing new services such as a spa or restaurant, you could outrank a current competitor altogether and warrant raising your prices above anything they can match.
On the other hand, they could respond by addressing their own refurbishments and level the playing field again.
Game theory offers hotels surmountable strategic power if managers take the time to understand the market, the competition and the various potential outcomes.
Of course, it is impossible to identify every piece of the puzzle, but game theory can fundamentally clarify thinking and deliver a route for the best way forwards. It won’t help your hotel if you’re making decisions blindly without assessing the variables.
If hoteliers contemplate their actions wisely this can result in the ideal strategy and a substantial payoff.