The Hotel Industry is unique among economic markets in that we sell perishable services with a limited capacity. The same room cannot be sold twice and a vacant room cannot be sold at a later date.
NB: This is an article from Catala Consulting
To further complicate things, we sell to very different customers, each with their own requirements and willingness to pay for the same product.
Revenue management is the activity of analysing and optimising these peculiarities to maximise revenue across all income streams. Pricing is used as a strategic lever, making it one of the most critical components of your revenue management strategy.
Getting your hotel pricing strategy wrong can be disastrous for your business. With prices set too high, a hotel may lose customers to its local competition. On the other hand, with prices set too low, the business may not cover its operational costs and could damage its brand image. Developing your hotel pricing strategy involves analysing your room types, distribution channels, value delivered, segmentation, occupancy and competition in order to find the optimal price points for all of your different rooms and guests.
How Does Dynamic Pricing Work?
While the competitive landscape becomes ever more challenging, hoteliers need to find new ways to maximise revenue. One of the most effective approaches is to move from static to dynamic pricing strategies. These strategies allow your hotel to find the optimum pricing point at any time. Single rate pricing means that only one rate is available for all transient customers. That may be one high season rate and one low season rate.
By its nature, single rate pricing is not designed to adapt to changes during those seasons. It also ignores the wide variety of guests and the different rates they are willing to pay. This approach to pricing can reduce occupancy during the low season and profits during the high season. In short, your hotel loses out on both fronts. So what is the solution?
Dynamic pricing could also be called “real-time” pricing strategy. Its goal is to analyse and adjust your room rates based on supply, demand and market forces. The complexity of this approach requires a revenue manager and, ideally, a sophisticated revenue management system. By working with the revenue management software, your revenue manager can review and adjust prices in real time. This approach puts you in an excellent position to increase occupancy, grow room revenue, and optimise RevPar and ADR.
Steps to Follow When Developing Your Hotel Pricing Strategy
Your hotel pricing strategy must address several elements:
- Desired business mix: Hoteliers need to analyse the different segment-related elements of the pricing strategy, starting with customer segmentation. Who are the target customer segments? Are there potential new customer segments to forecast? The objective is to identify customer willingness to pay and develop equivalent price points. For each customer segment, it is essential to highlight the hotel competitive value position. Business mix and hotel ADR are highly correlated, which allows the revenue manager to play with the desired customer segments, volume and their ADR contribution according to the market growth demand.
- Demand patterns: mostly related to seasonality, prices are based on flows of guests. It is common to increase rates during high season, and inversely, to drop them during low season. Therefore, hoteliers need to determine how they want their prices to flex by season. A timeframe strategy relates to the peak of demand identification, according to day-of-week. Forecasting remains a crucial element of all pricing strategies. You can create your forecasts by identifying consistent demand patterns across the year. You will also need to gather and analyse up-to-date information regarding marketplace events. The purpose is to predict the volume of business and revenue on a specific day as accurately as possible.
- Distribution channels: As part of the strategy, your choice of online and offline distribution channels is crucial. This process includes the decision to maintain rate parity, if applicable. Pricing strategies must reflect the different channel costs. Hotel commissions from indirect bookings can drastically reduce your Net RevPar and must be taken into account. Sophisticated revenue management systems allow you to quickly adjust pricing and inventory across your hotel website, OTAs and hotel booking platforms.
- Selling processes and booking policies: You can use tactical booking policies or rate fences to ensure customers segment themselves into appropriate rate categories based on their needs. This segmentation can include, for instance, non-refundability for leisure discounted travellers. Other examples might be frequency-based fences for membership and frequent flyer programs. Controls are also commonly used to manage high and low demand dates and boost occupancy. These policies must be viewed as reasonable by the targeted market segments to avoid damaging your brand image.
- Costs: Most hotels tend to have higher fixed costs than variable costs. Your fixed costs do not change according to the level of business, such as mortgage or bills payment. Having empty rooms during the off-season will reduce your variable costs, but not help towards your higher fixed costs. Contribution pricing is an approach which aims to ensure the selling price generates an acceptable contribution towards covering the fixed costs of the business.
- Customer Price Sensitivity: Each hotel requires a unique pricing strategy tailored to its location, size, level of competition, market demographics, and type of service offered. However, a critical factor in determining the ideal hotel pricing strategy for all properties is customer price sensitivity. Customers tend to be more price-sensitive in budget markets and lower-rated hotels. They react more to any change in price and respond far better to deals and discounts. Luxury hotel customers, on the other hand, are less sensitive. You may be able to increase your rates without any loss in occupancy. With some markets, the exclusivity of an expensive room may even increase your demand. With this in mind, your dynamic pricing strategies need to be carefully managed in order to match the brand image and avoid customer perception conflicts.
How Has Coronavirus Impacted Hotel Pricing?
The Covid-19 crisis has drastically changed the hospitality and revenue management landscape. Domestic and international travel restrictions have meant that revenue management has shifted from unconstrained to constrained demand optimisation. Even with restrictions lifted, consumer confidence may be slow to return. With this in mind, diversification is certainly one of the most robust recovery strategies. By exploring new distribution channels and new tactics such as Google Hotel Ads, you can expand your reach and improve your margins.
We believe you should also be researching and targeting new audiences. Your goal now is to identify the different groups of customers ready, willing and able to travel. The domestic leisure segment will likely be the first to recover, with ‘staycationers’ ready to explore their own countries. Likewise, some forms of corporate travel will resume in industries where a physical presence is unavoidable.
Revenue managers now face a critical choice. Should you decrease prices in the hope of stimulating demand, or resist the pressure and hold their prices to avoid a general market drop? The latter comes with the risk of eroding hotel brand image and pulling down the whole market. It is not something we recommend if you can possibly avoid it.
Next Steps: Develop Your Post-Covid Hotel Pricing Strategy
In addition to the limited historical data to forecast, customer booking patterns have shifted to shorter lead times. We would encourage hoteliers to minimise inventory restrictions and make booking processes as flexible as possible.
Your hotel may not be able to offer the same experience as before. If you have closed certain services, such as your gym, spa or restaurants, you will need to rethink your rates accordingly. One solution is to consider what other value you can provide in place of anything which is closed.
You may wish to review your terms and condition policies. Introducing flexible new measures such as “book now cancel later”, or the promotion of change of dates can all encourage nervous consumers to book.
Finally, we strongly advise conducting a comprehensive value price assessment. This process will review your hotel’s value proposition against your competitors, with recent changes taken into account. It will help you understand your place in the market, your competition, your new customer value perception and current price sensitivity. The results will be invaluable when reviewing your rates and developing new hotel pricing strategies.
