While pricing is often described as a science, it is a key factor to drive the right customer to the hotel, and the main element to optimizing profitability.
NB: This is an article from Catala Consulting
However, when a pricing opportunity is missed this can result in a loss of revenue. Experts say that when revenue is generated through pricing strategies, 95% can go directly to the bottom line, against 50% when the revenue comes from occupancy (CRME, 2019). Similarly, other elements are associated with stronger revenues such as personalization. According to the Econsultancy survey, 80% of companies implementing personalization report an uplift (Forbes, 2020).
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What Is Hotel Personalized Pricing?
Personalized pricing is a pricing model which targets individuals rather than a group of people. By pricing by individuals, businesses aim first to determine the customer’s willingness to pay to determine, afterwards, the price matching their purchasing power. This concept relies on effective data collection technologies, for businesses to know perfectly their customers, and be able to set prices according to their characteristics and actions. A large range of data can be investigated such as behavioural or demographic. The idea is that loyal customers could have access to more offers and that different customers could see different prices when checking at the same time the hotel website. The concept of charging different customers different prices comes at a time when technologies, such as the Internet of Things or Artificial Intelligence, allow having a more accurate customer’s insight. A greater use of mobile devices and a better connectivity has increased the ability of the business to understand customer preferences and forecast their behaviours. Reports say that 63% of consumers would be willing to share more information such as location, age, lifestyle or purchase history, with a company that provides greater experience (PwC, 2018). Personalized pricing can be used in different ways such as by personalizing only the offered discounts, based on individuals’ loyalty, personal characteristics or willingness to pay.
What Is The Difference Between Personalized Pricing and Dynamic Pricing?
As opposite to personalized pricing, dynamic pricing targets broader markets and the difference in prices does not depend on the individual customers. Instead, dynamic pricing evaluates other factors to know when to adjust the price upward or downward, such as segmentation, demand level, room types or booking channels. In other words, dynamic pricing looks at the overall environment characteristics to set a price whether than individuals’ attributes. Today, dynamic pricing is mainly used across all industries, from airline companies to our supermarkets and restaurants. However, this practice shows to have one downside that might catch our attention. Change in prices become more predictable for customers as price fluctuation can vary in time according to how far in advance customers book and at what time during the day. As a result, dynamic pricing can risk not always offering the right price to the right customer, and instead enhance customer frustration. Rather than enticing customers to take actions about the product or service they are looking for, dynamic pricing may entice price-sensitive customers to take action on when to make a purchasing decision. Prices depend on the “WHEN” whether that the “WHAT”.
4 Main Advantages For Hotels To Embrace Personalized Pricing
Personalized pricing takes dynamic pricing a step further to better tailor its customer’s real needs. Using this approach shows some advantages for both businesses and customers:
Expand the market
Using a personalized approach of pricing would unavoidably provide a larger range of prices for the same product or service on the market. Of course, prices can still be applied to a subcategory of people sharing the same personal characteristics. Personalized pricing can be a win-win strategy for customers and businesses. On the one hand, businesses can expand their targeted audience by offering lower prices to price-sensitive customers, and by conserving the profitability of the less price-sensitive customers. On the other hand, customers are provided with a price that matches their expectations. The difference in willingness to pay between customers may be due to their different income level or their level of trust and interactions with the providers.
Build loyalty & stimulate overall demand
By gathering more customers’ data, businesses are more equipped to provide personalized marketing campaigns and offer discounts in various forms. By paying what they think the product is worth, customers are more likely to repeat the purchase. Also, personalizing prices could be one factor contributing to the creation of a unique experience for the customers, hence, making the brand more valuable. However, this concept highly depends on the customer willingness to share personal data in exchange for benefits. According to Salesforce Research, the majority of UK customers is willing to share personal data in exchange for personalized offers or discounts (Salesforce, 2017).
Make it more affordable
Personalized pricing could lower the average price on the competitive market thanks to the ability to set different prices at the same moment for the same product. Businesses could compete harder to gain new customers by offering lower prices than the competition without lowering prices for their existing customers. Thus, personalized pricing can allow customers to find more affordable prices.
Enhance profitability
The purpose of pricing is to set offer the right price for the right customers at the right time. As with dynamic pricing, the objective to provide different prices is to avoid missing revenue opportunities. With too high prices a hotel may lose customers, compared to its local competition which may offer more reasonable rates. As the opposite, with too low prices the business may end up losing money by not covering its operational costs. With personalized pricing, businesses can set a price at the highest acceptable level for each person at any time, thus avoiding losing sales through peaks of demand.
Other Industries The hospitality Industry Can Learn From
As we already saw with loyalty programs or with hotel RMS, the hospitality sector grows with its time by constantly observing other industries and identifying opportunities. While some described personalized pricing as unethical price discrimination which raises legal concerns, this practice is however already used in some industries. According to the research of The National Association of Citizens Advice Bureaux concerning the impact of personalized pricing in essential markets, more than 85% of people know that their browsing history can be used to target adverts, and 61% knows this can impact the types of offer they might see (Wild & Thorne, 2018).
Airline companies started to price their seats according to the customer’s personal information. In 2014, the US Department of Transportation (DOT) approved the ‘New Distribution Capability’ program launched by The International Air Transport Association (IATA). The system consists of collecting passengers’ data such as an address, marital status, birthday or travel history to provide them with personalized offerings accordingly. In response, the White House published a report highlighting the difference between ‘differential’ and ‘personalized’ pricing, as well as the need for total transparency with customers regarding how their data are used. Similarly, following the finding that Apple Mac users were likely to spend up to 30% more on hotel rooms, the travel site Orbitz started in 2012 to increase its prices for those targeted customers (The Wall Street Journal, 2012).
The use of personalized pricing in essential markets is still widely discussed, and its potential implementation varies per sector. 55% of consumers anticipate its usage in mobile and broadband services (Wild & Thorne, 2018). In parallel, the British Department for Business, Energy and Industrial Strategy pointed out the practice of individualized pricing in competitive markets such as energy, telecoms and financial services (Department for Business, Energy, and Industrial Strategy, 2018).
As regards the hospitality industry, this is the entire customer purchasing process that could be re-examined. Today, customers are looking for more than just a bed, they are looking for a memorable experience. However, when looking to book rooms, customers first assess them on their monetary value. Personalized pricing may help hoteliers to reposition their room price characteristic as just one of the purchasing factors. The customer-choice pricing model rose our attention as a way to give customers the possibility to select the individual room characteristics they want or not, by increasing or decreasing their booking rate. While customers can better appreciate the value for which they pay, businesses could better monetize their assets by knowing what each customer is willing to pay. The challenge would become to offer the right choices, to the right customer, to reach the right price.
To conclude, the implementation of personalized pricing in the hospitality industry is yet to explore but is already promised a bright future across industries. The combination of state-of-the-art technologies and the customer willingness to share more data to receive a more personalized experience question our industry leaders as to how to enhance the true value of service while supporting the bottom line.
Read more articles from Catala Consulting
References
- CRME. (2019). Evolving Dynamics: from revenue management to Revenue Strategy. hsmai; STR; CMRE.
- Department for Business, Energy, and Industrial Strategy. (2018). MODERNISING CONSUMER MARKET Consumer Green Paper. UK: Controller of Her Majesty’s Stationery Office.
- Duetto. (2016, 08 29). Duetto GameChanger Empowers Hotels, Casinos With Personalized Loyalty Pricing. Retrieved from Duetto: https://www.duettocloud.com/press-releases/duetto-gamechanger-empowers-hotels-casinos-personalized-loyalty-pricing
- Forbes. (2020, 02 18). 50 Stats Showing The Power Of Personalization. Retrieved from Forbes: https://www.forbes.com/sites/blakemorgan/2020/02/18/50-stats-showing-the-power-of-personalization/?sh=3b4123332a94
- PwC. (2018). Experience is everything: Here’s how to get it right. PwC. Retrieved from https://www.pwc.com/us/en/advisory-services/publications/consumer-intelligence-series/pwc-consumer-intelligence-series-customer-experience.pdf#page=10
- Salesforce. (2017, 01 13). Customers Are Happy to Share Data. Marketers, Are You Ready? Retrieved from Salesforce: https://www.salesforce.com/uk/blog/2017/01/customers-are-happy-to-share-data-marketers-are-you-ready.html
- The Wall Street Journal. (2012, 08 23). On Orbitz, Mac Users Steered to Pricier Hotels. Retrieved from The Wall Street Journal: https://www.wsj.com/articles/SB10001424052702304458604577488822667325882
- Wild, M., & Thorne, M. (2018). A price of one’s own: An investigation into personalized pricing in essential markets. Citizen Advice.
