The Internet is full of specialist advice on dealing with prices and revenue management in the hotel industry.
NB: This is an article from HowsMyRate, one of our Expert Partners
The pandemic has changed customer behavior, their lifestyle, and affected demand, so the supply players need to adapt to the game’s new rules.
There may be many different pricing strategies that hotels can apply to respond to market needs. Each strategy may have a different result in different hotels. But there are a few strategies that hotels should avoid. Here are the top 5 of them:
1. Stop using template-based pricing.
As much as hotel revenue management is a scientific discipline, very often it is simplified for daily operational use. One of the typical approaches in pricing is to set several price points that would identify some specific and obvious days of demand characteristics.
Take a look at this graph:
The blue line represents the level of the best available price (vertical axis) of a particular small, privately owned city center hotel, for every day in April 2022 (horizontal axis). This hotel has applied a template approach in pricing. They identify higher demand on weekend days (Saturday & Sunday), so the weekend price is 440. The weekday price point is 380.
And that is it. There is no other insight into price dynamics.
Such an approach to pricing has many pitfalls. First of all, the pricing is very predictable. We know the price for the weekend, and we know what it will be on weekdays.
We also know it will not be any other price. Second of all, the application of such template pricing could result in the hotel missing some adhoc opportunities. There may be an event happening on a couple of days in April, there may be some group business booking in to hotel, there may be some cancelations, and most of all, there are competitors that most likely manage price based on our applied template. Third of all, applying template-based pricing is usually based on hotel statistical analysis from previous years. “It has always been like this” approach is a stereotype.
And post-pandemic, where people’s lifestyles and behaviors changed when there are new segments booking hotels and some old segments have not recovered yet, we should avoid any stereotypes from the past. Even when assuming weekend demand is always higher than a weekday.
Pricing strategy should be derived from recent data analysis and should be revised frequently, in case some changes occur.
2. Stop thinking about large price changes a few times per year.
Hotels think about their strategic price policy revision every once in a while. Often once per year, sometimes a few times per year. Such hotels usually consider significant 10-30% price change, which offset economic changes during the long period when the old price was applicable.
For example, one city hotel would set their price points once per year when making their budget. Every year, as costs increase, the hotel considers a general ADR (average daily rate) increase.
From the financial perspective, such a strategy feels like a good move. The increased prices sold in expected volumes offset the increasing costs. However, from a commercial standpoint, it is not that simple. Significant price increase influences the market. On the one hand, it is supposed to generate more revenue, but on the other hand, the price increase triggers reactions from customers and competition. If the market is highly competitive, increasing the price may result in a drop in bookings. Customers may turn to competition with lower prices, increase their volumes, and build customer loyalty to their brand. High price increase always bares risks when implemented.
The solution to this strategy is the exact opposite: small, frequent price changes are un-noticeable by customers and competition. Yet they are very powerful from the scale perspective. For example, take a look at these two competitors. Both in a city center 50+ room hotels:
The light blue line is a hotel directly competing with the dark blue line hotel prices. You can see that the light blue hotel does not seem to recognize the weekend higher demand during the weekends. Therefore their pricing is less aggressive than that of the dark blue hotel
Regardless of the true demand on the weekends for those hotels, if they are direct competitors, light blue line hotel could easily increase their prices on weekends. If they could increase their price by a few Euros, no-one would have noticed it; they would still remain cheaper on weekends and probably enjoy the same volumes with much better revenues. Think about it.
A 50 room hotel with 50% occupancy on average sells 9125 rooms per year. An un-noticeable 2 Euro price increase is worth 18 250 Euro. No risk. Now think how many times per year you can make such price changes.
3. Stop thinking top KPI level ADR
Measuring hotel KPIs is an effective way to manage a business from the top-line perspective. Understanding revenue, occupancy, and cost-related KPIs give a good insight into business performance.
However, this top-line managerial approach often is escalated to Revenue Management level, where hotels make pricing decisions based on overall ADR or occupancy indicators. A quick look at hotel results: revenue this month, last month, quick comparison and then check of ADR and conclusion is simple: If hotel ADR were higher, the revenue would have been greater. So the conclusion is, let’s increase the price.
This approach makes price management fairly simple however it brings a lot of risks associated with the too general approach. The decision of price increase based on top-line conclusion usually carries casualties.
A Revenue Manager instructed just to increase the ADR, will naturally focus on increasing the lowest prices. However, if applied well, the lowest prices are attached to very price-sensitive customer segments. The natural reaction to increase the price on very price-sensitive segments in order to increase the revenue will usually have the opposite effect.
Therefore, while it is great for the General Manager perspective, a top-level KPI approach should not be considered by the Revenue Manager at all. Overall, hotel ADR is not affecting the detailed pricing. It is the detailed pricing that forms the overall ADR. So when working on pricing, start working from the bottom. Here is an example:
The blue dots are price points that a city center small privately-owned hotel has used in the last 6 months. The horizontal axis represents the price and vertical instances of this price occurring in availability. You can see that dots start to appear at around 450 price on the horizontal scale, and the highest prices are somewhat higher than 750.
Every blue dot price has its specific meaning. This is the price that is sold publicly on OTA; it could be the price negotiated for a contract with a company, it could be a price included in the package or a group price.
All these blue dots create the black dotted line which is the hotel ADR. You can see now, why we say that price details create the ADR not the other way.
This means that in order to increase the ADR (shift the dotted black line to the right), we need to shift the blue dots. Notice there are much more dots with price below the ADR, and fewer on the right side of the ADR.
Notice also, that there is a high probability, that on the left hand side of the ADR line are low prices created for price sensitive customer segments. And on the right-hand side, prices are created for less sensitive segments. Now think where it would be easier to increase the price of the blue dot? Would it be better to increase a few not price-sensitive dots? Or many price-sensitive dots? Exactly. And what did we say earlier? Having only a top-line approach to ADR will naturally make the Revenue Manager focus on the many lowest prices from sensitive segments.
Now you understand how top-level KPI approach to ADR can be dangerous.
4. Stop treating your customers as statistical volumes
When we analyze data, we often see numbers, statistics, and comparisons. We barely see that these numbers are represented by humans – your customers. Looking at numbers only can result in some significant misconclusions that mathematically sound logic.
Hotels provide a mix of products and services to broad types of customers. What is characteristic for the hotel industry is that all products and services are offered to all customers at the same time. However, as customers are different, some products and services will be more valuable and obsolete to others. For example, fast and reliable wifi will be more valuable for a business customer than the playground in the lobby. For a parent, it may be the opposite.
When we analyze hotel performance we see the ADR and room nights sold, we see revenue and cost.
To sustain positive cash flow and to remain profitable, hotels must achieve an ADR that covers both fixed and variable costs.
The Revenue Manager would analyze their costs to determine the lowest price point. The average variable cost is the cost that occurs when the room is sold. The fixed cost is associated with general costs that occur despite whether the room is sold or not. The typical approach for calculating these costs is taking the hotel financial report, splitting costs to variable and fixed, and dividing them by the number of sold rooms or total rooms over a period of time.
This strategy of determining costs and then calculating the lowest possible price was very popular before the pandemic. But it has also proved some downfalls. As hotels provide the same product and service to every customer, they incur the costs. But as customers value different products differently, offering them other products is a cost waste. This means, if there is cost waste, it could be turned into cost-efficiency. And cost efficiency can affect the price.
Here is an example: Long-staying guests usually prefer their privacy more than daily room cleaning. Thus they do not require the service on a daily basis. However short staying guests will appreciate daily cleaning. Daily cleaning is a daily cost. It could be 7 times lower if the long-staying guest had weekly housekeeping. Therefore, long stay guest price could be at lower level.
To think this way, hotel financial systems should accumulate the revenue and expense information by operating department and market segments.
With such an approach, hotel Revenue Managers will be able to migrate their focus from ineffective typical pricing strategies to the concept of customer profitability.
5. Do not assume you know.
I have come across many cases where Revenue Managers would give their arguments based on assumptions, stereotypes, or simply gossip. In effect, their actions on price are based on those. For an analyst, any assumption is a threat. Because it can only by 50-50 correct.
Here is an example. A Resort mountain hotel, throughout their high season, had more demand than they could accommodate on weekends and very low demand on the weekdays. Their assumption was that they could apply a Min Stay restriction for all reservations made on Friday, so they do not have any one night customers booking the weekend when they can have two-nighters. Theoretically, their assumption was logical.
However, times are so different now that any assumption should be verified with proper analysis, even if true before.
We have run some numbers on the length of stay (LOS) per day of the week. We have realized that the Friday arrival average LOS was 1,4. Meaning there was a clear customer segment arriving on Fridays, not a big one, and huge traffic arriving on Saturday for the weekend. The assumed application of a minimum 2 day stay resulted in completely deleting all one-night arrivals on Friday, which did not threaten the weekenders arriving on Saturday.
Always have educated knowledge about your business and customers. Never assume, never gossip.
