Pricing is important in all industries. In the hospitality industry, and particularly the lodging industry, pricing is absolutely crucial.
Firstly, there is a massive profit incentive for hotel managers to get their pricing right: the demand in the industry is highly inelastic, and consequently, many hotel chains are leaving a substantial amount of money on the table by neglecting their price setting.
Secondly, the marginal profit for each room sold is huge since variable costs in the industry are very low, fixed costs incredibly high, and the salvage cost is zero. Every hotel room left unoccupied is ultimately a foregone profit, and should, therefore, be avoided at all cost – well, almost.
Nevertheless, the single most effective tool for maximizing Revenue per Available Room (RevPAR) is pricing: naturally, to increase the room rate you have to increase your prices, and similarly, you can use your prices to influence the occupancy rates, too.
What Is the Objective?
Before we start looking at how hotels can maximize RevPAR with pricing, let’s first take a step back and consider what the objective really is, and what it takes to get there.
Essentially, hotels want a room rate that is as high as possible while keeping the occupancy rate almost 100%. If the room rate is too high, rooms will be left unoccupied and profit is foregone: but if the room rate is too low, not only will money be left on the table, but you will inevitably have to turn away customers making last-minute bookings (and these customers have high margins!).
To hit the sweet spot, it is necessary to price rooms dynamically rather than setting one, fixed price: if you set one fixed price, you will inevitably leave rooms unoccupied or you’ll end up housing business travellers at a fraction of what they’re willing to pay. Both scenarios are undesirable, and in this article, we’ll look at how you find the aforementioned sweet spot.
#1 KEY: Market Segmentation
Pricing right in the hospitality industry essentially comes down to two things: defining the different segments in your customer base and their willingness to pay; and identifying the segments. It’s all well and good that you know you have plenty of business travellers and backpacking beach bums, but if you can’t identify them (before they enter the lobby), well, then it’s pretty useless.
