The hotel industry is close to peak pricing, if not already there. If we truly are at the top of the cycle, with hotel revenue performance at an all-time high, the industry is in a perfect position to hone its revenue management skills and maximize the situation.
Those of us who have weathered numerous industry cycles know that inevitably there will be a downturn that leads to price wars. Savvy hoteliers, however, can defend themselves using trends to mitigate the need for rate reductions.
Many revenue managers spend an inordinate amount of time focused on opening and closing segments with the brands and online travel agencies, and determining pricing solely on what the competition is charging across the street. Most use relatively sophisticated revenue management software. Yet, I often wonder how many people within the discipline truly understand the basics of how pricing should be established.
Hoteliers also should consider elasticity, a basic economic principle of pricing, as they consider revenue management strategies. For the hospitality industry, pricing elasticity is defined by how the demand for a hotel room changes in response to pricing. For example, if a hotel drops its rates by a percentage and sees a resulting increase in revenue, that demand is considered elastic. Conversely, inelastic demand is not price sensitive. Factors that affect price elasticity include competitor room availability, degree of necessity, income of buyer, stay pattern and day of week, seasonality, “sale” pricing and the price/value perception.
Where to start
So, how does one take advantage of price elasticity?
The first step is setting up “rate fences,” which allow hoteliers to charge different prices to different customers. These can include physical features such as bed size; concierge floor; premium rooms; suites; view; and connecting rooms; to more indirect rate fences, such as loyalty programs; purchaser age; corporate travel; affiliations; length of stay; advanced purchase; nonrefundable; preferred upgrade; online purchase; quantity sold; and weekday versus weekend; among others. Understanding the elasticity of demand and how it affects price and utilizing rate fences effectively can lead to higher revenues.
Next, consider “reference pricing” and how that plays into the “prospect theory.” Reference pricing is simply how a guest determines which rate to choose based on the relationship to other prices available.
For example, let’s say you were choosing between a cup of generic coffee at $2 and the same brand, premium roast for $3. What if we added a super-premium to the menu for $4? In the first instance, most would pick the $2 coffee. In the second example, studies have shown that the $3 coffee gets the nod most often.
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