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 logical. In a recent article, “5 Hotel pricing Mistakes to avoid” Kris Glabinski, President HowsMyRate, took a closer look into five misleading pricing strategies that are often applied to Hotel Revenue Managers and Owners.
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One of the points covered was the treatment of customers as statistical volumes rather than specified groups with their own unique needs.
Hotels provide a mix of products and services to broad types of customers. What is characteristic of 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.
Kris comments, “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 into 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.”
Let’s take a look at an example, in the case of long-staying guests, they usually prefer their privacy more than daily room cleaning. Thus they do not require the service on daily. 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 prices could be at a lower level.
What can we take from this?
Hotel financial systems should accumulate revenue and expense information by operating department and market segments. By focusing on customer groups’ individual needs, hotel Revenue Managers will be able to migrate their focus from ineffective typical pricing strategies to the concept of customer profitability.