The hospitality industry has been following revenue management practices for decades now.
Today, dynamic transient pricing is considered the industry standard for pricing guest rooms. Now, as rate transparency and channel complexity has increased, we hear hotels asking, “Can I manage my property’s revenue just by adjusting rates?” and “Why do I still need to manage rate availability?”
It is clear that there is confusion in the hospitality industry regarding dynamic pricing and its role in maximizing profitability. The confusion around pricing approaches has paved the way for vendors to claim to have complete revenue strategy solutions, even though the solution may address only the pricing aspect of revenue management, and ignore rate availability management and its benefits. Simply put, hotels cannot maximize their revenue or profitability solely by managing rate prices.
Daily pricing and the limitations of “pricing-only” decisions
To articulate the limitations of “pricing-only” approaches, let’s work on an example. Daily pricing (as opposed to arrival or length of stay pricing), is favored by many channel partners for its simplicity. However, daily pricing introduces difficulties in optimizing revenues. The reason for this is that with daily pricing, all guests from a particular segment or channel will pay the same price for each night, regardless of length of stay, and regardless of their willingness to pay – which is contrary to good dynamic pricing practices. This issue becomes much worse when availability controls are not available or used.
Take the following example of two nights for a particular property. The hotel has 20 remaining rooms available on day one, and 10 rooms on day two. There is demand for 10 rooms for one night stay for day one – at a Willingness to Pay (WtP) of $100. There is demand for 10 rooms for a one-night stay for day two – at a Willingness to Pay of $200. Finally, there is demand for 10 rooms for a two-night stay arriving day one – at a Willingness to Pay of $300.
