Pricing is of decisive importance for all businesses in all sectors.
While setting hotel room prices might seem like an easy step, it’s all part of a bigger game: revenue management. Setting the right price can often make the difference between the success and failure of your strategy and business goals.
In this article, we’ll cover some different pricing strategies used in the hotel industry. Although there’s no “one size fits all” solution when it comes to room pricing, just having a pricing strategy in place can make a huge difference.
First: what is revenue management?
Revenue management consists of satisfying the needs of the highest possible number of customers in the most cost-effective way for the business.
To be more specific, it’s the application of analytics to predict consumer behavior, with the end goal of offering the right product to the right customer at the right moment and price.
The origins of revenue management date back to the 1980s in the USA and the rapid expansion of one of today’s most dynamic industries: airlines.
Airlines recognized how important revenue management is to sustainable profitability in a highly competitive industry. Eventually, the largest players in the hotel industry also introduced the concept into their operations. For many industry players, optimized pricing became key to driving business to their establishments during times of peak demand and high competition. However…
Revenue management isn’t only useful during times of high demand.
A well-implemented revenue management system will also help stimulate demand in low seasons, avoiding cannibalizing rates and price wars with competitors.
That’s why revenue management is ultra-relevant in times of crisis – like the one that’s just been caused by Covid-19.
Pricing strategy – why it’s important
One of the key elements of revenue management is creating optimal pricing strategies for hotel rooms. Even for properties with dedicated revenue managers – prices set without the support of good data and solid analysis won’t be effective at capturing the greatest possible demand.
Creating good pricing strategies is all about getting the most revenue out of each room.
Maximizing ADR and RevPAR are key to sustainable profitability while optimized pricing can help properties protect their customer base in a highly competitive market.
Steps to take before implementing pricing strategies
Before creating a pricing strategy you need to get your hands dirty and investigate.
It’s essential to know the following:
Who is your target audience
Learn who the guests are in your hotel. You should offer prices tailored to the audience that is staying in your hotel.
At this stage, work closely with your marketing and sales team. These departments should have insight on your typical guests since they target them with their activities.
Understand guest demand
Analyze your historical data and identify repeating patterns.
This is one of the best ways to understand your market and adjust prices accordingly. However, that’s not all there is to it. In the following, I’ll cover what other factors should impact hotel room pricing
What are the factors that impact hotel room pricing?
There’s no one-size-fits-all strategy when it comes to the pricing since you need to take into consideration location, property size, competitors, market demographics, as well as the range of other services that your hotel provides.
However, these are the major factors that will have an impact on pricing decisions for most properties:
- online reputation
- operational costs
- social media/review comments
- market trends
- historical data
- competitor pricing and dynamics
- government laws and restrictions
- unanticipated circumstances (hurricanes, volcanic eruptions, or a global pandemic)
Forecasting in revenue management – why it’s essential and tips for improvement
Forecasting was always a domain left to dedicated revenue managers.
But even for specialists, how is it possible to predict the unpredictable? This is especially true in our current situation with a pandemic and economic crisis creating major uncertainty in travel and business patterns.
Until recently, a hotel’s historical data was the most important element of demand predictions. Revenue managers and hotel owners were spending hours on finding patterns and incorporating them into revenue management strategy. Combining historical data with the knowledge of local events and the actions of the competition was a recipe for successful forecasting.
The Covid-19 pandemic has drastically changed this reality. Without real-time market data, forecasting demand is nearly impossible.
To remain competitive in the current situation, hoteliers need to set room prices proactively, according to the most recent possible data. To price optimally for your hotel (and therefore increase occupancy and RevPAR), you need to be able to capture real-time data and follow current market trends.
And right now, these trends are changing from one day to the next.
Tips to improve your forecasting
- Pay attention to market trends
- Take into account events and holidays
- Break it down into segments – room type, business type, customer origin, booking channel
- Historical data (which, as I’ve mentioned might not be as effective now)
- Work with marketing and sales departments
- Monitor competitors (having this knowledge helps, but remember that they may not be pricing optimally)
Historical data vs Future predictions in a crisis market situation
Historical data can only take you so far.
Future predictions are being based on real-time market data at an increasing number of hotel properties. Proactivity in pricing strategy is becoming crucial to success.
Manually detecting market trends ahead of your competitors while factoring in market and competition data is close to impossible.
That’s why revenue management tools, (like Pricepoint) use artificial intelligence and machine learning techniques to scan these data points in real-time. Using this kind of tool can give hoteliers a competitive edge and help in making quick decisions without the need for guesswork. In turn, this can drastically increase a property’s chances of success in an unpredictable market.
10 Hotel pricing strategies for 2022 and beyond
When building pricing strategies, as a hotelier or revenue manager, you always need to take into account the factors that are affecting your business most directly.
However, there are some commonly used strategies that you can adapt to your particular hotel and market situation.
1. Prices based on customer segments (BAR, corporate, groups)
- BAR- best available rate. This can change multiple times throughout the day.
Let’s imagine this situation: in the morning you have 15 rooms free. Later during the day most of them are sold. You have 3 rooms left and most of your competitors are fully booked. Your prices go higher but your available rooms still get booked because there’s more demand than the supply.
Of course, this is a simplification designed to show you why your prices can fluctuate during a single day. This is increasingly common in the hotel industry- and it’s called dynamic pricing.
- Corporate – prices established with business customers. Rates remain stable due to the fact that you will have repeat guests on these accounts.
- Groups – usually offered lower rates as they book more rooms at the same time. Here you can set restrictions, such as dates when it’s not possible to book groups (for example, in high season when you can profit more from individual travelers.)
2. Create and Offer Packages
Creating attractive packages, where the price of the room can be rolled into additional services like stay plus spa treatment.
Usually, packages should be personalized and created for each of your target audiences. Using this strategy you can generate additional revenue by encouraging customers to pay for more than just a room.
3. Rate parity strategy
Using this approach you can maintain the same prices across different booking channels so as not to confuse your clients.
However, as you might know, OTA’s use different strategies to display lower prices than your direct booking channel. These include things like showing prices without taxes or creating discount programs based on the number of bookings made (in the case of Booking Genius).
You can also add value to your direct booking prices to increase the attractiveness of booking directly. That way you don’t have to pay the commission to an OTA. The added value can be free late checkout, drink at the bar, or other similar perks.
4. Discount codes for direct bookings
After receiving a guest who booked via a third party, you can offer them a discount code for any future reservation. You can do it directly at reception or send it via email.
It’s a proven strategy to win over the bookings from OTA’s and increase the number of return visitors who book directly with your property.
5. Length of stay
This price strategy is based on adjusting hotel prices based on length of stay. For example, during a major event in your city, you can introduce a minimum 2-night stay but maintain the same room price. Even though there is increased demand you can avoid raising your prices and capture additional bookings by offering more attractive rates than competitors.
Setting a minimum length of stay can avoid gap nights, where your rooms are empty for one night. As you already know, not selling a room is a lost revenue opportunity that can never be recovered.
6. Cancellation policy
Until now, it was common to have a non-refundable rate that rewarded early bookers with a discount but eliminated the possibility of free cancellation. And of course, there was still a standard rate including free cancelation.
With this approach, you could sell the same room twice without losing money, if the cancelation was made since there would be no need to make a refund.
Right now, as travel restrictions are still in place and government policies change from one month to another, it may be wiser to allow flexibility in cancelations.
Many travelers prefer to book either last-minute or choose the most attractive prices that allow a free cancelation policy.
That being said you might consider a flexible non-refundable rate. These include the discount of non-refundable rates, but give the possibility of changing booking dates without any additional fee.
7. Last-minute offers
You might consider creating last-minute offers when you see that same or the next day bookings are still quite low. Think of this as a flash sale for your room inventory.
Upselling is offering an extra, paid service that your guest might be interested in. Where “interested” is the keyword.
What you upsell needs to be customized to the type of guest you are selling to.
A backpacker who counts every cent in his wallet might not be interested in paying for a deluxe suite rather than a standard room, while a couple staying for a romantic night might be.
You can include an upselling strategy in your pre-arrival email campaigns and train your reservation and reception team to upsell upon guest check-in.
Similar to upselling, only here you sell a complimentary service. As the name indicates these are things which compliment a stay: a massage, a bottle of wine in the room, or an extra tour.
Again, a business traveler might not have time for a massage. But the guest who is staying in your hotel for a week just might.
Include it in the pre-arrival and during-stay emails or at reception upon check-in.
10. Review management: better reviews, higher revenues
It’s important to have a strategy around review management. The higher your rankings and the more positive your guest opinions are, the higher revenues you can bring. Strive to deliver an amazing customer experience, both online and offsite (yes, that includes social media too!).
Create a strategy encouraging your guests to leave a good review, and responding proactively to them. Engage your staff to remind guests about reviewing.
Send emails to your guests post-stay asking them to share their opinions. Don’t hesitate to send a reminder if they didn’t write one (sometimes they didn’t even see the first email).
What is dynamic pricing in hotels?
Traditionally you would set a price for a room and keep it unchanged for days or weeks.
Dynamic pricing is a strategy that continuously analyzes demand and adjusts prices to keep them at an optimal level in response to demand at a given moment in time. This flexibility allows your property to capture the right customer at the right time, and in turn, maximizes revenue.
Finding the optimal price to offer to consumers is the easiest and most effective way for any business to increase profits.
To understand how to effectively adjust price points, companies should run new pricing-sensitivity research and price tests, or invest in technology that can complete that workflow autonomously to make actionable and relevant price sensitivity information immediately available
Technology plays a major role in effectively establishing pricing strategies in a hotel
In these times of uncertainties and unknowns, demand for hotels is increasingly difficult to predict.
That’s where technology comes in handy.
You’ve read above that real-time data is necessary for staying competitive and profitable. You’ve also read that it’s nearly impossible to do it all manually.
You can certainly try but you may not have time to manage other important functions in your hotel and it’s almost inevitable that you will miss other important information. Due to the many competing responsibilities that come with running a property, it’s possible that you’ll commit mistakes when it comes to pricing without adequate revenue management support.
That’s why technology-based revenue management systems should be considered as an essential part of your overall revenue management strategy.
These tools make it easier for you to monitor hotel and market data, as well as the actions of your competitors. They can streamline demand forecasting and suggest the most optimal prices.
With new tools, pricing can change multiple times during 24 hours.
Pricing tools run 24/7/365 and can make effective pricing adjustments even when you’re enjoying time out of the hotel (we all need to disconnect from time to time but that doesn’t mean your business needs to take time off too!)
Some RMS’s like Pricepoint can run on autopilot. This is especially relevant for smaller hotels, where a hotel manager is juggling different departments including revenue management.
- There’s no one optimal price strategy for all hotels, and you need to adapt to your hotel and market situation.
- Before you start setting up prices you need to know the basics: your audience, location, and market data.
- It’s key to work closely with your marketing and sales team l as you create your pricing strategy.
- As much as historical data is important, it’s not enough. To forecast demand in times of uncertainty you need to take into account the current situation, hotel, and flight bookings, real-time data, and the overall market situation to get ahead of your competition.
- Automated revenue management systems incorporating artificial intelligence and machine learning techniques are powerful new tools to support revenue management strategy. It’s nearly impossible to gather all the necessary data manually, and you need the maximum amount of data to set prices optimally and maximize profitability.
Continuing to use manual and fixed pricing in times of unprecedented variability in demand introduces unnecessary risk and can negatively impact long-term profitability and success for any property.