LUXURY HOTEL PRICING STRATEGY
LUXURY HOTEL PRICING STRATEGY
By George Smith Last updated
Luxury hotel pricing strategy, more specifically pricing, plays a huge role in any consumer business. Especially in those businesses that hold a seat in hyper competitive industries such as hotels and travel. In the case of hotels, when your competition can be physically right next door, the pressure is always on to get your room rates right – both from a revenue perspective and guest perspective. Providing guests with value for money while trying to maintain profitability and avoid being undercut by competitors (or undercutting yourself) is a complex task that needs constant attention if your hotel is to succeed.
HOTEL PRICING IS DEEPLY STRATEGIC
Hoteliers need to stay proactive when it comes to pricing their rooms. Capturing real-time data and following (or better yet – setting) current market trends, along with your own business trends, is vital for maintaining an optimal pricing model for your hotel.
Adjusting your luxury hotel pricing strategy rates and managing the revenue you win from bookings cannot be viewed as a set and forget practice.
This blog will help explain everything you need to know about luxury hotel pricing strategy and give you helpful information on strategies to use at your property.
TABLE OF CONTENTS
- Understanding room pricing at your hotel
- Establishing a luxury hotel pricing strategy
- 1. Common elements of a luxury hotel industry pricing strategy
- Luxury hotel pricing strategy examples
- 2. Staying on top of hotel price optimisation
- 3. Hilton hotel pricing strategy
- How do hotels determine room rates?
- 4. What causes hotel prices to fluctuate?
- What is dynamic pricing in hotels?
- 5. A dynamic pricing strategy example for hotels
- Pricing hotel rooms: Where you can get help
- 6. The importance of booking performance data
- Tools for business intelligence in the hotel industry
- How you should approach pricing intelligence
- Why you need pricing intelligence software
- 7. Hotel revenue optimisation software
- 8. Competitive pricing intelligence
- Hotel room cost calculator
- The importance of unconstrained demand
- What are rate fences in the hotel industry?
- Summary Items
UNDERSTANDING ROOM PRICING AT YOUR HOTEL
Revenue management and room pricing can become very complex very quickly. When you aren’t a professional revenue manager it can seem overwhelming. The temptation to look no further than the simple room pricing you’re already employing may be hard to resist. The skills required tend to transcend many areas including technology, customer service, finance, and more so it can be very hard to feel like you’re covering all the bases and staying on top of your pricing. Such is the fickle nature of the market, prices can (or should) change not just every day but sometimes every hour depending on demand. This is the kind of agility property managers and/or revenue managers are faced with achieving.
However, that doesn’t mean effective room pricing is out of reach unless you do have those skills. There are plenty of methods less experienced hoteliers can use when they don’t have the bandwidth to become or hire a revenue manager. Pricing your hotel rooms is about getting the most revenue possible out of each individual room. Don’t think about what the room is worth; think about how much value you can get out of it – the guest will often be prepared to pay more money than the flat-rate if they sense an opportunity to get a little extra benefit.
Occupancy also plays a role in the way you price your rooms. After all, an unsold room achieves nothing so pricing your rooms to maximise occupancy can often be a better tactic than pricing rooms to maximise profit on them individually. In a highly competitive location, it’s sometimes necessary to lure guests in with lower rates. At least then you have the guests, and your competitors don’t. You can then find ways to gain more revenue from the guests through other services offered at the hotel.
Every hotel has its own unique room pricing considerations depending on:
- Market demographics
- Level of competition
- Type of service offered
Unfortunately there’s no one-size-fits-all, so the advice offered in this blog should be adapted as you see fit to your specific business.
ESTABLISHING A LUXURY HOTEL PRICING STRATEGY
Crafting and executing your luxury hotel pricing strategy requires you to do more than establish rates for your rooms during particular seasons. You’ll want to go beyond that – optimising your pricing strategy so that you maximise the revenue that you generate per room and per guest. There are a number of questions that should surround your pricing strategies:
- What do your guests want?
- Which strategy will complement the business mix?
- How will different strategies affect connected channels and distribution partners?
- How does your strategy integrate with your channels?
- Who are the experts that can help determine the right strategy?
Let’s take the first question as an example. Certain guests will prefer or be accustomed to particular pricing methods. For instance, some may like a cost breakdown of their stay by day, while others are happy with a rate for their entire stay. This is where either Daily Pricing or Length of Stay pricing strategies might come into play.
Sometimes you can spend far too long trying to understand the strategies of your competitors, asking:
- When are they increasing their rates?
- Why are they decreasing their rates?
- How often do they discount?
- Are my rates on par?
- Is my hotel offering value for money?
Competitors are certainly not the only factor that should influence your hotel’s room pricing. Often it’s better to look at competitors after you think you’ve priced your rooms to advantage and then adjust as needed.With the increased availability of real-time marketing data, it’s entirely possible to design a multi-tiered dynamic pricing strategy that can change at a moment’s notice. With accurate prior knowledge you can easily.
- Optimise your room rates
- Understand how competitive your room pricing is
- Increase your chances of being booked online
- Use the market to your advantage, rather than be dictated by it
Technology can also play a major role in accurately and effectively establishing pricing strategies at your hotel. Pricing and business intelligence tools make it much easier for you to monitor the market, track competitors, collect data, forecast, and make quick adjustments.
With all that in mind, the first priority of pricing should be forecasting. This way you can predict demand so you can get travellers to book early. Then you can raise rates later as availability drops and demand increases. (This is an ideal pricing structure known as the “ascending model” whereby pricing increases closer to an arrival day.) There’s no pricing strategy that is perfect for any hotel. Each property must consider the pricing strategy, or strategies, that work best for its particular brand. A revenue manager will spend a lot of time analysing data and other influencing factors to ensure the business is operating with the best possible chance to maximise income.
1. COMMON ELEMENTS OF A LUXURY HOTEL PRICING STRATEGY
As discussed, each individual property will have a pricing strategy that works for them but there are common practices across the industry that can be applied to your business. Dynamic pricing is often discussed, and we’ll example that later. There are many other, however. Here’s a list of the most common pricing strategies your hotel might find useful:
Open pricing defines the flexibility hotels around the globe have to set their prices at different levels depending on the various target markets and distribution channels they deal with. This luxury of choice allows hotels to forecast more accurately. For example, a high-end hotel may usually attract guests who no budget constraints but in the off-season bookings will drops and the hotel can drop rates to attract travellers who normally would not be able to afford the stay. While the average daily rate of the hotel will be lower, occupancy will remain steady and revenue will continue to turnover.
You can set your room rates higher than the local competition while also offering more extras in the basic package. This gives the illusion that the hotel offers a premium experience that focuses on value rather than just low rates.
Used in slow seasons to boost occupancy by dropping base rates. Revenue can be made up through other services in the hotel.
PRICE PER SEGMENT
Offering the same product at different prices to different types of customers. E.g ‘family rate’.
LENGTH OF STAY
When demand outweighs supply, it can help to implement a rule where guests are ‘obligated’ to stay a minimum number of days. In such cases, lower rates may not be necessary.
Basing your rates off brand strength and reputation.
Positioning yourself as the cheapest in the market. Be mindful of how travellers will perceive your hotel – you need to retain the opportunity to sell at higher rates.
Positioning your hotel among the most expensive. Price leaders often achieve among the highest profitability, however the consumers need to clearly understand the reasons that they would pay more for staying at your hotel. Most hoteliers would agree one of the most pressing issues they face is trying to keep up with their peers and staying on top of their hotel pricing strategy in a hyper-competitive market. The travel industry is so dynamic, a matter of months can see you fall behind the latest trends. The figures you glean from your competitors will help you manage your yield as you can increase your average daily rate (ADR) and revenue per available room (RevPAR) by comparing your live minimum/maximum rates against your competitors’, based on length of stay (LOS).
With new innovations seemingly rolling out every week, it’s hard for hotels to know where they stand or what solutions they should be employing to stay relevant and profitable.That’s why it’s important to have an airtight revenue management system which is based on real, up-to-date market intelligence. This is equally as important to small hotels and independents as it is to big hotel groups.
LUXURY HOTEL PRICING STRATEGY EXAMPLES
The method you use to to price your rooms can be extremely diverse depending on what you focus on.
For instance, there are three major formulas you could use and they all have their strengths and weaknesses:
- Cost Based Pricing
This involves adding up all the costs of running your hotel from admin, to cleaning, to food and beverage etc. Then, when you determine how much profit you want to make, add a markup to each room. Fixed (costs that aren’t dependent on how many guests you have or how many rooms you sell) and variable (costs that do change in response to guest numbers) costs need to be taken into account so the list of expenses can get quite extensive, but the approach is relatively simple. So, if the cost of running your hotel is equal to $10,000 every month, the profit you add on top will give you a total amount. You can divide this figure by the number of rooms you can rent and price accordingly. This strategy is logical and simple but not very conscious of competition.
- Customer Based Pricing
Customers pay no heed to your underlying costs, they wouldn’t really have a clue about how much it’s costing you to open a room for them. They pay based on what they think the room is worth. So the perceived value of your room could be much higher than what it costs you – or lower. Guests care about the value and benefits you can give. Their perception of value often comes from the connection they feel to your brand and social proof. Rave reviews that promise wonderful memories means the perceived value of your hotel will increase. So even though your rooms haven’t changed, you could raise your rates. This strategy has the potential to deliver very high profits and is very flexible around demand, however it won’t always be effective if demand drops or customers do a lot of research and see much lower prices at a similar competitor.
- Competitor Based Pricing
It’s unlikely that you will be the only hotel on the market so it pays to see what others are doing. Completing an assessment of all your competitors can allow to to make an accurate judgement on how to price your hotel. There may be opportunities to increase bookings at your hotel by charging an acceptable rate for your business that is still lower than competitors, or you can increase profits by charging higher rates because your offer is superior. This is a good strategy is areas of high competition but be careful to avoid pricing wars that just chip away at your profit margin. It’s probably more common that using a combination of all these methods will provide you with the best results, rather than sticking with one.
2. STAYING ON TOP OF HOTEL PRICE OPTIMISATION
The ability to stop and think, and ask probing questions, is one of the best assets when it comes to pricing your hotel. Optimising means assessing performance, exploring new ideas, and making adjustments for better results.
Here are 5 questions you should be asking yourself about your hotel’s pricing strategy:
- Are we actively monitoring our competitors’ rates?
First and foremost, as a revenue manager, you should always know the rates that are being offered at competing hotels in your local area. This allows you to make the right decisions when it comes to pricing your rooms to attract more travellers to your property. You can value match your competitors by pricing your rooms at the same rate as your competitors, or even slightly higher. In the event of high demand, this gives you the competitive edge while also allowing you to earn additional revenue.
- Are we running local promotions to increase occupancy?
Monitoring events and activities in the local area can help you design promotions that attract travellers. For instance, if a festival is planned for your community and you know that hotel rooms will sell out, create a promotion in advance that offers guests the lowest rate in town. This allows you to sell your rooms out as quickly as possible, because you have the best price available. Once you have your guests booked, focus on selling them extras that allow you to increase your revenue per room.
- Are we analysing current market conditions in real-time?
The revenue manager should be responsible for evaluating real-time data on a regular basis — sometimes multiple times per day — to evaluate the immediate pricing strategy. Room rates can be changed hourly, if necessary, particularly if there’s an unexpected spike in demand.
- Are we increasing bookings during traditionally slow periods?
If you’re located in a summer travel destination, then you know that the off-season can be a slow time at your hotel. Design a pricing strategy that encourages people to book your hotel when they might not typically think of travelling.
- Are we prioritising last-minute sales of available rooms?
All of the statistics and studies are showing the same results right now – mobile bookings are on the rise, and they will only continue to increase. It’s important to note that most mobile bookings happen more frequently at the last minute.
3. HILTON HOTEL PRICING STRATEGY
The majority of rooms owned by Hilton Worldwide belong to upper upscale and upscale pricing categories. Accordingly, the type of pricing strategy adopted by Hilton Hotels & Resorts can be specified as premium. A premium pricing strategy involves charging high prices for products and services that are perceived to have excellent quality and include additional features. Hilton only offers five star and four star rooms so the company is able to charge guests at premium levels because beyond the core room, Hilton also ‘sells’ a set of intangible benefits such as sense of achievement, high social status and luxury. Recently Hilton announce a new customer-centric pricing model which provides guests with added flexibility if they want to pay for it. It’s targeting guests in search of later check-out times, later booking cancellation windows and more.
HOW DO HOTELS DETERMINE ROOM RATES?
As we’ve seen so far, there are countless factors that will influence and help you determine your rates. Internal factors such as expenses – taxes, wages, supplies, cleaning, refurbishment – mean there’ll be a minimum price you must set to break even on your business each month, quarter, or year. External factors such as the season, competitors, and events mean you’ll have constant work to do adjusting your rates. However, even larger industry trends may supersede any of these factors. Google produces 500 million results when asked ‘Is travel getting more expensive?’. Unsurprisingly, the first 10 results are solely dedicated to the price of flights. Panicked headlines from global news organisations warn travellers about the rising costs associated with travelling by plane, thanks to increased fuel costs and the subsequent pressure on airline profits. One of the difficulties for airlines is knowing how to factor in the increasing fuel costs. Passing the increases onto travellers by raising ticket prices is one of the few options available to them.
4. WHAT CAUSES HOTEL PRICES TO FLUCTUATE?
Although hotel pricing has less to do with barrels of crude oil, airline prices could still impact supply and demand for hotels, the most common reasons for the fluctuation of hotel rates. As we all know, supply is how much of a service the market provides and demand is how much of the market wants to pay for it. While it would be too simplistic to say fluctuations in hotel room rates can be solely down to this theory, it’s a great place for hoteliers to start because economists have long believed the best way to allocate resources – in this case hotel room prices – is to let supply and demand decide.
Beyond your location and online reputation, your hotel’s room pricing will be affected by:
- The time of year – Is it peak or off-peak season? If it’s a quiet time you can lower your prices to coax more guests in. If it’s the height of your busy season and hotels locally are becoming booked up, you can afford to charge your guests more. It pays to obsess over long-range weather forecasts too.
- Your types of available rooms – Different rooms will require different pricing and this is where you can get creative with your packages and offers. A good channel manager will allow you to sell the same room in different ways across all your connected online channels – for example, a ‘deluxe suite including breakfast & local walking tour’ vs. ‘deluxe suite room only’. The possibilities are endless – almost.
- Any major events in the local vicinity – Knowing what’s happening in and around your hotel is crucial to pricing rooms accurately. If you’re a hotel in Melbourne and you know the Australian Open tennis tournament comes to town every January, start looking at your competitors’ prices early. Track the pricing trends and be strategic – you could be winning the business of the world’s biggest sports fans or leaving valuable revenue on the table.
WHAT IS DYNAMIC PRICING IN HOTELS?
Dynamic pricing involves changing room rates daily or even within the day based on real-time market data – which can only be executed effectively with an automated tool. Many hoteliers change their room rates on the weekends and believe this to be a form of dynamic pricing, but this is not the case. Dynamic pricing is truly agile pricing – frequently optimising rates based on market changes, but monitoring competitors’ rates and keeping tabs on upcoming events in your area is very time consuming to do manually. This is why it’s best done with the help of a tool that can gather market intelligence and suggest optimal pricing for you. Taking supply and demand into account, prices should fluctuate regularly if you want to maximise revenue. This pricing option is well suited in today’s market and is one many hoteliers opt to use.
5. A DYNAMIC PRICING STRATEGY EXAMPLE FOR HOTELS
Put simply, there will be days where supply and demand will be very different depending on the time of day. In the morning you may have lower rates because your occupancy is low, as is demand. However, by that evening supply may have reduced and demand grown. Many factors can drive this, such as competitors putting up their no-vacancy signs or setting rates slightly too high, or travellers arriving late for events the next day and so on. You can raise your rates to take advantage of the shifting market and earn more revenue than if you’d kept your rates static.
PRICING HOTEL ROOMS: WHERE YOU CAN GET HELP
The best tool to help price your hotels is data and often the only way to get enough data, or get accurate data, is by using technology solutions. Real-time market intelligence tools for the hotel industry help accommodation providers make better room pricing decisions based on accurate market data. Specifically, this means more effective revenue management as you can increase your average daily rate (ADR) and revenue per available room (RevPAR) by comparing your live minimum/maximum rates against your competitors’, based on length of stay (LOS). With things like room-rate comparison tools, hotels have the ability to analyse their local competition and respond to demand – up to one year in advance.
Here are five reasons why your hotel need a room rate comparison tool:
Reason 1: You can understand the demand for your rooms among your target markets. You can see at a glance when your hotel rooms are in highest demand, and when you typically experience less bookings. This information allows you to create a hotel room pricing strategy to maximise your profits year-round.
Reason 2: Hotel business intelligence highlights how you measure up to your competitors. Ultimately, the main purpose of a room rate comparison tool is to do just that — provide you with valuable information about what other local hotels are charging for their rooms. With this information on hand, you can make slight adjustments to your rates that may give you a competitive advantage in the market.
Reason 3: It provides accurate, instantaneous data to help determine hotel room pricing. A room rate comparison tool not only showcases the most recent information about room rates in the surrounding area, but also collects data and gives you the opportunity to generate reports. These reports will provide information about room rates and hotel room pricing trends that are taking place in your destination and across the industry. With these reports in hand, you can make informed decisions about when you need to raise or lower your room rates.
Reason 4: It notifies you of rate changes in the market. Notifications serve as instant reminders when there are changing trends in the market. The best part is, you have the ability to determine your own rules for when you should be notified of these updates. This means your room rate comparison tool is going to work to the advantage of your specific property, allowing you to accommodate local demand and competition within your specific market.
Reason 5: It simplifies the forecasting process. Forecasting can be an overwhelming and cumbersome process, even for the most experienced hotel operator. Given this fact, you may opt to avoid forecasting for fear of making mistakes. With the right room rate comparison tool, however, long-range forecasting is much easier.
6. THE IMPORTANCE OF BOOKING PERFORMANCE DATA
Combining your business intelligence tool with a channel manager enables you to access crucial data in the form of a Booking Performance report. Included in this analysis on your channel mix, allowing you to see which booking channels are most valuable to you, and allowing you to find ways to maximise revenue from every guest booking. Given the current status of travel in particular, you need to be at the forefront to know when and how to change your distribution mix and adjust quickly.
TOOLS FOR BUSINESS INTELLIGENCE IN THE HOTEL INDUSTRY
Business intelligence tools give you the capacity to make better decisions at your hotel. With technology solution, you’ll have all the information you need to be confident that the strategy you put in place will work. Business intelligence tools even analyse the data for you to present digestible and actionable points.
If you hear yourself saying any of these 10 things, you could benefit from using a business intelligence tool…
- “I don’t have rate visibility”.
Where do you keep all of your rate data? How quickly can you find what rates you are selling at – across all of your booking channels, including your own website?
- “I don’t have the budget for revenue management technology”
Remaining competitive and profitable doesn’t have to come with a huge cost. Plenty of BI tools are affordable and flexible.
- “I have no time to monitor third party sites and check for accuracy”
Manual revenue management means that to get visibility, you are monitoring multiple 3rd party sites. This is time-consuming and not always accurate.
- “I already have a competitive edge”
While pricing should never be the only way to differentiate yourself from your competitors, with all things being equal, price plays a big part. And there’s no way to ensure that your offering is truly competitive without clear visibility into what your competitors are offering.
- “I don’t have access to the right amount of reporting for my property”
Generating a report out of manually-compiled rate data to benchmark against your competitors is difficult enough. By the time you’ve created the report, the data is likely to be out-of-date.
- “I’m not sure how to tailor my pricing strategies during peak and off-peak periods”
You need to know what to set your rates at, and when – especially during peak and off-peak periods. But without real-time market data, forecasting demand is nearly impossible.
- “I am only focused on ensuring my hotel’s profitability”
You need to ensure that your hotel business remains profitable, and when you undersell your hotel’s products, you leave money on the table. The market fluctuates so frequently that without a way to keep track of it all, you won’t be able to react fast enough.
- “I find forecasting tricky and it makes me look bad”
The stakeholders that you report to expect you to be able to forecast demand accurately, so that you can explain the reasoning behind how you price your inventory.
- “I don’t have the time to keep learning to use new systems and technology”
Many rate management tools are too complex for your hotel’s needs. The end result is that you are never able to truly master it.
- “I have so many targets to meet and I need help achieving them”
Among many other things, you have an ADR, RevPAR and Occupancy target for the quarter that you need to meet. The only way to hit these targets is through accurate rate forecasting.
HOW YOU SHOULD APPROACH PRICING INTELLIGENCE
Many properties will build plans and strategies based on historical data. This is certainly useful for a general long-term forecast but it could lead you into trouble, causing you to miss key information that could help you maximise revenue. You don’t want any gaps in your business. Key factors such as online reviews, social media comments, competitor pricing & dynamics play a large role in deciding business pricing strategy – not only acting upon historical market or business trends.
Some key issues on only using historical pricing strategies include:
- One dimensional strategy that misses out on key information that can maximise sales
- All market players will have access to the same information, meaning it doesn’t give you any sort of edge over competition
- May cause you to ignore vital factors such as online reviews, social media perception, competitor pricing and market behaviour
- Doesn’t react to less traditional or predictable markets
- Risk involved with confusion in short term & long term strategy
It’s recommended you combine historical data with real-time data as the year goes by so you can be agile when it comes to pricing. The market can shift quickly and fluctuate many times during a day, week, or month. Relying on averages means you’ll miss opportunities to gain extra revenue, putting you behind competitors in the long run.
WHY YOU NEED PRICING INTELLIGENCE SOFTWARE
Essentially, pricing intelligence software is the only way to be sure you’re making smart decisions based on accurate, current data. There is pricing intelligence software that’s designed with busy hoteliers in mind, solving many of the time-consuming issues that hotels encounter every day.
Here are some ways your hotel will benefit from using pricing intelligence software:
- Know the market demand for your hotel business up to one year in advance
- Optimise your room rates and maximise your profitability – easily
- Be in control to make smart decisions for your hotel business and take fast action
- Save time and effort involved in monitoring multiple sources manually
- Understand how competitive your room pricing is
- Increase your chances of being booked online
- Long range room rate forecasting
- Rules and notifications for price changes
An added benefit of pricing intelligence software such as what is offered by SiteMinder, is that you can set notifications and alerts. They help keep you up-to-date and, crucially, ahead of your competition. Think of them as an important decision-making department. You can set your own rules and receive email alerts when market pricing changes and demand conditions fluctuate. The alerts allow you to react to any factors that might impact your room rate strategy. This puts you in control to make quick decisions based on accurate real-time data.
Room pricing software should be an essential cog in the machine that is your revenue management strategy. It’s an innovative tool that analyses hotel pricing trends, current market conditions and local competitor rates so you can take a more expert approach to the rates you set for your hotel rooms. At the same time, the best tool will help you simplify your strategy and adapt its application to other hotel technology solutions that you use. Using a pricing intelligence tool means you can easily track the rate activity of your local market, maintain parity across all your channels, and then use your discretion to make changes. Long-range forecasting is also vital to ensure what level to set your rates at, and importantly, when. Without real-time market data, this is impossible. But with this capability, you can be clearer in the logic behind your room rates.
7. HOTEL REVENUE OPTIMISATION SOFTWARE
Using multiple pieces of software to inform and support each other means you can get even more out your pricing strategies and overall revenue management strategy. For example, with a channel manager you can connect to as many online channels as you want, including online travel agents, your own booking engine, and a GDS. While you may be satisfied with the amount of bookings you receive, how can you be confident the revenue coming in is maximising your profit? Setting rates, trying to collate data, and analyse your revenue management strategies can be difficult and time-consuming, and that’s without taking into account the risk of inaccuracy when you do it manually.
That’s why you should strive to inform your channel management with a pricing intelligence tool. With a business intelligence tool and channel manager you can gain insight into your competitive market and channel performance. The technology makes the information digestible so you can quickly identify opportunities and action anything you need to in the short-term. Long-term you can get a much better grip on demand and forecasting, allowing you to maximise occupancy and revenue. To take full advantage of your channel manager, you need to be agile and change your rates hourly if necessary, depending on what time of day, month, or year it is. With the up-to-the-minute data you get from a pricing tool, this poses no issue for you and your revenue will always be in line with your targets. With this data behind it, your channel manager becomes an even more powerful tool.
Data sets and reports are another feature available on pricing optimisation software. Generating and analysing reports is extremely important for future revenue plans. Each of your distribution channels will differ slightly (or significantly) in terms of the business they receive. Different segments may also display varying booking behaviour, the patterns of all travellers are not going to be the same. By looking at this data you can identify the different periods when certain channels are more or less popular and put your own strategies in place. Getting your reports from this tool is also a lot quicker, meaning it’s more likely to be current.
8. COMPETITIVE PRICING INTELLIGENCE
Hours – and in some cases days – can be lost trying to understand and stay ahead of a competitor’s room pricing strategy. When do they increase rates? How often do they discount? Are your prices on par? Is your hotel offering value-for-money? So many questions. So few answers. And so little time. How can you use revenue management strategies to get ahead in today’s increasingly competitive landscape? By keeping a close eye on the local competition. Among other things, your hotel should be monitoring the room rates of your competitors so you can see just how competitive your pricing is and react in a timely manner when needed.
Here are a few examples of what you can do with the information at hand:
- Value Match Competitors
One of the ways you can use competitor pricing to increase your hotel’s revenue is by matching them on price. Set one room rate at the same price point as competitors, and set another room at a slightly higher rate. This allows you to attract deal seekers without sacrificing the opportunity to make a slightly bigger profit. Keep in mind that value-for-money is the key point here – value-matching goes beyond bringing your hotel in line with your competitors’ rates or simply making your hotel rooms cheaper.
- Run Effective Promotions
Continuing with the idea of value-for-money, promotions are one of the best ways to keep up with, and stay ahead of your competition. When you notice your competitors are doing it – probably in the lead up to an event in your local area – find out what their rates are, and then set your rates at the lowest price possible to draw a crowd. This is your opportunity to be proactive and truly get ahead of the pack. Look at the details of the room offers. Do they include breakfast? How many nights is the special rate on offer? Are there any spa or restaurant incentives factored in? Think about how your hotel can give guests that little bit extra. A word of caution, though: you should only do this in short promotional bursts so your hotel isn’t perceived as low-quality or constantly discounting.
- Meet Market Demand
Monitor your competitors’ rates to look for signs in the market that indicate demand is increasing and inventory is getting booked out. Then you can react accordingly. For example, when your competitors increase their rates or you notice their rooms are closed out, increase your own room rates to make sure you’re not losing out on revenue and profit. You can read more about the science of supply and demand in our recent blog.
- Maximise Midweek Bookings
While discounted promotions are great, they rarely sell enough to offset reduced revenue. Instead, look at your competitors’ rates and add value to increase midweek bookings. Create and promote special packages which offer additional services. Think clearly about who your weekday audiences are. We recently wrote about attracting midweek guests, with some great tips for boosting revenue during quieter times. Did you know that for a two-night stay it’s likely your guests will travel about four hours’ drive from your hotel’s location? You can read more on this, here. Another great approach is collaborating with tourist attractions locally and submit advertisements or editorial to newspapers and websites in population centres within the vicinity promoting midweek breaks that include bus tours, wine tasting trips, or a concert.
- Sell Stressed Last-Minute Inventory
Data from Hotels.com shows that 50% of travellers who book via mobile devices do so for last-minute or next day stays. This trend represents a huge opportunity for hotels to sell their very final rooms, right up to the last minute. By monitoring your competitors’ rates in real-time, you’ll be able to make the right pricing decisions to ensure those final rooms are sold without compromise. The best way to do this is through a pooled inventory system via a channel manager. A seamless two-way connection to your hotel’s various booking sites is key to ensuring the constant flow of information is reliable.
Bonus Tip: Understand the importance of real-time data
Without real-time data, you won’t notice competitor rate changes – or by the time you do, it will be too late to respond in a way that maximises your own hotel’s revenue. Having real-time data allows you to assess the level of live demand in the market so that you can react faster, and more accurately – whether it’s increasing your rates or lowering your rates and putting promotions out.
HOTEL ROOM COST CALCULATOR
Adopting a cost-based pricing model will help you figure out how much each of your hotel rooms will, or should, cost. It’s a simple formula but may not always be so easy to calculate. You need to add up all the costs of running your hotel and divide it by the number of rooms you have to sell. This will give you an average figure for each room, meaning you should charge at least that much to break even. The reason it can be a complex process is that your hotel is likely to have a lot of expenses, some fixed and some variable. Collating this list may take some time.
Fixed costs include things such as taxes, staff wages, utilities, and maintenance. They’re fixed because the amount of guests you have at your hotel shouldn’t impact them.
These include things like food, beverages, supplies, and amenities. They’re variable because the number of guests you have will probably impact them directly.
For example, if fixed costs equal £5,000 and variable costs are £50 per guest/room. With 40 rooms the average cost works out to be around £150. To profit, you either need to set your rates higher, reduce costs, or produce extra revenue from guests through other services.
THE IMPORTANCE OF UNCONSTRAINED DEMAND
Unconstrained demand refers to the maximum bookings you could get with unlimited rooms based on demand and not limited by the actual physical inventory. It’s your total demand for a particular date irrespective of your capacity. . You should identify when unconstrained demand is above the capacity of the hotel. This is an important part of your hotel revenue management strategy. It will help you calculate your Last Room Value for certain dates, and possible length of stay restrictions. Once peak periods are detected, you can start regretting low paying business. Historical data capture will help to calculate potential unconstrained demand. It is possible to develop manual tools which would help to identify those periods, such as with excel. When it comes to maximising your hotel’s revenue, supply and demand is a principle that should be cleverly implemented. Strategic control of your hotel’s inventory is the name of the game to engage revenue management disciplines.
WHAT ARE RATE FENCES IN THE HOTEL INDUSTRY?
Fences are rules that apply to room rates. It means that to secure a certain rate the guest will have specific conditions applied to them. One such example might be a minimum stay length. If the guest wants a discounted rate they might be required to stay at least two nights. By that example, the cheaper rate is ‘fenced’ off from those guests who only want to stay one night. Potential guests need to feel that they are buying different products when they pay different prices. Rate fences are the elements that can help create this differentiation. Rate fences are commonly used to prevent customers who are willing to pay a higher amount, to have access to a discount.
The most common types of fences include:
- Physical fences – These include features such as the location of the room, the view, furniture, amenities, size, etc. Some segments will be willing and able to pay more for rooms with a great view, while other segments will prefer to forgo that view in return for a lower rate
- Transactional fences – These involve time, place, quantity of purchase and flexibility of use. An example can be non-refundable rates. It’s likely that non-refundable rates will not be attractive to a corporate guest but a more price-sensitive leisure guest might prefer a non-refundable product if the price is lower.
- Buyer characteristics – These regard attributes such as age, affiliation to an institution or group and frequency or volume of consumption.
- Controlled availability fences – In this case, availability and price points are assigned based on geographical criteria or distribution channels. For example, charging different prices according to the customer’s place of residence.
Applying fences the right way can make your business more successful and give you a competitive edge.
- Pricing your hotel rooms is about getting the most revenue possible out of each individual room
- An unsold room achieves nothing so pricing your rooms to maximise occupancy can often be a better tactic than pricing rooms to maximise profit on them individually
- Pricing considerations include location, size, demographics, competition, type of service
- Think about what your guests want, how your strategy integrates with the rest of your business, and who can help you determine the right strategy
- Pricing and business intelligence tools make it much easier for you to monitor the market, track competitors, collect data, forecast, and make quick adjustments
- There are numerous pricing strategies you can use, many at the same time, to maximise profit at your hotel
- Think about using a combination of cost-based, customer-based, and competitor-based pricing
- Supply and demand is the biggest factor to consider when determining rates
- Real-time market intelligence tools for the hotel industry help accommodation providers make better room pricing decisions based on accurate market data
- Unconstrained demand refers to the maximum bookings you could get with unlimited rooms based on demand and not limited by the actual physical inventory
- Fences are rules that can apply to room rates