Goal of Revenue Management:
Selling the right product to the right customer at the right time for the right price.
How can a hotel determine what that "right price" should be?
Why a hotel’s pricing strategy is important?
Setting the "right price" is a challenging, never-ending process that is crucial to a hotel's success. Pricing should be rational and fair to customers.
It should address differences in customer demand and segmentation across regions, hotel types, and seasons, contributing to overall customer loyalty.
It should target specific customers and offer them the best possible price/value relationship for their money.
Additionally, a hotel's pricing strategy should help increase revenue.
Pricing is one of the three key processes involved in revenue maximization, the other two being Inventory Allocation and Selling Strategy.
As a revenue management process, pricing focuses on appropriate price setting, offering a broad range of rates to customers.
This allows a hotel to increase revenue beyond what it would make if it offered only one rate to its guests.
For extended stay properties, the pricing strategy should also focus on maximizing extended stay revenue and occupancy.
Extended stay is defined as stays that are five nights or greater. An extended stay brand’s business model is most efficient when servicing extended stay guests, as this requires different service levels and staffing compared to short-term guests (< 5 nights).
In summary, when setting its pricing strategy, a hotel needs to balance the long-term goal of building customer relationships and brand equity with the short-term goal of maximizing revenue. An extended stay brand hotel must also take into consideration the long-term goal of maximizing extended stay occupancy.
How does a hotel set its pricing strategy?
Establishing a pricing strategy is not an exact science but an interpretive process that requires balancing internally oriented needs and information with externally oriented data.
The hotel needs to consider its financial goals and historical pricing while analyzing supply and demand, the relative strength of its product, competitor actions, and customer response to pricing.
The pricing process includes setting both a
Pricing Structure and
Pricing Level:
Pricing Structure involves the number of rates that the hotel offers and the qualifications for each rate, determining when and under which circumstances the rate should be available. For extended stay properties, this also includes determining when to offer price breaks based on the length of stay (LOS tiers).
Pricing Level involves setting the primary price point(s) for the property. For extended stay properties, this includes setting an appropriate benchmark rate for each length-of-stay tier and room pool type.
A hotel needs to develop a pricing strategy for both its transient and group business. While the benchmark rate is the main price point for transient business, group rates are based on a different set of criteria and vary between groups.
What is a hotel's rational pricing philosophy?
Rational pricing forms the cornerstone of a hotel's pricing strategy. To fully understand this philosophy, it’s important to understand the fundamentals of rational pricing.
It involves:
- Market-positioned benchmark rates that reflect customers' price sensitivity and
- Ability to pay, relative to the market.
For extended stay properties, market-positioned LOS tiers based on customer price sensitivity and demand by length of stay.
A rational reason for each rate.
Room pool quoting, which enables reservation sales agents to qualify the room pool before giving the rate and offer the best available rate for that room type.
Seasonal pricing.
Discounting based on length of stay patterns to generate incremental revenue.
What are the benefits associated with a rational pricing philosophy?
The benefits include:
Increased RevPAR (Revenue per Available Room) driven by selling more room nights at non-discounted rates.
Consistency and Price Integrity:
- Rate differences can be easily explained and are relevant to guests.
- Customers are always quoted the best price first, eliminating the need for haggling.
- Competitive differentiation and increased market share.
Increased ability to adjust rates for varying demand times and proactively respond to shifts in demand.
Increased brand loyalty and pricing integrity in the eyes of the customer.
Who should be involved in setting a hotel’s pricing strategy?
The hotel’s General Manager or Above-Property Revenue Management should lead the pricing strategy process.
Participants should include stakeholders from the property executive committee, sales, and revenue management.
These may include:
- General Manager
- Assistant General Manager
- Leaders from these functional areas (local, cluster, and regional):
- Sales Revenue Management
- Front Office
- Finance Regional VP CRST Managed /
- Franchised Regional Vice President of Market Strategy (RVPMS)