Thinking Beyond the Short Term: How to Make the Best Pricing Decisions for Your Hotel. By Fabian Bartnick, Senior Hospitality Consultant for IDeaS Thursday, 15th November 2012
Hoteliers are under constant pressure to maximise occupancy and profit in the face of strong or waning demand.
It goes without saying that the ability to price rooms and services correctly is key to a hotel’s profitability. However, while pricing decisions can seem straightforward on the surface, they are actually very complex and not without significant risks.
Currently in Asia, hoteliers are faced with a number of business challenges associated with softer booking conditions. According to STR Global ‘In year-over-year measurements, the Asia/Pacific region’s occupancy fell 1.1 percent to 67.5 percent,’ and in the case of India, occupancy fell by 2.8%*.
While some hoteliers facing lower occupancy rates may be inclined to offer short term discounts to bring in guests, it is important to remember that aggressive discounting to help stimulate demand can have serious long term consequences.
Consumer behaviour research has shown customers establish a reference price for a good or service based on previous experience, and use this reference price to evaluate whether a future price they’re offered is reasonable or fair. The more and longer hotel room rates are discounted, the more likely that the discounted rate will become the reference price, and the more difficult it will be for hotels to recover their value in the minds of the consumer.
The worst thing a hotel can do in times of strong competition is offer a short term discount to gain an edge over a competitor and then reduce services (to help accommodate for the price reduction) that differentiate its property from competitors.
In order to fight commoditisation brought about by an excessive focus on price, hotels must maintain service levels and a strong brand focus. Every customer that comes through a hotel’s door needs to understand what makes the property different and special, and what makes its brand unique, whether they are a loyal customer or came in because of a discount.
If a hotelier is unable to convince customers that their product is worth more than their competitors’ through “soft” factors beyond price (assuming that hard factors such as location are equivalent), then they’ve become a commodity. Price then replaces the brand, service standards, and physical property as the key driver of purchase decisions.
A strong strategy based on analytics, supported by solid data collection, integration, and quality is essential now more than ever, as competition increases and the global economy continues to face challenges. The basis of accurate hotel room pricing has always been supply and demand and incorporated length of stay, rate management and overbooking management. The reality for the global hospitality industry is that revenue management and dynamic pricing, a competency based on demand, length of stay and product mix, are inextricably linked.
Dynamic pricing is much more than just changing rates according to ‘high’ and ‘low’ seasons. Revenue management systems available now analyse a complex mix of historical, current and future data to determine optimal rates, allowing hotels to price dynamically up to multiple times a day and make the most of their demand.
Hoteliers should look to utilise the data and analytical tools provided by revenue management technology, to determine the best marketing and pricing strategies for the future. If data is collected every day, it will allow the hotel to establish simple booking pace forecasts by segment and day of the week, from which they will be able to compare any historical data. If this is done consistently, it will allow hoteliers to quickly gather any changes when demand picks-up, and enable them to adjust their pricing strategies, and any sales and marketing strategies, accordingly.
There are a range of different factors that need to be taken into consideration when determining how best to implement dynamic pricing strategies. The positioning of key products to key market segments is a vital aspect of dynamic pricing. To enjoy a strong competitive advantage, hotels must gain an understanding of the competition, in terms of both existing and future competitors and what they are offering consumers.
Dynamic pricing requires hotel pricing or revenue management tactics to be a high level combination of inventory control, pricing / channel controls, business intelligence and an automated tool set for setting and resetting pricing, based on rapidly changing market demand. One key part of dynamic pricing is the Best Available Rate (BAR), which is the recommended rate for unqualified business when there is no pre-agreed rate. This is the optimal rate to quote based on the probability of booking the guest and requires the correct balance between demand and price.
Due to its complexity, dynamic pricing is not without its challenges. One of its most inherent and common challenges relates to a lack of clear and consistent data. The BAR is often perceived as the all-important “anchor rate”, meaning the rate has to be positioned correctly at all times, and this can be troublesome.
Using a structured and consistent approach to setting the BAR structure that includes a relationship between price, value, and benefit is one way to face this challenge. The key to a successful dynamic pricing competitive strategy is to minimise deviations and ensure a logical, clear structure that the organisation’s staff, as well as customers, understand. Hoteliers should not underestimate the importance of transparency and rate integrity.
As dynamic pricing continues to evolve and become more complex with its multiple distribution channels, hotels will find greater benefits from thinking beyond the short term.
Hoteliers will have to take into account an increasing number of variables impacting price, demand and, in turn, performance. Every price and promotion strategy should be carefully planned with all stakeholders participating. Key stakeholders should evaluate why the pricing decisions are being made and whether the promotion supports or grows the brand promise.
If the decision is strictly made because a competitor lowered its rate, then hoteliers need to go back to the drawing board - as impulsive pricing decisions that benefit the short term must be replaced with strategic, consistent decisions.
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