Understanding hotel pricing

For hotel guests, it can be confusing how the cost of the same room, at the same property, can vary dramatically from one day to the next. But there's definitely a method to the seeming madness. Unlike running a convenience store, where you can display the merchandise – all neatly organised on shelves and racks and sit back for customers to walk in, get what they want and pay at the counter, those of us who are in the hotel business, simply cannot lay back and expect to earn maximum revenues. Unlike in a store, where the shelf-life of an item or product may be between a week to a year or more, a hotel room has a perpetually revolving 24-hour expiration cycle. Every unsold hotel room represents a daily loss of revenue. Unlike in a store, where an overstock of certain items could be returned exchanged or given away, a hotel cannot adjust its inventory of rooms, unless they are demolished. No matter how well you try to forecast sales trends, you end up selling a lesser amount of rooms and / or selling rooms at a lesser price than what you planned. Every hotelier will confess that it happens from time to time.

Hotel Revenue can fluctuate for a variety of reasons. Hotels decide how to price their rooms based on many different factors, including the market they are in, special events or holidays that may affect their demand for rooms and the differences in the rooms they have to sell. Unforeseen climatic conditions like an unseasonably wet season, can also drive away hotel guests. Weather can certainly figure into calculations for beach and mountain resorts. If the weather stays beautiful it can whip up last minute demand. The flip side is where a spate of cancellations can follow a bad weather forecast. Other factors like demand, long weekends, competitor rates, security and political situations can constantly put pressure on hotels that plan to operate at maximum occupancy throughout the year. Achieving a constantly high occupancy level is clearing the first hurdle and yet half-the-battle won. Maintaining that occupancy at the maximum possible rate is winning the other-half of that battle. In other words, selling the most number of rooms after extracting the maximum revenue from each room under given circumstances is the primary goal. This is where ‘Yield Management’ comes into play and a skilful revenue manager can help the hotel accomplish that goal.

Basically, it is about how you establish the price you are going to charge for your hotel rooms, and, the process of determining what to charge is called a “yield management strategy.” So what is Yield Management?  It is setting the right hotel room pricing. Simply stated it is where you sell a product or service to the right customer, at the right time and at the right price. Hotels must first fully understand which markets and which segments to target. Unfortunately a significant number of hotels still have not switched their ways of thinking and by not setting realistic leisure rates or corporate rates properly, they put themselves under pressure.

Traditionally, hotels have just looked at how many reservations they have on-the-books, or what competitors are charging and the historical data on occupancy levels the hotel posted in the previous year/s. Thereafter, the occupancy forecast and rate structure for the coming season or year is established, targets are set, performance is measured and corrective measures taken when occupancy goals are not met. These measures are often reactive and include pricing decisions to counter what is perceived to be unforeseen prevailing market conditions. In many cases, the self inflicted wound of dumping or adhoc discounting of rates inevitably then occurs. To many this approach made sense and still does, when room rates are locked in and occupancy is the only indicator of revenue. However, this old forecasting model is largely irrelevant in today’s world of revenue management where dynamic pricing structures is a game changer. Regrettably, a significant number of hotels have not switched their old ways of thinking.

The forward thinking operators may vary the price of a room type based on its popularity on a particular day of the week. For instance, a city hotel may charge more for a standard room with a king-sized bed on weekdays – based on a customer segment of solo business travellers…while a room with two queen beds may be priced higher on weekends when more families and groups are travelling. Some cast the net even wider to get the pricing spot on by extracting data ranging from airline ticket sales to the most popular days being searched on booking sites to accommodation reviews on TripAdvisor. For example, if airline tickets sales are up 15% in the market and / or searches on the website are up 12%, the hotel might consider raising rates.

HSL

•  Share this page