Pricing Is Critical to a Hotel’s Success

The question becomes: how are we making these important decisions and what factors do we take into account? Whether you use a sophisticated price-optimization system or determine your rates manually, it is necessary to make a critical assessment of the information you are using to make and validate your pricing decisions.

Too often pricing decisions are made simply by following the competition’s lead or increasing rates once a hotel has limited inventory. Competitive pricing and available supply are two factors to be considered, but only skim the surface. I will explore some of the factors influencing price and how they may be used to make more effective pricing decisions. Each individual hotel’s situation is somewhat unique with differing internal and external pressures on how they price, but the overarching factors are universal.

Booking patterns
Before looking at external factors, let’s examine some of the key internal factors affecting how we make our rate decisions. We need to have an understanding of where we are before making forward-looking pricing decisions. Understanding your hotel’s business mix and segmentation will help inform the potential outcomes of price changes in the future. If a hotel’s business is primarily group and negotiated accounts, then changes to transient selling will have less of an effect on the hotel than in a hotel that sells primarily transient rates. It also is important to understand each segment’s typical booking window. Changing rates closer in will have less of an impact on segments that book further in advance.

Available inventory
With an understanding of business mix and booking patterns, we can now look at available inventory. Every hotel has a finite number of rooms to sell. The old school method of yield management was simply to increase rates as we had less supply available. There was one critical piece of information ignored in these scenarios: Demand. We can’t talk about supply without considering demand. To have a price change be effective, the demand conditions must be right. If increasing the price, there must be demand to buy the remaining inventory at the higher price point. Decreasing price will not typically increase demand. There may be an opportunity to shift market share with lower pricing, but it is more often than not a small window of opportunity that will not yield long-term results.

Hotels do not operate in a vacuum, so we must consider the market when making our pricing decisions. We should be positioned appropriately in comparison to our key competitors so as to offer a value based on a number of factors including location, product, amenities and services to name a few. The hotel’s direct competitors can vary by day of week, season and market segment. Once we have identified and shopped our competitors, it isn’t enough only to adjust rate based on what they are doing. By doing so, hotels are basically ceding control of their pricing to their competitors.

Demand must once again be considered from a market standpoint. What are the key events and factors that affect demand on any given date or time period? When your hotel has limited availability, is it hotel-specific demand driven by group or market demand driving your limited supply? Do other hotels’ changes to their pricing indicate changes in market demand? If a competing hotel increases their rate because they have limited rooms available, it does not necessarily mean there is enough increased demand in the market to warrant a change in your rates. That said, rate changes by competitors are a good indication of market demand patterns.

Competitive response
Another element to pricing is competitive response. What will happen when we make a change to our pricing? Will the other hotels follow suit? It is important to have a sense of the dynamics of price changes in your market. This is especially vital when decreasing rates. If competition quickly follows a price decrease on your part, you may have lost any opportunity to shift share from competing hotels and more or less driven price down across the market. Having the other players in your market follow your lead is not a bad thing. It is typically advantageous to be the trend leader where you are less dependent on following the competition’s pricing decisions.

Understanding the guest
Any discussion of factors to consider in making pricing decisions would be incomplete without discussing the guest. To effectively price, we need to understand the guest response to changes in rates. How sensitive are our customers to rate changes? Will an increase in rate stop guests from booking? Will a decrease in rate entice guests to switch? The price-optimization tools available today have sophisticated algorithms to address elasticity and price sensitivity. In the absence of one of these systems, an understanding of booking pace and expectations of demand are critical. Whether or not you are achieving the bookings you would expect will help inform whether the customer reaction to a price change is what was desired.

There may be additional factors to consider when making your pricing decisions, but I believe asking yourself these questions will put you on the path to making better decisions:

• What is your business mix/segmentation?
• What are the booking windows of your various segments?
• What is your supply?
• What is your demand (hotel and market)?
• What is your value in comparison to the competition?
• What are your competitors charging?
• What will the competitive response be to your pricing changes?
• What will the guest response be to changes in price?
• What are your expectations of the outcomes of your decisions?

Once you decide to make changes to your pricing, watch the results and make tactical changes where warranted. Also learn from the results to continue to make better choices in the future.