Expedia, Hotels.com, Agoda, these are just some of the providers that assist the hotel industry in managing their risk and maximising their exposure. No business owner likes to see their business operating inefficiently, so in an increasingly competitive tourism market, making sure every room in your hotel or every seat on your plane is occupied can be the difference between a profit or a loss.
But how much can you charge per night? $100 or $1000? To determine the final price the following 6 steps need to be explored:
- Select the price objective – profit or sales oriented
- Determine demand – hotel attributes eg. location, amenities
- Estimate costs – staff requirements and overheads
- Analyse competitor price mix – consider neighbouring properties
- Select a pricing strategy – luxury vs budget accommodation
- Select a final price
The pricing objective often changes throughout the life of a hotel and as such, developing a dynamic pricing model allows each hotel to manage revenue effectively. For a new provider or property, demand is often low and a sales orientated approach to maximise market share is often used – this involves a higher volume of rooms being occupied but at a lower price. The below image is an example of a hotel using an Opening Special discount offer to encourage patronage.
Conversely, as a business matures, assuming demand has increased and a strong customer base has been formed, a profit orientated approach is taken. In peak times, such as weekends or holidays, when demand is much higher than normal, pricing becomes more inelastic and a premium can be charged without compromising occupancy rates. As customers become less price sensitive often sales are harder to come by and discounts for early bookings are reduced. The market has been conditioned to accept higher prices during these times as the perceived value is increased .
Over the past decade, the rise of third party booking services has been both a positive and a negative for the hotel industry. As discussed by USA Today writer Charisse Jones “Over the last five years the commissions paid to those third-party intermediaries have been growing at roughly twice the rate of (revenue) growth”. On one hand, the additional exposure to customers allows for greater visibility in the marketplace. On the other hand, any bookings through these services have rebates and commissions payable by the hotel, reducing the profit of each booking.
Third parties are now a consumers best chance at getting a cheaper rate – not only can we directly compare each hotel side by side, often without excessive bias, but hotels need to provide competitive prices at the detriment of their own profit maximisation.
Another option for consumers to secure a cheaper rate is through Advance Purchase offers. This in turn benefits both the consumer and the hotel as occupancy is guaranteed in advance and revenue can be realised earlier as these offers are generally non-refundable.
Through the use of third parties, advance purchase rates and off-peak sales, hotel managers can more accurately forecast future operational costs. This allows for more accurate cash flow and profit planning with the main goal being the reduction of risk on future revenue.
With high price sensitivity – the hotel industry is still very formulaic for many of the major chains, with large teams of revenue managers closely monitoring the dynamic pricing models that are in place. However, for many boutique suppliers, consumer psychology still plays a large part in their pricing strategy. Some luxury hotel chains may inflate their room rates in an attempt to increase the perceived value of their product and brand. Across the entire hotel industry – it is the dynamic pricing model which allows for the different pricing objectives to be met whether it be profit or volume maximisation.
Student ID: 900209063