IDeaS: Ideal Pricing vs. Only Pricing: Revenue Strategy Beyond Price
Hospitality experts agree that hotels can’t maximize profitability by managing rates alone. When your revenue strategy only focuses on managing price, you can’t deliver optimal results. Managing only price works well when your inventory is not perishable; however, when it comes to hotel rates, your strategy requires a higher degree of sophistication.
Let’s compare a hotel (with perishable inventory) to an office supply retailer (selling non-perishable goods). When an office supply store prices a product like staplers, there’s really no consideration for how many staplers are in inventory. There are overhead costs to cover and it is priced accordingly. The price for the first stapler sold is likely the same price for the last stapler sold. If the stapler does not sell today, it can always be sold tomorrow.
Hotel rooms are inherently unique in that you do have to sell each room today – or else you’ve lost revenue opportunity. The number of rooms available to sell – and the demand in the market for those rooms – should impact your pricing decisions. A pricing-only approach works well for selling staplers, but to sell hotel rooms and capitalize on revenue opportunities, hotels need an ideal pricing approach that understands the relationship between price, inventory and demand.
So what exactly does a revenue management strategy that goes beyond only pricing need to incorporate? In addition to an analytically-derived pricing strategy, hotels need to consider the varying products or room types they have. Each guest requires different room features; some guests search for a view, some want a certain bed type and others just need more space. With unique demand for room types, your revenue strategy needs to support your customers’ buying behavior.
Ideal Pricing delivers that functionality by analytically determining the ideal price, inventory controls and overbooking strategy for each of your different room types. Many RMS providers claim to do this, but often only provide the ability to manually set rate differentials on each room type. This means you provide all the insightful data…and you still have to set rates yourself. With revenue managers already responsible for managing so many other rates as it is, they should be able to rely on their revenue management system to automatically and analytically do this component for them.
Pricing is important and being able to analytically price by room type is even more optimal. Most hotels have demand from many different segments of business (i.e. packages, qualified discounts like advanced purchase, OTAs, corporate negotiated and loyalty programs). How can you manage the demand for each of those segments in the most effective way?
It’s imperative you price each of these segments – whether that involves setting a fixed price, a flexible discount percentage or an amount off another rate. However, if you can only manipulate price, what additional opportunities are you not capturing?
Taking loyalty pricing, as an example, and identifying guest value to offer guests with an established value at your hotel, brand or chain an additional incentive to book direct. If this incentive involves a discount off the published rate, how do you ensure you’re not offering this discount when demand is high?
When you’re only managing pricing, your options become far more limited. You can reduce the discount to 0%, but then your loyal guest sees that their “special rate” is the same as the published rate without understanding it’s because they are booking on a high demand night. Or perhaps you still offer them a discount – however nominal – but as a result, sacrifice crucial revenue to your bottom line. Both of these don’t sound like very flexible options – and luckily, they are not the only options. A revenue strategy that integrates both pricing and sophisticated inventory controls (like hurdle rates) provides a more flexible approach to manage your loyalty rates.
Let’s say you have two guests with a similar overall value: one is checking in on Monday for three nights and the other on Tuesday for one night. You are forecasted to sell out on Tuesday night and don’t need to offer the loyalty rate of 15% off the published rate. Ordinary revenue management systems will tell you to manually reduce the loyalty discount to protect yourself from those pesky one night stays on peak nights.
However, with a hurdle rate or Last Room Value (LRV), a threshold is analytically established for each night to ensure your hotel captures the maximum revenue over their entire duration of stay. An LRV requires the loyalty rate to meet or exceed its value to be bookable. This restricts the loyalty discount for the guest staying one night, but still offers it to the guest booking three nights. This optimization of pricing and inventory controls also occurs multiple times each day for every day into the future – and doesn’t require revenue managers completing tactical activities, like adjusting discount percentages.
Revenue strategy’s ultimate goal is to price a room that will result in the most overall revenue and profitability for your hotel. The challenge is pricing different rooms, through many different channels, across many different days, to many different types of guests. And let’s face it, your hotel is not selling staplers off a shelf…don’t settle for a revenue approach that focuses only on pricing.