5 common Revenue Management pricing mistakes and how to fix them

While this is a significant part of our role, it's easy to overlook the in-depth analysis that underpins each pricing decision to get to the sticker price.

If you get too fixated on solely pricing, it can be very easy to lead your hotel astray and deliver sub-optimal revenue outcomes.

There are countless pitfalls you can wind up in when it comes to finding that perfect price-point. In this article I’m going to give you 5 that I see most often.

Mistake 1: Defensive overpricing

How many times has this happened to you?

A big event is announced. Pressed for time, you put in a dummy $999 price to deter bookings (as in the image below), and create some breathing room until you can come back and put in a more logical pricing strategy.

This is a big rookie mistake for many reasons, but here are the key reasons why this isn’t a substitute for a real strategy:

• A hotel’s BAR or RACK rate isn’t always the only rate a revenue manager has to worry about. Think of all of the flat, static, and negotiated rates that don’t move in tandem with a $999 RACK rate.

• Raising your rate to an unrealistic deterrent often creates a “challenge accepted” scenario with shoppers. If demand is high enough, expect a defensive rate such as this to push prospective guests to book unconventional booking channels. It’s not uncommon to see a major uptick in points stays/redemptions, flat LNR rates, and other accounts with Last Room Availability.

In short, what was usually intended as a quick, time-saving method for guarding inventory can actually create more headaches unless a flawless yielding strategy is also implemented.

But, paradoxically this takes just as much time as simply pricing the hotel correctly from the start.

The fix:

Slow down, and take the time to implement a holistic strategy that includes a realistic price point, logical yielding, and realistic policies to avoid throwing down the gauntlet with prospective guests.

Mistake 2 - Pricing decisions based on an improper competitive set

This mistake is almost so basic that you may be eye-rolling already, but think about all the ways in which we build competitive sets, or compsets that might not serve our best interest.

As a revenue manager you may find yourself pressured to compare against other hotels that obviously should not be in your competitive set.

Maybe over time your compset has seen the addition of hotels that are not even the same lodging type.

For example, adding an economy extended stay property to your compset while you are an upper-midscale select-service property - this is an all too common mistake that can lead to sub-optimal pricing decisions.

I know that we, as revenue managers, are competitive and always pushing ourselves to win out over as many other hotels as we can.

But, pause. Take a step back to ask yourself: “Is my compset realistic?"

The fix:

Be realistic with your primary compset - but use your secondary compset for that “stretch” compset. This is exactly why we created the “secondary compset” feature in Rate Insight: to allow you to keep an eye on those competitors that might not be a perfect match, but are still important to you.

This leads us right into mistake #3 which is…

Mistake 3: Not reviewing your rate shop compset at least yearly

This is closely related to mistake 2, but has some subtle differences. How many times have we as a revenue manager inherited a hotel assignment, and then simply picked up the reins without asking any questions about the compset?

Or perhaps you’re in a market with explosive growth over the past few years (such as Dallas or Nashville), and simply haven’t taken the time to assess whether new supply is a threat?

There is a good chance that if you haven’t modified or updated your compset in the past year, more has changed than you may realize: new supply, brand conversions, and renovations are all valid reasons to consider brushing up your compset and re-evaluating where you stand.

The fix:

Mix up strategy meetings at least 1 time per year to review supply changes in your market and change your rate shop competitive set accordingly

Mistake 4: Not factoring marketing mix when making pricing decisions

Market mix should always be top of mind when making any revenue management decision. But, one of the most common pricing mistakes I see is making pricing decisions in a vacuum, separate from the realities of market mix.

Here’s a classic scenario: a revenue manager raises rates far beyond a reasonable amount because of a large amount of blocked groups. Then, the groups hit their cut-off date and either cancel entirely or wash heavily leaving the revenue manager to panic and drop rate in an attempt to fill the hotel with last-minute transient business, eroding their ADR and jeopardizing the perfect sell-out.

Also, monitoring other key statistics such as “Bar Based” mix (or, stays that derive from the hotel’s BAR) can indicate the level of success of your current pricing strategy, and help keep pricing decisions on track.

The fix:

Utilize a BI tool such as Lighthouse Business Intelligence to monitor your market mix throughout the entirety of the booking curve to ensure that your pricing strategy makes sense.

_{A date range in BI with very heavy Group Contribution, but reasonable pricing - this revenue manager isn’t raising rate just because of the group contribution.}

Mistake 5: Ignoring GTD and CXL policies when making pricing decisions

Policies often take a bit of a back seat to pricing decisions, but this shouldn’t be the case!

House and Guarantee policies are another way to further tailor and complement your pricing decisions - all too often revenue managers make the mistake of simply focusing only on rates when making these decisions, especially around high-demand periods and special events.

Think about this scenario; if I’m considering attending a major music festival in 6 months' time, a fully refundable $999 rate is considerably less scary than a non-refundable $499 rate, especially when I’m in the planning phases of my trip.

If I book the refundable rate, the chances that I cancel the $999 is astronomically higher, and I will likely book a better deal the first chance I get, but it’s far too early in the booking curve to commit to the $499 non-refundable booking.

A smart revenue manager will balance the sell rate with reasonable cancellation policies throughout the booking curve. This is to ensure guests do book but are also serious about staying and not just using the reservation as a placeholder.

Setting a market-appropriate RACK rate, but with slightly more restrictive policies is usually a winning combination for high-demand dates.

This approach helps stabilize your forecast by reducing cancellations and securing more guaranteed revenue.

The fix:

Do a deeper analysis of which policies competitors are implementing during high and low-demand periods. Put yourself in a prospective guest’s shoes and ask yourself the question: “Where would I stay?” given the combination of price and policies you find. Make adjustments if your price + policy isn’t cohesive, and enticing to potential guests.

Final thoughts

This list should give you a great starting point and awareness of which pricing mistakes you should avoid.

The fewer pricing mistakes you can make, the more top and bottom-line revenue you can drive to your property.

Over time a more consistent, high-quality pricing strategy will have a noticeable knock-on effect on your overall performance.

To learn more about how the best revenue managers the world over are avoiding these common pricing mistakes, check out our products at mylighthouse.com

Daniel Foreman is Evangelist for Lighthouse Business Intelligence and Revenue Strategy Services products - he has been in a revenue management role for the past 10 years, working with hotels of various service levels and brand affiliations!