Pricing Strategy 101: How to set hotel rates to maximize revenue

And while you may be aware that there’s a science to it, you’re time-poor as it is.

On any given day, you’re looking at your own KPIs, what competitors are doing, what OTAs are doing, and the latest industry trends - not to mention all of the meetings you get pulled into.

In the first of a three-part series - tying in with our new downloadable eBook, How to price right: a guide to setting profitable B2C hotel rates - we ask:

How can you accurately forecast demand and pull all the right levers to result in maximum revenue for your hotel?

1. Understand what impacts demand

Hotels are economic units, so pricing depends on supply and demand at any given time. The problem is demand fluctuates on a daily basis, so it’s not a set-and-forget activity.

To forecast demand accurately, look at:

Historical data

To forecast demand for Day Y on Day X, consider two key measures. The first is your current on-the-books (OTB) reservations. The second is your likely “pickup”. To determine your pickup for Day Y in the previous year, review how many bookings were made between Days X and Y.

All other factors being equal, this year should be similar, so you can price according to likely demand. (But do assess any future data you can access too, as other factors aren’t always equal.)

Events

There are two kinds of events that should be factored into your marketing, promotion and pricing strategies:

Major events. Those like the Superbowl, the Olympics, Detroit’s Auto Show or Monaco’s Yacht Show are events you can plan for years in advance.

Local events are smaller events like concerts and holidays (for your leisure business) and business conferences or government assemblies (for your corporate business).

Because of the increased demand, you should not hesitate to raise your prices.

Timing

You have your high season, and your low season, which are defined by the holidays - but don’t forget - it’s not just about the holidays in your area, it’s also about the holidays from source markets. For example, Chinese travelers tend to travel around Chinese New Year.

You also have your high demand days (weekends) and low demand days (weekdays) - or vice versa, depending on the location. You should be adjusting your rates during these periods of high and low demand to increase occupancy and revenue.

Trends

Traveler trends can drastically impact demand. Your location might be ‘in’ right now, causing an influx of international travelers like never seen before. The only way to be aware of these trends is to stay updated with your industry association and other educational resources.

Competition

While you shouldn’t let them define your rate strategy, you need to keep an eye on your competitors’ rates, because that’s exactly what your guests are doing. The harder part is being honest with yourself about who your competitors are. Make sure you compare apples with apples on things like type of accommodation, location, hotel category, quality of service, and facilities. You should also consider how you compare to your competitors in terms of the type of products they are offering - think room types, breakfast, check-out, and cancellation policies.

2. Understand what pricing strategies you can use

While some pricing strategies are considered to be rudimentary to today’s savvy hoteliers, it’s important to understand the evolution of hotel pricing strategies and how we got to where we are today.

Cost-plus

This is the traditional method, where you add your profit on top of whatever it costs you. Your goal is to generate cash flow and maximize profit, so you need to calculate revenue versus expenses.

Market-based pricing

This is when you base pricing on your competitors’ rates. The main problem with this is it puts too much value on your competitors, and doesn’t take into account the customer perception of your hotel. What if your competitor offers an inferior product?

Value-based pricing

It’s not all about price - it’s also about your brand. Value-based pricing is often used by large hotel chains or luxury brands, who determine pricing based on how the guest perceives the hotel.

Dynamic pricing

These days this is the dominant pricing model, and it seeks to combine the cost-plus and market-based pricing models. It’s the best by far because it’s highly flexible.

Rate-shopping tools like Rate Insight help hoteliers monitor competitors’ prices, from which they can derive actionable insight.

3. Pull the right levers to increase revenue

Here are some tactics you can use to increase revenue by adjusting your rates at the right times, to the right guests.

• Keep an eye on your competitors’ best available rates to make sure your rooms are not priced too high or too low in comparison (an obvious point, but crucial nonetheless).

• Maximize revenue without significantly bumping up the price by prolonging occupancy (use minimum and maximum length of stay).

• Apply non-refundable discounted rates for specific promotions.

• Increase the perceived value of the room to justify an increase in room rates.

The theory behind setting your hotel rates is simple, but putting it into practice is another beast altogether.

This is the first installment. Read Part 2 .