Pricing Strategies in the Hotel Industry

Pricing strategies in the hotel industry are methods used to set room rates based on various factors like demand, competition, and market trends. These strategies are crucial for maximizing revenue and ensuring the profitability of a hotel. By adapting prices according to different circumstances and customer segments, hotels can optimize occupancy rates and enhance overall business performance.

Key Takeaways

  • Forecast-Based Pricing: Emphasizes setting room rates based on anticipated demand, utilizing historical data and market trends.
  • Rate Parity Strategy: Maintaining consistent rates for the same product across all online distribution channels.
  • Segment-Specific Pricing: Involves offering different prices for the same product to different customer segments.
  • Value-Based Pricing: Tailors prices to what customers believe the room is worth, considering various factors.
  • Dynamic Pricing: Adjusts prices in real-time based on changing market demand, competitor pricing, and other factors.
  • Length of Stay Pricing: Offers discounts or premium rates based on the duration of a guest’s stay.
  • Discount Codes for Direct Bookings: Utilizes discount codes to incentivize future direct bookings.
  • Packaging Offers: Involves creating attractive package deals that include additional services or products.
  • Length of Stay Adjustments: Adjusts pricing based on the duration of a guest’s stay.

Introduction

For those operating in the hotel industry, maximizing revenue is a top priority, and achieving this goal often requires the right pricing strategy, at the right time. Making room rate adjustments based on demand, customer segmentation, and other factors can be the key to overall business success. In this article, we offer insight into ten pricing strategies that hotels can adopt in their revenue management strategy to increase the amount of revenue they generate.

1. Pricing Strategy Based on Forecasting

The single most important pricing strategy for hotels to master is forecasting to set their prices based on anticipated demand. Essentially, this should mean that the hotel room rate being charged will depend on how high the demand is. For instance, times of high demand may lead to higher room rates, to maximize revenue.

A robust forecasting strategy relies upon accurate records, with historical data proving particularly useful, such as occupancy, revenue, room rates, and average spend per room. In addition, it is important to use data already in the books, such as reservations, and any wider market trends.

This data can then be used to make pricing decisions. So, if your hotel has historically experienced low demand in January, strategic considerations are associated with that. As an example, you could consider lowering prices in January to try to build demand, or you could raise prices, to get more out of the smaller customer base.

Further information and some top tips related to forecasting can be found in the article “Forecasting Tips to Improve Your Revenue Management Strategy”.

2. Rate Parity Strategy

In simple terms, a rate parity strategy involves maintaining consistent rates for the same product, across all online distribution channels. The key benefit of this is that it provides transparency for consumers, while it is also often a prerequisite of advertising rooms through online travel agents, such as Expedia and Booking.com.

The primary challenge is that OTAs charge commission, and paying this while charging a low rate can eat into the revenue you would have earned through direct bookings. However, direct bookings can be stimulated in ways aside from simple room rate adjustments, as we will cover later in this article.

3. Price Per Segment

One of the most commonly used pricing strategies for those in the hotel industry is price per segment, where you offer the same product at different prices to different types of customers.

While “open market” prices should be subject to a rate parity strategy, prices for corporate segments could be lower, especially if they commit to a certain number of rooms, or a certain number of meals. Another option would be to sell multiple rooms to travel agents for a lower rate, so the travel agent can include the rooms in packages.

4. Discount Codes to Stimulate Direct Bookings

Although a price parity strategy may prohibit some pricing incentives that can stimulate direct bookings, one highly effective strategy involves using discount codes to encourage future direct bookings.

So, when a guest visits your hotel or property after booking through a third party, you could offer them a discount code for any future direct bookings they make with you. This has the dual benefit of encouraging repeat business and allowing them to book directly if they opt to stay in your hotel again.

5. Offer a Package

Another solid option for those in hotel management attempting to maximize revenue is to create packages, allowing customers to pay for more than just a room. Additional items, services, or products that may feature in a package deal include meals, bicycles, access to golf courses and equipment, and so on.

With packages, the actual room rate may be lower than the equivalent rate for an identical room. However, your hotel will be able to sell more products simultaneously.

6. Length of Stay Strategy (LOS)

As the name implies, a length-of-stay strategy is based on adjusting pricing based on the length of the stay. In some instances, such as when demand outweighs supply, it can be beneficial to implement a rule where guests are ‘obligated’ to stay a minimum number of days. In such cases, lower rates may not always be necessary.

On the other hand, when demand is lower, you can potentially encourage guests to stay longer by offering them a lower rate if they stay for multiple days, resulting in fewer unused rooms overall.

7. Cancellation Policy

A hotel’s cancellation policy can also factor into a pricing strategy and help increase revenue. For instance, one option is to charge a lower rate because a guest cannot receive a refund if they cancel the room, while higher rates are charged when guests have greater flexibility with cancellations.

This can be of particular value in hotels with high demand. By charging lower rates, in exchange for no refunds, busy hotels can benefit from effectively being able to sell the same room twice in the event of a cancellation.

8. Upselling

The basic principle of upselling involves encouraging customers to spend more on their existing purchases or booking, and it is a vital component of any effective hotel revenue management strategy within the hotel industry.

It may mean encouraging a guest to upgrade to a better room, or pay a higher room rate for a more desirable view. It could also mean persuading them to pay more for a king-size bed. Upselling is often most successful during the booking process, so it can be beneficial to promote upgrade options while guests are making their choices.

9. Cross-Selling

Cross-selling is similar to upselling, but rather than encouraging customers to spend more on an existing purchase, and it involves encouraging customers to make additional purchases on top of the one(s) already made.

Within the hotel industry, this will typically refer to additional services, such as local tours, massages, or gym services. Generally, cross-selling is most effective after the initial booking, but before the guest arrives. For this reason, it is often best achieved through promotional emails.

10. Excellent Review Management

Finally, better reviews are likely to result in improved conversion rates. Meanwhile, guests are also usually willing to spend more on hotel rooms with positive reviews, because they can have greater confidence in their choice. Indeed, when two hotels offer a similar product, the one with superior reviews will often be chosen by customers.

For this reason, to maximize revenue, it is important to have a comprehensive review management strategy in place. This will likely mean striving to deliver an excellent customer experience, encouraging guests to leave reviews, and responding swiftly and competently to reviews and feedback posted on social media.

What is Revenue Management?

A major part of hotel management involves optimizing financial performance. To achieve this, hotels need to predict or anticipate customer behaviors ahead of time so that pricing can be adjusted and the right distribution channels can be used. Revenue management is a technique that allows for this to happen.

In the article “What is Revenue Management?” you will learn much more about how revenue management is defined, what it involves on a practical level, its main strategies, and the technology that can be used to enhance your hotel revenue management strategy.

What is Total Revenue Management?

Hotel owners looking to achieve the best possible financial results must optimize their revenue channels, not just the sale of hotel rooms. This is where total revenue management comes in, with the core concepts of revenue management being applied to all relevant areas, including food, beverages, leisure, and conferencing.

Read the “Total Revenue Management: How Hotels Can Maximise Their Revenue” article for a more in-depth exploration of total revenue management as a concept, along with information on its advantages, the key performance indicators that need to be tracked, and some specific tips on how to implement a total revenue management approach.

Maximizing revenue in the hotel industry relies on implementing the right pricing strategies, which is an important part of your revenue management strategy. Typically, this requires the use of forecasting to understand and anticipate demand, as well as a willingness to adjust room rates strategically, use cross-selling and upselling techniques, and manage online customer feedback.

More Tips to Grow Your Business

Revfine.com is a knowledge platform for the hospitality & travel industry. Professionals use our insights, strategies and actionable tips to get inspired, optimise revenue, innovate processes and improve customer experience. You can find all hotel & hospitality tips in the categories Revenue Management, Marketing & Distribution, Hotel Operations, Staffing & Career, Technology and Software.

This article is written by:

Hi, I am Martijn Barten, founder of Revfine.com. I am specialized in optimizing revenue by combining revenue management with marketing strategies. I have over 15 years of experience developing, implementing, and managing revenue management and marketing strategies and processes for individual properties and multi-properties.