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 a hotel’s profitability. 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 price 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 a guest’s stay duration.
  • Discount Codes for Direct Bookings: Discount codes are utilized 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 a guest’s stay duration.

Table of Contents:

Introduction

Maximizing revenue is a top priority for hotel operators, 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.

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.

1. Pricing Strategy Based on Forecasting

The single most important pricing strategy for hotels to master is forecasting, which allows them to set their prices based on anticipated demand. This should mean that the hotel room rate charged will depend on the demand. 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 spending 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. For example, you could consider lowering prices in January to build demand or 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

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. It is also often a prerequisite for advertising rooms through online travel agents like 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.

Video: Rate Parity Explained

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 meals. Another option would be to sell multiple rooms to travel agents for a lower rate so the travel agent can include them in packages.

Table: Examples of Price Per Segment Hotel Pricing Strategies

Approach Benefits Considerations
Leisure Travelers Offers package deals or discounts during off-peak times to attract vacationers. Must balance the attractiveness of offers with profitability; avoid cannibalizing high-value bookings.
Business Travelers Premium pricing for value-added services like high-speed internet and flexible cancellation. It requires an understanding of business needs and a willingness to pay for convenience and efficiency.
Group Bookings Discounted rates for large bookings, such as conferences or weddings. Logistics of accommodating large groups and the impact on service levels for other guests.
Loyalty Members Exclusive offers or rates for members, encouraging loyalty and repeat business. Development and management of a loyalty program that truly incentivizes repeat stays.
Early Bird Lower rates for bookings made well in advance, improving cash flow. Predicting occupancy and demand to set early bird rates that will still be profitable.
Last-minute Deals Discounts on unsold rooms close to the date, maximizing occupancy. Pricing must not undermine value perception or encourage guests to wait for last-minute bookings.
Seasonal Travelers Adjusting prices for peak and off-peak seasons based on demand. Requires accurate demand forecasting and understanding seasonal travel patterns.

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. According to the Digital Hotel Operations Study by H2c, around one-third of hotel bookings made are now coming via direct booking channels.

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.

Pricing Strategies - Discount Codes to Stimulate Direct Bookings

5. Offer a Package

Another solid option for hotel managers attempting to maximize revenue is to create packages that allow 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.

For more information about hotel packages, read “Hotel Packages: Tips to Optimize the Use of Hotel Package Deals.”

6. Length of Stay Strategy (LOS)

As the name implies, a length-of-stay strategy adjusts 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 bookings. It is a vital component of any effective hotel revenue management strategy.

It may mean encouraging guests to upgrade to a better room, paying a higher room rate for a more desirable view, or paying more for a king-size bed. Upselling is often most successful during the booking process, so promoting upgrade options while guests make their choices can be beneficial.

9. Cross-Selling

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

Within the hotel industry, this typically refers to additional services, such as local tours, massages, or gym services. Cross-selling is generally most effective after the initial booking, but before the guest arrives, so it is often best achieved through promotional emails.

Pricing Strategies - Cross-Selling

10. Excellent Review Management

Finally, better reviews are likely to improve conversion rates. Meanwhile, guests are usually willing to spend more on hotel rooms with positive reviews because they can have greater confidence in their choices. Indeed, when two hotels offer a similar product, customers often choose the one with superior reviews. According to the State of Online Reviews Report by Podium, 93% of consumers ay that online reviews impact their purchase decisions.

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

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. It includes information on its advantages, the key performance indicators that need to be tracked, and some specific tips on implementing a total revenue management approach.

Pricing Strategies in Hotel Industry FAQs

Most hotels adopt a dynamic pricing strategy, adjusting room rates according to demand and competition. Hotels look at past trends, local events, and other factors to forecast demand levels. From there, prices are modified to maximize occupancy while also generating as much revenue per room as possible.

Discount pricing strategies are designed to increase demand for hotel rooms by offering low room rates. They are generally a short-term measure used to avoid vacancies. Discounts are especially common during off-peak periods.

A cost-based pricing strategy involves calculating the cost to the hotel of selling a room to a guest, including costs associated with the room, amenities, and additional services, then adding a markup to ensure profit. Both fixed and variable costs should be factored in. Effectively, the markup added serves as the profit margin.

Price skimming, or a skimming pricing strategy, is typically used when a hotel first starts or when a new service is launched, although it can also be used during peak demand periods. The aim is to set prices high to capture customers who are not price-sensitive, then gradually lower the price to attract more customers as demand decreases.

A hotel sales promotion is a short-term marketing activity that is intended to boost demand and generate bookings. Examples of hotel sales promotions include limited-time discounts, loyalty program rewards, discounts for group bookings, and special packages, including packages based around events.

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.

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This article is written by:

Martijn Barten
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.