3 factors to consider when pricing rooms
3 factors to consider when pricing rooms
10 JUNE 2013 6:30 AM

Experts suggest taking a critical look at segmented demand, competitive sets and guest behavior to perfect the practice.

REPORT FROM THE U.S.—Hotel pricing strategies used to be fairly simple: in slow times hoteliers would drop their rate and in busy times they’d raise them.

But an increase in the availability of data coupled with number-crunching technology and smarter human strategies has made the practice of pricing much more complex. On a recent webinar hosted by the Hospitality Sales and Marketing Association International, experts discussed the context revenue managers need to consider when they’re pricing hotel rooms.

Internal factors
Contrary to old-school beliefs, lowering rate does not typically create demand, said Jon Eliot, VP of revenue management for Premier Hospitality Management.

Eliot said understanding supply and demand trends is critical to pricing rooms and that forecasting future demand is a highly complex practice. Hoteliers need to understand demand by segment, he said, so they can price rooms accordingly.

“Know what is already booked and gauge what is expected to book,” he said. “There are opportunities where a change in pricing may not affect what you can and cannot sell. In fact, there are times it could be detrimental.”

How far out hoteliers change their prices can affect their ability to optimize revenue, Eliot said, because different segments have different booking windows.

“Understand how (travelers) book so you don’t price them out,” he said. “Don’t discount when they would’ve come anyway.”

Eliot said it’s important to have data to help make these decisions. Rely on data rather than anecdotal events, he said.

“It’s much easier to make these decisions if you know what market segment the business is going to come from,” he said. “For example, a lot of people don’t understand that less than 10% of demand on average comes from (online travel agencies).”

Eliot suggested challenging your property-management system vendor and brand to offer access to the customer data they have.

Chris Crenshaw, VP of strategic development at HotelNewsNow.com parent company STR, said it’s important to have data hoteliers can use to make decisions rather than a wealth of useless data.

Study the competition
An important factor to consider when making pricing decisions is how the competition—the hotels in your market—will respond. Therefore determining which hotels truly compete is critical to making pricing decisions, said Jim Rozell, founder and CEO of data analytics company Hotel Compete.

If one hotel raises or lowers its prices and hotels nearby don’t follow suit, it might be time to reconsider which hotels comprise its competitive set, he said.

“Look at the demand drivers in the market and ask yourself, ‘How many days do I align with these guys?’” Rozell said.

He said price is a hotel’s “attribute,” similar to Wi-Fi or concierge services, and should be included in the mix when determining the proper competitive set. Also, consider hotels that have similar group and meeting facilities. Brand recognition, loyalty programs and review scores are other things hotels don’t often consider, but should, when assessing their competition, he said.

“Pressure to align myself with competitors I can’t price against is a major pitfall,” Rozell said. “If someone higher in the food chain says we should be competing with this hotel down the street, you need to be confident enough to say why we can’t compete with them and what we need to do to be able to do to compete with them.”

Guest factors
Better understanding the guest and the reason the guest is traveling also is critical to correctly pricing hotel rooms. Marco Benvenuti, co-founder and chief analytics and product officer for Duetto Research, said OTAs are doing a much better job than hotel suppliers at this.

“Guests are becoming far more experiential in their travel,” he said. “At any touch point you should be able to ask or gather what the purpose of the trip is.”

Benvenuti also said hotels don’t do enough experimentation with price and, when they do, they don’t collect the right information or the right data from the experiment.

“Even when demand is low you shouldn’t offer lowest possible rate,” he said. “If you have enough demand to fill 60% to 70% of your rooms, lowering the rate won’t make your phone ring.”

He said last-minute shoppers still may be price insensitive and willing to pay full rate, they just are part of a growing number of people who book travel later.

Benvenuti suggested using “fences” to segment customers and price correctly. Having customers login to a supplier website for the best rate is a simple fence that still complies with rate parity agreements, he said.

“Try to experiment with different customers,” he said.

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