The Key to Hotel Pricing. By Craig Macdonald of IDeaS.
Revenue managers across the globe spend large portions of their days managing rates. They are constantly lowering, raising, and analysing their hotel’s pricing. With the hotel’s bottom line depending heavily on the revenue generated from proper pricing strategies, simply managing rates without looking at the whole picture can unfortunately become a quick go-to scenario.
Revenue managers understand the critical need for optimal pricing strategies –after all, their hotel’s livelihood depends on it. However, with constant increase in market pressures and channel complexity, it can be easy to miss the ongoing importance of valuing inventory and using availability controls. When pricing is managed independent of availability controls, the pricing decisions aren’t actually optimal – meaning that revenue is likely being lost.
Dynamic pricing strategies don’t focus on only setting prices; successful dynamic pricing optimizes a hotel’s demand and revenue to maximise total revenue performance. Demand and revenue are the two crucial components a hotel needs to balance because they combine to deliver the strongest revenue performance.
This is where the analytics of revenue management technology becomes a critical component in organising and deciphering data to employ an optimal dynamic pricing strategy. Dynamic pricing approaches use three main analytical ingredients to complement one another: demand, inventory and price sensitivity.
Dynamic pricing approaches demand as a function of price. It basically follows the school of thought that if the price increases, the demand will drop and if the price decreases, the demand will be higher.
Seems like a pretty simple concept, right?
It becomes infinitely more complex when looking at market conditions, competitive dynamics and a myriad of market segments and channels. Analytics help hotels determine the optimal prices to sell, the achievable demand at different price points, and any corresponding revenues that can be attained for each market segment and channel.
Taking maximum advantage of the available inventory is a primary goal that challenges revenue managers. Using analytics allows hotels to determine optimal prices based on not just the demand, but the available inventory (or capacity) in the hotel.
How prices affect guest booking behavior is important in dynamic pricing because it helps hotels offer specific pricing to market segments and optimise total revenue.
Low price sensitivity means that changes in price have a relatively small effect on the quantity of the rooms demanded, while high price sensitivity means that changes in price have a relatively large effect on the quantity of rooms demanded.
To maximise overall revenue, hotels will want to determine whether the market segment has low or high sensitivity, and understand the number of rooms those market segments are booking.
These analytical ingredients are at the core of dynamic pricing and should be seasoned with the evaluation of additional elements such as: costs, competitors, demand for products and services, and the overall quality of products and services.
It is also important to consider the type of organisation that’s being managed − a limited service hotel will generally have a different pricing strategy than a full-service property.
The key to successful pricing is combining technology with the human knowledge that revenue managers know firsthand.
Using a dynamic pricing approach with a strong analytical base that evaluates demand, inventory and price sensitivity is a proven practice that helps create the right prices for the right customers at the right time.
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About the author: Craig Macdonald is the Sales Manager Africa at IDeaS Revenue Solutions. For any questions on this article, Craig can be contacted at: Craig.Macdonald@ideas.com or call +27 (11) 713 3471 or 082) 389 5335.