Once you've prepared your forecast, it’s time to put it into action. The forecast serves as the foundation for two crucial aspects of revenue management: pricing strategy and inventory management strategies. In this article, we will focus on pricing strategies, while inventory management strategies will be discussed next week. Together, these components create a comprehensive approach to revenue management, which should not be confused with
Total Revenue Management.
Objectives of Pricing Strategies
The primary goal of pricing strategies is to maximize both rates and room sales for specific time periods, whether that’s for a particular day, season, or specific products like suites or villas. Pricing must manage the buyer's perception while simultaneously maximizing revenue for the property. Remember, pricing is just one critical element of revenue management; it must be paired with effective inventory management strategies to optimize the property’s revenue potential.
Inputs to Pricing Strategies
Several key inputs influence pricing strategies:
Forecast Data: As outlined in Revenue Journey Part 6, the forecast serves as a foundational element for pricing.
Price Elasticity: This reflects how sensitive customers or customer segments are to price changes. Price elasticity is typically calculated using a revenue management system and requires substantial data. If a property isn't utilizing such a system, it’s advisable to gauge price sensitivity through continual testing rather than attempting complex calculations.
Competitor Rates: Customers often compare prices among hotels before making a purchase decision. If your property is well-regarded in terms of product and service but your competitors are pricing significantly higher, you may be leaving revenue on the table. Your pricing strategy should clearly define your position relative to competitors.
Reputation Data: If you have access to an online reputation management tool such as ReviewPro, TrustYou, Revinate, or GuestRevu, leverage this data in your pricing strategy. Positive online reviews compared to competitors can present an opportunity to increase rates. Conversely, if your reputation is lacking, it might be wise to maintain your current pricing rather than lower it.
Additional Inputs: Other factors may also be relevant, but their effectiveness in shaping your pricing strategy should be evaluated cautiously.
Developing the Pricing Strategy
The components mentioned above work together to form your pricing strategy. It involves a complex puzzle of incorporating various prices, room types, arrival dates, and lengths of stay. Each room type, rate rules, payment requirements, and price create a unique product offering.
As a result, a property may offer multiple products, which could cater to various market segments. Within each segment, it’s essential to maintain clear and logical pricing structures to avoid confusing potential buyers, which could result in lost sales. Testing your pricing strategy is advisable.
When implementing public pricing on your property website, select a date (or multiple dates) and evaluate how the pricing strategy is presented. If you can explain the pricing logic clearly, it has passed the test. If you find it difficult to rationalize, it may need to be reevaluated.
Price sensitivity and potential upselling to higher room categories should also be considered, as price elasticity can vary significantly between room types and may fluctuate by day or season. This means that pricing increments between room types should not be static or uniform.
If you’re considering a revenue management system, ensure it has the capability to handle this level of detail and flexibility in pricing. Many systems rely on preloaded increment amounts, which may not account for the varying price sensitivities associated with different room types. Understanding these sensitivities will also help you establish appropriate upgrade paths and determine how many complimentary upgrades to offer before transitioning to paid upgrades.
Detail of a Pricing Strategy
The necessary level of detail in your pricing strategy is contingent on your specific business and its operational dynamics. A strategy should reflect the volatility of the inputs mentioned earlier.
For instance, if demand fluctuates significantly based on the day of the week, the corresponding pricing should exhibit that variability. Conversely, if demand is relatively stable, your pricing strategy can afford less frequent changes.
A minimal price difference (such as $1) is unlikely to substantially affect customer price sensitivity. Thus, you can typically utilize broader rate bands that require infrequent changes while still maximizing rates and capitalizing on customer sensitivity. For example, a typical city hotel may function well with 10-12 BAR (Best Available Rate) levels plus associated derived rates such as advance purchase discounts. Resort properties might perform optimally with around 5 or 6 levels.
Channel Pricing Strategy
In today's market, multiple channels are available for selling hotel rooms. With consumers having greater visibility into rates through the internet, discrepancies between different channels can lead to distrust. When customers see lower rates offered on one channel, they may seek even better deals on others, potentially losing sight of your property entirely and booking with a competitor.
To maintain trust and integrity in your pricing, it’s vital to execute consistent pricing across all channels. While some properties may close out all channels to sell exclusively through direct channels during periods of high demand, overall pricing integrity should be maintained.
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