3 Important Pricing Strategies for Hotels
By Nathan Mayfield
Last updated August 22, 2022
3 min read
Any business owner who understands the basic concepts of revenue management knows the importance of pricing their product appropriately. This means evaluating the market’s demand for the product and the business owner’s supply of the product. If the inventory vanishes quickly, this is an indicator that the product was priced too low. If the seller had charged more, then they would see greater revenue. Conversely, if the inventory is untouched by consumers, then it may be priced too high.
The laws of supply and demand apply to hotel availability just like any other product.
Here are three important aspects of revenue management that every hotelier should understand. They are 1. Variable Pricing, 2. Dynamic Pricing, and 3. Yield Management. By carefully applying these pricing principles, hoteliers are better equipped to form an effective pricing strategy for their property and maximize profitability.
1. Variable Pricing: Not All Rooms Are Created Equal
The first pricing strategy is to recognize the value of your rooms compared to each other. If one room has access to more amenities than others, or has an ocean side view, or has two king beds, then those are factors that add value to the room.
Remember, customers who want a premiere product will pay more money for it. So consider which rooms in your hotel offer a premiere value. Is there a way that you can add value to some of your existing rooms to make them more enticing? Offering choices to your guests allows them to decide what’s worth the extra cost to them, and what isn’t. These choices provide greater guest satisfaction and more revenue for your business.
2. Dynamic Pricing: Are You Hitting 100% Occupancy Too Soon?
Being knowledgeable about your busy, shoulder, and off-seasons is an important piece of your overall pricing strategy and revenue management. After all, if a product is in greater demand during a certain time period, then the price should increase to reflect that. And when demand is low, you still want to make use of your inventory, so a decrease in price will keep the guests coming in.
Weekends, holidays, local school breaks, conventions, and large entertainment events are all good opportunities to adjust your pricing to match the increase in demand. And during slow seasons, it’s better to have some business at a lower rate than no business at the normal rate.
Let’s take a more indepth look at some of the most basic use cases in which your hotel should implement dynamic pricing.
Start with Weekend Rates
Perhaps the most common example of dynamic pricing is “weekend rates,” which charge guests slightly more for booking outside of normal weekdays. This incentivizes people to book during the mid-week, which shores up your occupancy during these off-days, and provides more availability for those who prefer to travel on weekends, even if it means a higher price tag. Remember, a room on a Tuesday is a different product than the same room on a Saturday.
Don’t Underestimate Sliding Rates
Everyone knows that buying in bulk means you’re getting a cheaper price than you would from buying the same quantity in individual purchases. That’s because it’s a tried-and-true method of encouraging customers to spend more than they might have otherwise. Sure, you could buy one can of soup for $1.50, but if you buy ten cans of soup they’re only $1.00 each!
The same concept applies to hotels. If you offer a discount to guests if they reserve a room for a greater number of nights, you’re providing them with an enticing incentive. Plus, it’s always nice to give your guests a good reason to extend their travel plans.
Minimum Nights Make It Worth Your While
As a hotel, the weekends are your most important days. So if someone wants to reserve a room for Saturday night only, they might be blocking a slot for someone who might want to book Friday through Sunday. That means you could be missing out on two days worth of income for that room. A boutique hotel peppered with one-day bookings during their busy season isn’t very efficient, and could block guests who want a longer stay.
Minimum nights are the solution. You might institute a rule that says any guests must book a minimum of two nights, or that guests who book Friday through Saturday must also book Sunday–especially during your busy season. This helps you make the most of those important weekends, and discourage one-day stays that consume staffing resources for relatively little revenue.
Let’s move on to the last pricing aspect of revenue management.
3. Use Occupancy-Based Yield Management to Increase Revenue
Think about it: the higher your occupancy, the more exclusive the remaining available rooms are. With a smaller supply sample comes higher value. Guests who are late to book are vying for a high-demand product, since there are only a few left. And where there’s high demand, the price should reflect that.
Conversely, if your availability is largely open, then it’s a low-demand product at the given price.
Accounting for these occupancy variations with price adjustments is called yield management. This can be put into effect with a few simple rules. Here’s an example. When your occupancy is at 30% or lower, decrease your rates by a certain dollar amount or percentage. When your occupancy is at 70% or higher, instead increase your rates.
It’s a very simple method, but shockingly effective. This can help to account for the shifts in demand that you can’t predict. So when there’s an unexpected surge in travel on a particular weekend, you’re remaining competitive and priced appropriately.
Conclusion: Experiment and Measure Your Results
Remember, your prices don’t have to be written in stone, but should instead flow with market demands based on the basic revenue management principles of Variable Pricing, Dynamic Pricing, and Yield Management. An effective revenue management strategy is one that evolves over time, and there’s no better time than the present to start.