Revenue Management – Pricing Strategies
After preparing the forecast it now needs to be put to use. The forecast is the basis for two of the most critical aspects of revenue management: determining the pricing strategy as well as the inventory management strategies. In this article I will discuss pricing strategies and next week I will discuss inventory management strategies. The two together combine into Complete Revenue Management, which is not to be confused with Total Revenue Management. A series on Total Revenue Management will be published in 2017.
Pricing strategies are used to maximize rates and rooms sold for a particular period of time. This could be for a particular day or a season or for a product that is being sold like a suite or villa. Pricing should manage the perception of the buyer and at the same time maximize revenue for the property. Note that pricing is only one of the two critical parts or revenue management and only in conjunction with inventory management strategies it can be called optimization of the property’s revenues.
Inputs to Pricing Strategies
There are several inputs to pricing strategies:
– Firstly there is the forecast, discussed in the Revenue Journey Part 6 – Forecast
– Next there is price elasticity – Price elasticity is the number that reflects price sensitivity of a customer or customer group for a product. It is typically calculated in a revenue management system and requires large amounts of data. Therefore if a property is not on a system, it is not recommended to try and calculate the number but rather gauge price sensitivity by ongoing testing.
– Thirdly the competitor rates need to be considered. Customers will look at certain hotels, compare prices and decide what to buy. If, within you competitor set, you are a well perceived hotel in regards to product and service but your competitors are all pricing well above your rates, then you are likely leaving revenue on the table. Your pricing strategy should determine where you position yourself within your competitor set.
– Finally, reputation data can be taken into consideration when pricing the property. If you subscribe to an online reputation tool like ReviewPro, TrustYou, Revinate or GuestRevu, you can use this data in your decision making.Typically if your online reviews are good and favorable vs. competitors, then there is an opportunity to increase rates and improve pricing positioning. If the opposite is true it is not necessarily good to decrease your price positioning vs. the competitors, but rather maintain a status quo.
– Other inputs are sometimes considered, however their effectiveness in the pricing strategy setting should be carefully considered.
Determining the Pricing Strategy
All above mentioned components are used to determine the pricing strategy. It is a complex puzzle of different prices, room types, arrival dates and length of stays. A combination of a room type, rate rules, payment requirements and a price are considered to be a product.
A property can therefore have many different products. The offering of these products could cover many different segments. Within one segment it is important to keep a logic or rational within the pricing strategy or the buyer will get confused and potentially buy elsewhere. It is a good to test a pricing strategy.
When you implement your public pricing on your property website, it is good to choose a date, for one or multiple nights, and try and understand the strategy and prices that are presented. If you can explain it logically, it passes the test. If you cannot explain it rationally to yourself, then it needs to be reviewed and revised.
When looking at price sensitivity and potential up-selling to higher room categories it is necessary to realize that price elasticity for each different room type can be very different and vary by day or by season. Therefore increments between room types cannot be static and always the same.
If you are considering a system, only the most sophisticated revenue management systems can manage this level of detail and flexibility in pricing. Most systems will simply use pre-loaded increment amounts. Keeping in mind the different price sensitivities for the different room types, you will also be able to determine your upgrade paths and whether you should be giving free upgrades, and how many, before starting to charge the room appropriate rate.
Detail of a Pricing Strategy
The level of detail needed in a pricing strategy is dependent on your business. Since pricing strategies depend on the inputs mentioned earlier, the level of volatility in those inputs should be reflected in your pricing strategies.
If demand fluctuates strongly by day of week, then this should be reflected in the rates you charge. If the fluctuations are less often, then your pricing strategy should have less frequent rate changes. Price sensitivity will usually change in small jumps.
A price difference of $1 will not create a noticeable change in price sensitivity for a hotel. You can therefore normally use rate bands that require less frequent changing and still maximize rate and capitalize on price sensitivity of the customer. A typical city hotel is perfectly served with 10-12 BAR rate levels plus their set of derived rates like advance purchase. A resort property might be well served with 5 or 6 levels.
Channel Pricing Strategy
There are many different channels on which to sell a property. Today’s consumer, via the internet, has great visibility of your rates. A different rate in one channel vs. another channel will therefore create a level of distrust with the consumer.
When a consumer sees a lower rate in one channel, they might keep on looking for another channel that has an even lower rate. In this ‘customer journey’ of looking for that lower rate, it is very possible the consumer will lose sight of your property and book at a competing property instead.
Maintaining this rate integrity is critical when executing a channel pricing strategy. Different prices on different channels does not work. On occasion properties may close out all channels and only sell on their direct channels, especially during very high demand periods.
The principles for group pricing strategies are similar to what has been described with a few additional considerations. Keep in mind that groups may:
– Have additional revenue like conference & banqueting revenues, restaurant, spa & other incremental revenues.
– Incur additional cost, like 1 free room for every 15 paying, or a commission percentage.
– Show unusual wash of rooms on different days of the group.
– Displace other, higher rated business.
All these need to be taken into consideration when pricing a group.
In 2017, we will focus on a group handling and strategies. Next week more about inventory management strategies which, together with pricing, make up Complete Revenue Management.