Rate Optimization: Enhancing Your Hotels Pricing Strategy

By Paul van Meerendonk Director of Advisory Services, IDeaS Revenue Solutions | November 17, 2014

For many hotels, developing effective pricing strategies remains a complex issue. Increasingly, savvy hoteliers are turning to specialist revenue managers, whose goal, ultimately, is to maximize company wide revenue and profits while building strong hotel partner relationships across the country.

While the emergence of revenue management and rate optimization is helping to demystify pricing practices, it is important that hoteliers around the world understand the demand characteristics of the various grades of rooms in their facility, along with how price affects demand and design a rate spectrum that is tuned to all of these. This allows hoteliers to take full advantage of their business opportunities, ensuring that they are capturing the maximum revenue at all levels.

Beyond the scope of regular revenue management practices - such as selecting the correct overbooking, rate restrictions and best available rate, lies the challenge of selecting the correct rates to choose from in the first place. Rate Optimization is the practice of selecting the room rates offered in a rate (or price) range based on the historical price sensitivity of demand. The goal of rate optimization is to understand the demand characteristics of rooms and the price sensitivity of demand and utilise the data to define room prices that will capture the maximum revenue over time.

‘Price Sensitivity of Demand’ is a measure of the change in demand relative to a change in price. If a small change in price is accompanied by a large change in demand, the product is said to be elastic (or responsive to price changes). However, a product is inelastic if a large change in price is accompanied by a small amount of change in demand.

Price sensitivity can have a dramatic impact on revenue. For example, if the price offered for a room in a hotel is too low, the demand for the product may be significant; however the revenues from the sale of the product will also be low. In turn, if a rate offered is too high, there is a risk that not enough demand will materialize, and both situations may result in a reduction of potential revenue.

Through working with many different hotel groups throughout the region on the issue of price optimization, IDeaS has noticed that some companies have a tendency to ‘overshoot’ or undercut themselves when discounting. In one recent example, IDeaS was able to estimate that the client could improve revenues by 3.5% by increasing rates from the current (discounted) levels. This was able to be achieved because the client had reduced their rates so much, that they missed the optimal price point - which IDeaS was able to identify. Between these two extremes of over discounting and overpricing, is a rate offering that will capture the demand to maximize the overall revenue. It is crucial to determine, in advance, the correct rates to be used when there is excess capacity or excess demand. An incorrect determination of the rate, or price, range is likely to affect the overall revenue for a variety of rooms.

Coming up in January 2018...

Mobile Technology: Relentless Innovation

Technology has become a crucial component in attracting and retaining hotel guests, and the need to enhance a guest’s technology experience is driving a relentless pace of innovation. To meet and exceed guest expectations, 54% of hotels will spend more on technology in 2018, and mobile solutions in particular will top the list of capital investments. Many hotels are integrating mobile booking, mobile keys, mobile payments and mobile check-in into their operations. Other hotels are emphasizing the in-room experience, boosting bandwidth and upgrading flat screen TVs to more easily interface with guest mobile devices. And though not yet mainstream, there are many exciting technology developments on the near horizon. The Internet of Things (loT) is taking form in some places, and can be found in guest room control systems, voice activation systems, and in wearable sensors that can be used for access and payment options. Virtual reality headsets are available at some hotels so guests can enjoy virtual trips to exotic locations or if off-property, preview conference facilities and guest rooms. How long will it be before a hotel employs a fleet of robots for room service, or utilizes a hologram as a concierge, or installs gesture-controlled walls that feature interactive digital displays? Some hotels are already using augmented reality for translation services, or interactive wall maps, or even virtual décor. This pace of innovation is challenging property owners and brands to stay on top of the latest technology trends while still addressing current projects. The January Hotel Business Review will explore what some hotels are doing to maximize their opportunities in the mobile technology space.