The Evolution of Pricing: From 'Set It and Forget It' To Dynamic Daily Rates
By Inger Oliver Director of Revenue Management, McKibbon Hospitality | June 03, 2018
It wasn't long ago that pricing a hotel room was a straight-forward exercise - often coming down to just a handful of factors such as the day of the week or perhaps the length of stay. Even then, some hotels had just one flat rate that covered all seven days of the week. And many adopted a "set it and forget it" mentality. Often, the only time a guest paid a different rate was when they paid a lower price by joining a club like AAA or clipping a coupon from an entertainment book. Too little thought was given to the rates, and for those hotels that wanted to maximize revenue, the tools needed to make an informed decision simply weren't available.
But if hotels were going to increase profitability and forecast revenue, it was going to require a better understanding of their customers, collecting the right data and - most importantly - making sense of it all. In the absence of revenue management tools, some hotels in search of insight filled page after page of paper ledgers by hand. They meticulously tracked guests by segment, length of stay, and day of week. Even then, the use of such historical data coupled with a better understanding of target numbers led to little in the way of pricing changes over time to reflect market trends. The industry grew to understand and appreciate the difference between a weekday guest and a weekend guest, and that they needed to be approached differently. But for the most part, a rate was a rate - unless a special event boosted it, or a coupon reduced it.
You might call what was happening then an evolution. The airlines were ahead of the hospitality industry when it came to pricing and revenue management. They weren't manually collecting information in paper ledgers. They were building a complex yield management system giving them the ability to collect hard data and spot trends over time. What were airline customers paying? How did it vary by day of week and time of year? When did customers look to book their flights, and how did they go about it? What were the patterns? Hotels saw what the airlines were doing, and quickly recognized they needed to be doing the same or something very similar. It wasn't long before hotels began using airlines as their model for revenue optimization.
And how were the airlines using those insights? They learned to overbook flights to ensure maximum capacity knowing that not everyone would show up at the gate on time. The efficiencies of flying without empty seats more than made up for the cost of bumping the occasional overbooked passenger. They studied arrival patterns and quickly saw they varied considerably by season and day of week - and even by time of day. By understanding these variations, airlines could employ dynamic pricing to achieve optimal revenue per flight by charging more for high-demand periods. It was a fairly simple realization supported by a complex set of underlying factors.
As it turned out, the hotel business is not unlike the airline business. Both involve a perishable finite inventory and greatly varying demand. Now, like the airlines, hotels have yield management tools available to assist with pricing, anticipate demand, and influence the behavior of customers who are more savvy and informed than ever before. Using the same approaches, hotels can maximize occupancy and revenue with hotel revenue management systems. This means selling the right room to the right guest at the right time and place. Not only is this easier said than done, but four new factors are adding to the complexity of the task - technology, demographics, consumer behavior and market.