All About Pricing: Why Assuming is Dangerous When it Comes to Revenue Strategies
By Paul van Meerendonk Director of Advisory Services, IDeaS Revenue Solutions | May 2012
With the world economy better resembling a roller coaster ride, hoteliers need to have an effective pricing strategy to maximise profits, while riding out the ups and downs in the market. Currently transient demand in the US hotel sector is breaking all records, yet subsequent price increases are not keeping pace. Since April 2010 the increase in average daily rates has been growing at half the speed that it dramatically fell, when the full impact of the global financial crisis kicked in September 2008. The European economy is still in turmoil, with daily ups and downs, leaving the direction for the hotel industry hard to predict.
If forecasting was easy, all weathermen would be rich. In these erratic and uncertain times, pricing decisions will have one of the biggest impacts on hotel profitability. It is more vital than ever that revenue managers understand industry best practice and the latest supporting technologies to ensure their hotel rooms and services are priced at the right rate regardless of periods of high or low demand.
A successful market pricing strategy will mean maximum sales of rooms and additional services, through the balancing of perceived benefits and price. In developing this strategy, customer responses to price changes, market position and competitors pricing must all be assessed. The new reality for hotel pricing is that revenue management and dynamic pricing, a competency based on demand, length of stay and product mix, are inextricably linked. Dynamic pricing finds an optimal price through a sophisticated pricing strategy, based on demand as a function of price, to maximise revenue. There are a range of factors that need to be taken into consideration when determining how to successfully implement dynamic pricing strategies.
Look at the facts
Even with demand returning in the hotel sector and increasingly sophisticated pricing support technologies, few hotels are executing pricing strategy well. While it can be easy for emotions or gut feelings to influence decisions, revenue managers must put these aside and take a data driven approach to pricing - based on facts.
As a starting place, hoteliers need to ensure they have detailed data that is both historical and forward looking. Historical data should include the number of occupied rooms and revenue broken down into market segments by day, for a sufficient period of time to make fact based decisions. If data is then collected every day following it will allow hoteliers to establish simple booking pace forecasts by segment and day of week, from which they will be able to compare to historical data. If this is done consistently, it will allow hoteliers to quickly adapt to any changes when demand picks up and enable them to tweak their strategies accordingly. Sometimes something as simple as comparing occupancy and average daily rates (ADRs) can provide deep insights into pricing and revenue management opportunities, for example by assessing when ADR and occupancy do not move in tandem.