Pricing Techniques for Revenue Management Professionals
By Trevor Stuart-Hill President & Founder, Revenue Matters | October 2013
The function of pricing is a pivotal component of revenue management that requires practitioners to thoughtfully consider various influences in order to develop a strategy that best fits. It should be stressed that pricing is not synonymous with revenue management but is rather, one activity within a greater process which includes other elements such as tracking, forecasting, inventory management, distribution and communication to name a few. Revenue management can best be defined as a business process designed to optimize the financial performance of an asset through all market conditions. Pricing is an extremely critical component of this process that can't be ignored. Get it right and the enterprise is set up to flourish. Get it wrong and… well, let's just say that it is critical that you get it right.
Owners, asset managers, general managers, controllers, marketing directors and others players whose primary day-to-day focus is not on revenue management may exert considerable influence on pricing strategies that are ultimately deployed. While the motivation behind decisions made by these individuals are well intended, performance may not always match expectations, which can obviously be frustrating for all stakeholders at a given property. In other cases, pricing actions of one or two competitors are relied on heavily to determine how prices are to be set. In the latter case, this normally signals that broader strategic objectives have not been clearly defined or articulated. This article is designed to outline a proven approach to establishing a pricing strategy to avoid these pitfalls and to enhance the impact that pricing can have on overall financial performance of a hospitality asset.
There are six fundamental building blocks to consider when establishing a pricing structure. It is important to consider each separately and independently of one another first before considering the interplay that naturally exists between them. This will contribute to objective price setting and provide additional clarity into the individual factors that combine to drive pricing decisions.
1. Marketing Objectives
Clearly articulating the marketing objectives of an organization will enable pricing to support those objectives. For example, one property may be interested in penetrating a new market (either by geography or by segment) whereas; another property may be interested in driving market share within a given segment. Yet another property, perhaps one in desperate need of renovations, may simply hope to maintain their existing client base. In any case, the pricing approach that best supports these different marketing objectives will need to be addressed appropriately.
Taking the time needed to ensure that all key stakeholders are aligned on marketing objectives is essential. This is a foundational component of any discussion around pricing and one that is often overlooked. It is also important to avoid making general assumptions around the means to a given outcome. For example, driving average daily rate (ADR) may be a stated goal. One stakeholder may falsely assume that the best way to drive ADR is to increase prices associated with published rates. In certain circumstances this approach would actually result in substandard ADR performance. While completely counterintuitive, dropping published rates from current levels in these cases would actually help drive ADR. As you can see from the above example, it is important to not only state a desired outcome, but to clearly define an approach that will contribute to that outcome.