Are You Pricing for Profits?

By S. Lakshmi Narasimhan Founder, Ignite Insight LLC | October 16, 2016

A consistent misconception among hoteliers is that pricing for profits means operating at the highest price level within your competitive set. This is as far from the truth as anything. Pricing for profits is an approach which takes into account how well your pricing strategy deals with one of the most common phenomenon in hotel or any form of business - price resistance. Price resistance is a price point where customers feel the need to look elsewhere. A superior indication of price leadership and pricing for profits is to see where you stand in terms of REVPAR against the Market Average. This is principally because if you are well above the market average REVPAR, you are exhibiting price leadership more than merely an average daily rate in the higher levels.

Revenue Contribution

The most fundamental question in any revenue performance is: What is contributing to the revenue increase or decrease? Revenue Contribution has three major factors: capacity, business volume and price. For instance, in the case of room revenues, these are represented by: Rooms Available, Occupied Room Nights and Average Daily Rate.

Capacity is related to the original owner investment. In the case of the rooms, it is your total rooms available. Your occupancy % shows at what level of business volume compared to this rooms available you are currently operating. Your Price shows the average of room rates of all your market segments which your customers have paid at the occupancy % you are operating. It is customary to look at these three factors when you are looking at room revenue contribution.

Price in Revenue Streams

So, one of the three factors in the revenue contribution is your price. It is your per unit revenue earned depending upon the particular revenue center in a hotel. In room revenue terms, the price is represented by the Average Daily Rate.

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Coming up in December 2018...

Hotel Law: New Administration - New Policies

In a business as large as a hotel and in a field as broad as the law, there are innumerable legal issues which affect every area of a hotel's operation. For a hotel, the primary legal focus includes their restaurant, bar, meeting, convention and spa areas of their business, as well as employee relations. Hotels are also expected to protect their guests from criminal harm and to ensure the confidentiality of their personal identity information. These are a few of the daily legal matters hotels are concerned with, but on a national scale, there are also a number of pressing issues that the industry at large must address. For example, with a new presidential administration, there could be new policies on minimum wage and overtime rules, and a revised standard for determining joint employer status. There could also be legal issues surrounding new immigration policies like the H-2B guest-worker program (used by some hotels and resorts for seasonal staffing), as well as the uncertain legal status of some employees who fall under the DACA program. There are also major legal implications surrounding the online gaming industry. With the growing popularity of internet gambling and daily fantasy sports betting, more traditional resort casinos are also seeking the legal right to offer online gambling. Finally, the legal status of home-sharing companies like Airbnb continues to make news. Local jurisdictions are still trying to determine how to regulate the short-term apartment rental market, and the outcome will have consequences for the hotel industry. The December issue of Hotel Business Review will examine these and other critical issues pertaining to hotel law and how some companies are adapting to them.