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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