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.

Technology

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The hotel industry has undertaken a long-term effort to build more responsible and socially conscious businesses. What began with small efforts to reduce waste - such as paperless checkouts and refillable soap dispensers - has evolved into an international movement toward implementing sustainable development practices. In addition to establishing themselves as good corporate citizens, adopting eco-friendly practices is sound business for hotels. According to a recent report from Deloitte, 95% of business travelers believe the hotel industry should be undertaking “green” initiatives, and Millennials are twice as likely to support brands with strong management of environmental and social issues. Given these conclusions, hotels are continuing to innovate in the areas of environmental sustainability. For example, one leading hotel chain has designed special elevators that collect kinetic energy from the moving lift and in the process, they have reduced their energy consumption by 50%  over conventional elevators. Also, they installed an advanced air conditioning system which employs a magnetic mechanical system that makes them more energy efficient. Other hotels are installing Intelligent Building Systems which monitor and control temperatures in rooms, common areas and swimming pools, as well as ventilation and cold water systems. Some hotels are installing Electric Vehicle charging stations, planting rooftop gardens, implementing stringent recycling programs, and insisting on the use of biodegradable materials. Another trend is the creation of Green Teams within a hotel's operation that are tasked to implement earth-friendly practices and manage budgets for green projects. Some hotels have even gone so far as to curtail or eliminate room service, believing that keeping the kitchen open 24/7 isn't terribly sustainable. The May issue of the Hotel Business Review will document what some hotels are doing to integrate sustainable practices into their operations and how they are benefiting from them.