Avoiding Price Wars: Exploring Discounting and Strategies that Determine Your Rates
By Ahmed Mahmoud Founder, revenueyourhotel.com | March 27, 2011
Price is the amount your customers pay for your product. Pricing is more than a number we calculate: it is the process of monetizing your social enterprise's value in the marketplace where it helps you to define your profitability, which has implications for the rest of your hotel reflecting in Revpar and GOP. At its core, good pricing strategy will reflect your enterprise's overall marketing and business strategy.
Since price directly affects revenues (price x quantity sold = revenue) and, therefore, profitability (total revenue - total costs = profit), a good place to start.
Although developing effective pricing strategies remains complex. It reflects the value of your product to your customers, but there's always confusion about all the different rates offered at a hotel. (Rack rates-BAR rates, Published Rate, Group rates, Corporate rates, travel agent and T/O rates, OTA rates, package rates, Limited time offers etc.)
You must ensure your rates make sense when you apply them to your customers. You must consider segmentation or seasonality, nationality, channel distributions, etc. You must decide who has the final decision on rates, consider which scenario could be best and make sense for your hotel profitability Example: Carrying 90% occupancy with $100 as ADR or carrying 50% occupancy with ADR of $180. In each situation the revenue is the same $16,200.
If we ask hoteliers, how did you arrive at your current rate strategy? We receive the following or similar answers:
- Our competition increased or decreases their rate by 5-10 % so we did also." So it is based on Competitive Pricing to raise the market share.
- Our costs increased by 5-10 % or whatever which might be renovation cost, so we needed to increase our rates.
- Our owners push us for more profit for his share, we have no other way except to increase or rates - and so on for several reasons and answers.
How scientific are the above answers?