There are many hotel pricing strategies that can be used to increase your revenue. Having the right room rates plays an important role in generating revenue, as well as boosting occupancy, and gives you the ability to increase profit. The goal of having the right price is to sell as many possible rooms.
Since for any hotel, maximizing revenue is a top priority, by the right pricing strategy, keeping in mind demand, customer segmentation and other factors that we will discuss in this article, hotels can be sure to do exactly that. In this article we will also talk about what a hotel room pricing strategy is, why it’s important, and the 12 most effective hotel pricing strategies to increase revenue.
What is a hotel room pricing strategy and why is it important in the hotel industry?
A hotel room pricing strategy is an important part of hotel revenue management. It is essentially the rate you charge per hotel room in an effort to sell as many rooms as possible and gain maximum room revenue. It’s that sweet spot between charging enough so that you make money and charging a fair price so that you don’t lose customers to the competition.
The strategy you use is important in the hotel industry because it helps you to sell rooms, boost occupancy and profitability. Furthermore, if you don’t charge enough, you might end up losing money and not being able to cover your operational costs. It’s not an easy task and that’s why we’ll talk about the factors to keep in mind and 12 strategies that can help make the task easier.
What factors should you consider when implementing a hotel pricing strategy?
The factors you should keep in mind when implementing a hotel pricing strategy are varied. First of all, you must be mindful of the supply and demand in your local market, making sure that you don’t go way above the market prices or way below.
Another factor hoteliers should also consider is the value of the services they offer and the types of rooms. Often it’s useful to have a range of rooms at different prices so you can meet different targets and guest segments. You should also keep in mind the competition’s prices, your current occupancy, seasonality and even the day of the week.
The 12 most effective hotel pricing strategies to increase revenue
Now that you know the key factors behind implementing a pricing strategy, let’s take a look at the 12 most effective pricing strategies in the hotel industry.
There is no better indicator of how well you’re doing or the market trends than by looking at the competition. The competition affords powerful insights and ideas not only about how you can improve but also pricing strategies you can implement yourself. It’s important to look at your direct competition, that is the same segment and star category.
A competitor-based hotel room rate pricing strategy starts by understanding the rates your competitors are selling their rooms at. See how they are setting their rates for each room category, when they are increasing or decreasing their room rates, and how often they offer discounts. Then compare your rates with their rates in order to understand what customers are already paying and how much they are willing to pay. This is a useful way of deciding what price to charge.
Forecasting is an effective strategy to set prices based on what you expect the demand to be. This expectation relies on understanding your hotel’s occupancy data, revenue, room rate and average spend per room for the last couple of months and in the same period the previous year, as well as looks at demand and events. It is one of the most important strategies for hotels.
By understanding what occupancy could potentially be based on historical data, you can then modify the hotel room price by forecasting the number of rooms that will be available in the future.
If you do it right, you’ll be able to predict the best prices based on demand and expected occupancy. It’s also important to keep in mind whether your hotel is in a trending destination or if the competitors have increased or decreased when using this method.
Length-of stay strategy
This way of setting prices is effective because it allows you to charge one rate for the entire length of stay based on how long guests stay and their arrival date. In order to use this strategy, you need to establish the correct price by looking at bookings you already have as well as forecasts to understand the demand.
For example, if there’s a festival or special event, you might set a minimum length of stay for the duration of the festival so that you are sure to lock in some bookings, and ensure that you have an increased number of nights’ stay. The goal is to modify prices based on the minimum and maximum length of stay to increase occupancy and hopefully encourage longer stays.
This strategy is similar to the airline’s strategy, where you charge different prices to different people for the same room. This is one of the most commonly used pricing strategies in the hotel industry because it has a huge impact on a hotel’s bottom line revenue.
Customers can be segmented by volume (booking more rooms at once), attributes (those wanting a sea view room vs a garden view), service offering, time of purchase, time used, or more. For example, you might charge corporate guests a lower price for the same room because they are more likely to book more rooms at any given time, whereas you might charge a walk-in guest who needs just one night’s stay a higher price because of the urgency of their booking.
Guest-type based pricing is similar to segment-based, where you charge higher prices to different types of guests. In this type of price structure, guests can be categorized based on different factors, such as their preferences, the purpose of visit, age, class, location, or occupation.
You can take into consideration the booking trends of each type of guest and then adjust the pricing strategy accordingly to who brings you more quality business. This is an effective way of setting prices because it studies trends for each type of guest to accurately and effectively set prices.
An occupancy-based hotel pricing strategy is another very common way of setting prices because it’s one of the best ways of increasing room revenue. An occupancy-based strategy works based on supply and demand; essentially when demand exceeds supply, you increase your room rates. On the contrary in low season, in order to ensure revenue, you can charge lower prices in order to increase occupancy.
An incentive-based pricing strategy is based on rewarding customers better prices through discounts, promotions, and other package deals, thereby giving them an incentive to book. In order to implement this strategy, you can offer discount codes or promotions through email marketing and online marketing for your repeat guests, and thereby encourage them to book directly with your hotel, which provides more revenue per booking by taking out the middleman.
The loyalty-based pricing strategy is similar to the incentive method, but is targeted at members of your loyalty program or encouraging people to join the loyalty program to get better prices. This is a useful and effective method to encourage not only direct bookings, but also to keep guests coming back. In this way, you can offer better prices to loyal customers, and loyal customers are likely to keep coming back, so it’s a win-win scenario.
A surprisingly effective way of increasing your revenue is the cancelation policy pricing strategy. Essentially, people pay a better price if they book at a non-refundable rate. In this way your hotel can sell rooms at a profitable price while at the same time cutting losses. That is to say, if a guest cancels they won’t get a refund, so since you have already locked in revenue from the room, you can charge a lower rate to resell the room if it gets canceled. This is a particularly useful strategy during the high season.
Upselling is a useful tool in any industry, but it is especially useful when setting hotel prices. You can give guests the option to upgrade to a better room, suite or a sea view or add in services at the time of booking which helps generate more revenue per booking. The idea is that once you have captured the client, you can encourage them to spend more.
Similar to the upselling strategy, cross-selling is a useful strategy that is particularly effective after the booking is made. You can encourage clients to book additional services, such as spa services, tours, and airport transfers for example through email marketing and online campaigns. Just like upselling, cross-selling helps generate more revenue per booking.
The rate-parity strategy is an effective method that inspires trust in your clients as well as giving a sense of transparency. Essentially, you keep the rates for each product the same across all online distribution channels. While OTAs charge commission, so you won’t get the same revenue as with a direct booking, you can also implement one of the other room rate strategies listed above to encourage direct bookings.
As you can see there are a lot of strategies to optimize prices and make the most out of your hotel revenue. In order to do so there are a lot of factors to keep in mind, such as supply and demand, time of year, the different segments and the competitors, among other factors that we have discussed throughout this article.
The different pricing methods can be used at the same time and can also be used during different times of the year. Without a doubt, successfully implementing the best prices is one of the most important things you can do to increase revenue in the hotel industry.
10 May 2021
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