One of the most challenging things for hoteliers is determining how to price inventory. Charging too much will deter customers and increase vacancy, while charging too little can significantly undercut your revenue. It’s not an easy problem to tackle, and there are a few different approaches that can be taken. Here’s a quick overview of the various pricing strategies utilized by lodging operators.
Cost-based pricing strategies are the easiest to implement. Hoteliers simply calculate the sum of all expenses involved in running their hotel, divide that cost by the number of units at the property, and then markup each unit based on the profit they hope to make. This is a logical approach to pricing that aims to ensure expenses are always covered, but there are certainly some drawbacks. Without accounting for the state of the market or the perceived value of what you have to offer, opportunities to maximize revenue could be missed.
Taking a customer-based approach to pricing is a bit more labor intensive. This strategy requires a hotelier to understand who their customers are and determine what they are willing to pay for a particular room or package. Because rates are determined by the perceived value of a unit (as opposed to the actual cost), adopting this type of pricing offers the best potential for maximizing profit. But make sure your pricing decisions are backed by thorough analysis. If you over-estimate the perceived value of a stay at your establishment, customers won’t have a problem choosing a cheaper competitor.
Another approach for determining appropriate pricing is to base decisions on competitors within your market. Hoteliers that use this strategy do a complete audit of rates offered by similar operations in their area and then adjust their own accordingly. To use this method effectively, it’s imperative to make appropriate comparisons (single rooms to single rooms, and so on) and then decide how you want to respond. Depending on your property and the market, you may choose to:
Price match>> This strategy involves setting room rates at the same price point as a competitor offering a similar experience (although you don’t necessarily need to do this for all unit types). Price matching ensure you’re in the running for customers looking for the best deal.
Price high>> Setting your rates higher than other operators signals to browsers that your property has a higher value. If the customers in your market prioritize quality, this could encourage bookings and improve your average daily rate (ADR). If you use this pricing structure, make sure to justify your higher rates with superior service and amenities.
Surround the middle market>> Another strategy involves setting your most basic room as the cheapest in the market while pricing the rest similar to the first available rates offered by your competitors. This is called “surrounding the middle market.” Essentially, it allows you to get customers looking for the best deal while also snagging those willing to pay a little extra.
Many operators use a combination of these approaches. You may start with cost-based or competitor-based strategies as a new operator but later transition to customer-based pricing once you have the means to do a proper analysis.
Whatever strategy you choose, avoid round-number pricing. For example instead of offering a room for $100, offer it for $99. Instead of setting a rate at $150, set it at $149, and so on. People associate the number nine with getting a deal and studies have shown that room sales increase when establishments adhere to this commonly used structure.
There are many different approaches to take when setting pricing for a hotel. Each has its advantages and shortcomings and not all work for every type of property. As you play around with different strategies, use reporting to determine what works best for you.