Pricing policy as a hotel strategy tool
Traditionally, revenue management is aiming in achieving the ideal balance, thus maximum profitability, between the average daily rate and the occupancy of the hotel. Moving to different, more “social” models with a lot of user generated content; pricing policy needs to get in line, more than ever, with the hotel’s strategy. While some pricing decisions lead in revenue and today’s cash flow, they might weaken the hotel’s revenue in the long term. The hotel’s pricing policy need to be in complete harmony with the brand and how we chose to be placed in the market. Let’s see how we can adapt our pricing policy correctly and support our brand in the long run.
Or simply: price fairly. A price can be considered “fair” when the majority of travelers feel that the brand promise has been fulfilled. A guest has conducted his research in our destination, checked the competition and finally booked in our hotel. This procedure automatically creates some expectations, depending on what the guest was promised (brand promise). Price is a major factor of the promise and the traveler’s expectations. As long as the hotel is in position to fulfill the guest’s expectations, the pricing policy is considered well structured and results in positive reviews.
A mistaken pricing policy can be wrong both under and overpriced. Both have negative consequences on the hotel’s revenue. If the hotel chooses prices above what we define as “fair”, it will clearly have to deal with negative reviews. What about a lower price? If we do not take into account the hotel’s revenue damage, doesn’t it benefit the guest and the hotel’s reputation?
Then again, a poorly structured pricing policy that deviates from price fairness is damaging the brand. For example, if we apply a low price policy on an upscale product, customers will hesitate to buy because of the ambiguous information that they receive. Brand promise is not being reflected on the pricing policy and automatically “blocks” sales.
When hotels adjust prices according to demand patterns and market conditions, it is also important to consider fairness perceptions (Hotel Pricing in a Social World, Kelly A. McGuire 2016).
Offers & Promotions
Avoid big discounts for long time periods. The bigger the crowd that has access to the discount, the harder it will be to raise your price when the time comes. This occurs because the discounted price that is available for long periods of time tends to become the “reference price”. Use distinctive separators such as flash sales campaigns & channels, in order to protect the hotel’s reputation and keep the reference price intact. Another practice is offering a free night with the purchase of a few nights under regular price. This practice suits our needs because the traveler can see the initial price of the room and consider that as «reference price».
Research has shown that consumers have become accustomed to fluctuations in hotel room pricing (Kimes and Noone 2002).
Round prices, ending in 0, suggest a high quality product, while prices in 9 indicate offers!
Should I reduce prices due to COVID-19?
Not at the moment, possibly be prepared for promotions when the market opens up again. At the moment, demand is low no matter the price and when there are security risks travelers are not tempted by good offers. In the contrary, when demand starts to rise, some travelers might be financially affected deeming them unable to travel. This might be a case when promotions are meaningful, paying attention to the length and the target of the promotion.
What can I do at the moment?
Flexible cancellation policies. Keep your pricing policy as is and provide the potential guests the option to make reservations, even if they are not sure of what tomorrow is going to bring. Moreover, very important, due to the insecurity of these days, travelers are more likely to choose major OTA’s for their reservations. Establish flexible cancellation policies so that travelers can be sure that they will have a refund in case the situation swifts, so that you do not miss any reservations. This policy is not necessarily ideal for every hotel, for instance small hotels might be driven to apply stop sales and then face cancellations. Strategy needs to be in line with the hotel’s specifications. Furthermore, take into account the existing reservations and cancellations, so that you can take the right calls for your hotel.
Did you know;
Demand is «relatively inelastic». A hotel that has an aggressive pricing policy, lowering prices for an extended duration, benefits in the short term by gaining a bigger piece of the market but does not create new demand. So, in periods of crisis, when hotels choose to adopt discounted pricing policies we observe that the average daily rate in the whole destination drops while the occupancy remains the same. (Why Discounting Doesn’t Work, Mark Lomanno, 2004).
Hotels that chose to preserve their prices though periods of crisis achieved smaller decrease on their RevPAR in comparison to the competition (Strategic RM and the Role of Competitive Price Shifting, Cathy Enz, Linda Canina, 2012).
Achieving higher average daily rate leads to bigger profit, in comparison to bigger occupancy at the expense of decreased average daily rate. (Competitive Hotel Pricing in Uncertain Times, Linda Canina, Mark Lomanno, 2009).