Is your hotel pricing strategy optimizing profitability?

The Ho.Re.Ca industry (Hotels, Restaurants, Coffees) is subject to very specific market and competitive dynamics. However, as in any other industry, Ho.Re.Ca industry is driven by product, branding, competition, and pricing dynamics. As for many industries, pricing is a key success factor in the Ho.Re.Ca industry, even if the dynamics can be very specific.

In this article, we will focus on Hotels.

Very often, hotel pricing strategy is quite intuitive and simple, specifically in the case of small players. Regarding big players that own important and global brands like Four Season Hotels & Resorts, Relais & Châteaux, Fairmont, Marriot, Radisson, they have a dedicated Pricing/Revenue management department. Why ? Because these corporations fully understand the power of having a sophisticated pricing strategy and a methodical approach for pricing execution, as dynamic pricing and value-based pricing. By doing so, these players can maximize their annual profit.

Nowadays, before booking a room, travellers are checking out reservation platforms like Booking.com, hotels.com, AirBnB and many others. These platforms allow travellers to see all available solutions and prices straight away, increasing dramatically the price competition between hotels and increasing the pressure on prices, and therefore on profit. Many travellers are booking the most convenient solution, meaning for some of them the cheapest one, and for the majority the best value-for-money solution based on their needs and preferences. For example, all other things being equal, if I must choose between 2 nearby hotels where, for the same price, I can choose one with a panoramic sea view, I would most likely book that one. The real question is whether I would pay a bit more for that feature and the answer is yes. However, the approach to determine the premium price that the hotel could charge for that room and that would be acceptable for the customer is quite complex, and is usually managed only by sophisticated players, that can deploy relevant budgets to maximize their revenue and profit. This assessment is sometimes made through guesstimates, sometimes by a test and learn curve, rarely and only for the top players, with the support of market research techniques, surveys and specialized professionals.

Several aspects should be taken into account in this assessment, as the hotel pricing strategy depends on many factors. Here we will focus on nine most relevant factors:

• the geographical location: the price of a hotel room in the Principality of Monaco or on Capri Island is quite different from a similar room in a suburban area of a small city. Also, the specific location within the same city is key: for instance, a sea front hotel will have a higher value than the same hotel at 100 mt from the beach and no sea view.

• the seasonality: a room in mid-August in Cannes will have a higher price than the same room in the same hotel in November. In Paris during the fashion week everything is sold-out. Applying the same price through the year without considering these factors will result in leaving money on the table.

• The demand peaks: hotel rooms during the Grand Prix F1 of Montecarlo, during EU meetings in Strasbourg, or during the Cinema Festival in Cannes can cost several thousand euros per night. When the demand is higher than the offer, pricing is not the main selection criteria.

• The competition. Very often, some hotels apply prices that are too low and not representative of their value. Increased competition, particularly of small players, is the main reason behind this phenomenon. The most common response to these dynamics is to re-align the price to match those low-price offers, resulting in a price war, which significantly erode the profitability and involves some bankrupts too. The impact of price wars is devastating and sometimes inevitable, but the good news is that there are some techniques to face price wars through value propositions.

• The overall demand. Let us take an example, in a touristic area by the Mediterranean during the high seasonal weeks of the summer: we attend very often to inconsistent pricing strategies resulting of price wars, duringwhich the willingness of some players to quickly fulfil their rooms is higher than the one of their competitors. A possible solution to this threatening situation is to assess the level of demand. Considering that the overall demand is high enough to fulfil all rooms in the area, a smart solution is to stick to the right price and wait that those players get their bookings first. The customers who will look for accommodation after that will have different expectations and will be willing to pay your hotel the fair price. In fact, when some players are priced too low, they disrupt the market. For a customer, seeing very different prices for similar rooms will imply a cognitive dystonic perception. The customer will tend to believe that the price should be at the lowest level, and that the hotel charging more has an unfair pricing strategy. However, if the room which is offered at half price has many inconveniences, you should not worry about that, because the customer will understand that the price difference will reflect a difference in value. That customer will choose based on his preferences and budget and can still come to you. If instead, in this example, you are matching the lowest price, you will undermine the brand image of your hotel, because the customer will be confused by that low price, and will assume that you know there are inconveniences, and that price is reflecting the value proposition, with a consequent impact on brand image.

• Level of costs. The cost+ pricing approach is the most common, unfortunately. By applying a margin as a percentage of your cost, you may undermine the profitability and leave money on the table by not benefiting from the potential that the market can sometimes offer. However, having a precise view of your cost structure is extremely important and should be considered during the pricing process. Fixed and variable costs should be assessed and taken into consideration when defining the pricing strategy and the tactical moves.

• Promotional activity. The promotions are widely used in the hotel business. Sometimes however, these promotions are only having the effect of eroding profitability. Sometimes instead, they can offer good opportunities for revenue management and profit increase. A classic example is the dynamic pricing applied by airlines and some big hotels. Easyjet is offering to those who book in advance prices as low as 29€ per flight. This approach helps them to reach a capacity which will cover their fixed costs. The remaining passengers will have to pay much more, and the overall result of that flight will be profitable. When you book an Easyjet flight at the very last minute you usually pay very high prices. Why it is not / less the case with hotels? The answer is in the understating of the level of demand again. In the principality of Monaco, booking a last-minute hotel room during summer will cost 2000€, because they know that you will have no choice and if you really need it, you will take it.

• Services. Customers are also assessing the services that are attached to the room, that can be of many kinds: swimming pool, inside restaurant, private beach and many more. They should be used as levers to add a premium the standard price. Another example can be the room cleaning, which has a cost too. More and more often, hotels are offering apartments, where the cleaning is not included during the stay. This difference in cost can be significant, and offering promotions for more than 1 night stay can give an opportunity to increase the profit by charging for additional services. In fact, the customer will see a discount, but if the discount is somehow less than the cost of cleaning, the result will be an increased profit.

• Room comfort. Today’s reservation platforms provide all kind of information for each accommodation. The size of rooms, facilities, distance to local attractions, equipment and so on. They all enter into account when the customer must choose and assess the value of each solution. If your room has air conditioning, the customer will notice and may be willing to pay a little extra for that or make a decision due to the fact that for the same price, he will get the A/C too. Each feature offered in the room has some value and should be part of the equation compared to competition.

Example of pricing impact on Profit uplift.

Here is a simplified example (excluding taxes, commissions and other factors which should come in the calculations), which could give a sense of the impact of increasing the room price by 10€, based on the value approach. In this example, 10€ (11% increase) would bring a 29% margin uplift and raise the overall gross margin % by 6 points.

New frontiers of Pricing.

The democratization of pricing expertise is a great opportunity for many organizations, particularly for family-owned hotels, which can leverage on experts like DM Pricing Consulting, allowing them to achieve high ROI, benefiting from consolidated practices that proved to fuel performance in other industries, invest into new technology like Artificial Intelligence, Machine Learning, and data science.

At DM Pricing Consulting, in collaboration with BlueBirds, we can help your organization review and optimize your Pricing strategy, proposing and implementing new digital and SaaS based solutions to manage your pricing, improve productivity and financial performance.

About Domenico Mulatti and DM Pricing Consulting

Domenico Mulatti is an expert of pricing strategies and tools, and member of the BlueBirds community

For Domenico and DM Pricing Consulting, Pricing strategy is not just establishing the right price to maximize revenues, market share and profitability. It has a powerful impact on how your brand and products can be perceived in the market. It represents your positioning, your competitive strategy, and your growth plans.

Cutting prices on a premium brand can be very harmful for your long-term performance, as well as over-pricing can prevent you from optimizing your revenue stream and overall profit.

We help companies in defining the right approach to pricing in complex environments, to establish the best processes and implement new tools that help them manage in a cost-effective manner all aspects of pricing and commercial capabilities.

We partner with SaaS firms to support you implementing the best software platforms to reduce complexity and maximise ROI.

Each company is unique and pricing strategy should reflect that too. Our approach is tailored to your own strategy, we leverage on the most sophisticated methodologies of value-based pricing, market research, conjoint analysis and price elasticity. We create state-of-the-art reporting dashboards, management by KPIs, performance management tools.

Our expertise is to assist you on all aspects of pricing enhancement projects, starting from an assessment up to the implementation of solutions and the training of your staff.

We can potentially serve any industries, Consumer electronics, Food & Beverage, FMCG and other Consumer Products, Banking, Pharma & Medical Devices, Energy, Information Technology, e-commerce, Hotels and more.

Ce point de vue a été rédigé par Domenico Mulatti, Consultant international hautement expérimenté et dynamique dans le cadre des opérations commerciales, du marketing et de la performance et membre de la communauté BlueBirds.

En tant que propriétaire, Domenico gère un AirBnB, ce qui le met en concurrence avec les hôtels de Monaco et alentours, qui sont des acteurs très sophistiqués (tous les hôtels de Monaco sont des multinationales de premier ordre ou de la même société princière, la SBM)

www.dm-pricingconsulting.com