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Pricing considerations for hotels (part 1)

While it is easy to understand why some people think pricing is synonymous with revenue management, it isn’t. Instead, pricing is an integral step in the overall revenue management business process. This two-part blog explores the main drivers that shape pricing decisions for hospitality operations.

It is best to begin by understanding the environment in which your property is operating. “Good” pricing decisions can only come after these environmental factors are fully considered. Let’s start with the four primary, inter-related influences that should be noted.

(Getty Images)
(Getty Images)

Market power factor: Each property is unique. Even branded properties face their own set of unique circumstances, in spite of the sign that may hang on the side of the building. Staffing levels, service quality, sales presence, appeal, market segmentation, location, seasonality and competitive landscape (including the impact of alternative accommodations) all conspire to give the property what I term “market power.” A property with a strong market power factor can, and should, command a rate premium.  It stands to reason, then, that the opposite is true for those with a weak market power factor. 

Ownership and/or management bias: Leadership philosophy toward pricing will have a huge influence on the pricing decisions that are ultimately made. Some individuals may see value-pricing as an attractive way to stimulate trial or to drive occupancy, while others may strongly advocate for demonstrating quality and preserving brand positioning to would-be guests by driving prices ever higher.  Getting influential stakeholders on the same page and pulling in the same direction is vital for success. Without consensus, any pricing action will be doomed from the start. A realistic and objective evaluation of price positioning, both current and future, may help bridge any disagreements regarding a suitable approach. For new properties, understand that the proforma you inherited was created for a specific financial purpose and is likely to be slightly aspirational in nature. Shifting the conversation from ADR growth as a sole measure of success to RevPAR index change may help you make your case.

Life cycle: Historically, the concept of life cycle was related to the physical plant itself. And while there may be some physical attributes that define a particular property, design and aesthetics that touch all six senses (yes — six), will shape guest experience. Even a “tired old dog” can be transformed and, with the right marketing support, a sigmoid function can emerge that will defy the once-inevitable slide down the backside of the value curve. What once was old becomes new again. The important thing to know at all times is where your property lives on the life cycle curve — no matter its shape. One of my favorite success stories that illustrates the point that an amazingly beautiful property and unique guest experience can emerge from what seems to be the most unlikely start comes from a former client — Liz Lambert from the Bunkhouse Group. (Check out her video here.)  

Competitive environment: In any situation, there are market leaders and there are market followers.  While the beautiful luxury property down the street with tons of amenities and attentive staff may be the market leader in terms of price, it doesn’t necessarily mean they wield more market power than you do. Instead, you have to think about the specific segments that you serve versus the ones that they cater to.  If they are the same, then yes, all things held equal, you are by definition a market follower. Being a market follower doesn’t mean you are doomed, it just means that you need to ensure your value proposition is appropriate. In fact, a strong competitor that is rate-proud is a very good thing. This will give you more “headroom” to drive rate when appropriate, without taking a hit in occupancy. Of course, the challenge is to get creative in order to become and to stay a market leader in your own right — and to remain the property of choice for your loyal guests.

In the next post, we will explore some specific elements that will help guide your tactical pricing decisions that fit within the broader context of the macro-level drivers outlined above. Until then, I’d love for you to drop in a comment or two regarding what you have found to have the most influence on your pricing decisions.

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