Hotel room pricing is a difficult subject within the larger school of revenue management, and as such it has garnered much study over the years. At the heart of any pricing discussion is the balance between healthy average daily rate and high occupancy; the metric representing this balance is revenue per available room, or RevPAR.

Published: 14 Jun 2010

Hotel room pricing is a difficult subject within the larger school of revenue management, and as such it has garnered much study over the years. At the heart of any pricing discussion is the balance between healthy average daily rate and high occupancy; the metric representing this balance is revenue per available room, or RevPAR.

Pricing strategies generally take three forms: those that try to maximize ADR, those that try to maximize occupancy and those that try to maximize RevPAR. Though each of these categories of strategy may be applicable in different situations, the only consistently workable pricing strategy is one that focuses on keeping RevPAR at a high, sustainable level.

Of course, there are several strategies and tactics within the category of RevPAR maximization, some more effective than others. And even when executing these kinds of pricing strategies, there are pitfalls that hoteliers can encounter, and often do. In an age of increasing online bookings, hotel revenue managers can sometimes get caught up in maintaining parity with their comp set, or madly racing to the lowest advertised rate, or clinging to historical norms. All of these are counterproductive to good pricing practice.

The strategies and tactics below are relatively new, through they all incorporate a grain of common sense. The four identified here begin with forgetting the comp set.

Forget the Comp Set

Many hotels operating under an antiquated business model rely heavily on their Smith Travel Research Competitive Set analysis. As a tool and gauge, the STR comp set is useful for at-the-moment assessment (and of course, for pricing group business), not as a basis for a pricing or marketing strategy to individual consumers. In certain markets with homogenous competitors (like the super-luxury market in Miami, for instance, or the upscale resort market in Aspen) this strategy may bear fruit. But for most other markets with a diverse range of rate levels, service standards and amenity offerings, hotels would be well served by looking outside of their comp set for sales opportunities, particularly in times of weak demand.

The ability to set prices (and, of course, subsequently sell rooms) outside a hotel’s comp set allows that hotel to reach an entirely different segment of customers. Travelers are increasingly putting a premium on value- trends are showing consumers both snatching at upscale bargains and trading down in service level- so by setting a rate well beyond those comparable in the hotel’s STR comp set that hotel gets access to a new pool of potential guests.

The misconception is often that reducing ADR to gain occupancy is a wash; what a hotel gains in rooms sold is given away in reduction of average rate. There is even some anecdotal evidence to support this, particularly among luxury properties. In reality- particularly in the reality of online travel agency bookings- even slight reductions in ADR can yield dramatic increases in occupancy, more than making up for the drop in room rate. The price elasticity of hotel rooms is generally high, and thus setting a rate slightly lower than that of a hotel’s comp set can result in significantly higher occupancy than other hotels in that set.

A Cut Above
Taking this strategy to its logical extreme, however, is just as ineffective. Across-the-board discounting and deep rate cuts may be appropriate for the very short term (and perhaps in times of crisis), but keeping rates artificially low for a protracted period of time simply robs ADR in the service of occupancy. While there is certainly a time for lower rates- a good case can be made for prior two year period of depressed demand being such a time- research actually indicates that discounted ADRs relative to a hotel’s competitive set lead to decreases in revenue per available room even as occupancy percentage increases.

We’re number 12!
Another interesting aspect of the age of Internet bookings is that the position of a property’s listing on the viewable page within an OTA has a profound impact on the booking pace of that property. And because listings on OTAs are presented in order of ascending price, pricing strategy has much to do with determining booking pace. It is an interesting function of hotel room booking through online travel agency websites that the first listing on the second page outsells the last four listings on the first page combined. A comprehensive, adaptive revenue management system will calculate the nature of the rate that will land in these coveted positions, and adjust the rate it presents accordingly.

Set it and forget it
Automation is the practical key for many of these pricing strategies mentioned above. It is possible to present a discounted rate relative to a hotel’s comp set in one circumstance and project a slightly higher rate in another. It is possible, in other words, to have your ADR cake and eat your occupancy, too.

Determining which channel is selling inventory fastest is usually a minute-to-minute decision, and that determination is best left to an automated system. Moreover, an automated RMS system of the appropriate sophistication can make those decisions with ostensibly less information than a flesh-and-blood revenue manager. An algorithm-based computer program can recognize, by combing through data faster and by extrapolating trends and tendencies with less raw input, which channel is performing best, and allocate inventory there at the appropriate price. This can- and should- happen automatically.

Rate Discipline
Maintaining sound rate discipline should be the primary pricing consideration for all hotels. The discounts most hotels engaged in during the financial crisis of the past two years are just about phased out; now it’s time to get back to the hard work of optimizing rates and the RevPAR they ultimately generate.

The rush to discount implies an undue emphasis on maintaining occupancy and a shortsightedness in terms of brand development. Yes, discounts can attract new customers, and distinguish a hotel in a crowded marketplace. But competition-based pricing is not a game many hotels are well-suited to play. At the extreme, deep discounting in a given market can lead to a pricing death spiral, with each hotel racing the other to the effective rate bottom. The airlines provide an excellent example of the profoundly negative effect this can have on the health of an economic sector.

Pricing strategy will continue to be the subject of study and debate for hotel owners, managers and revenue managers for some time to come. But the concepts outlined above- reducing dependence on the comp set, maintaining rate discipline, paying attention to pricing’s impact on page positioning, and utilizing automation- are all good pathways to a comprehensive pricing policy that allows for maximized RevPAR. In an industry that hung on far too long to entrenched practices like historical pricing, it is important for hoteliers to stay abreast of innovative pricing techniques and practices, to maintain their competitive edge.

(This article has been contributed by Jean Francois Mourier, CEO of REVPAR GURU)