9 pricing strategies to consider implementing at your independent hotel to drive revenue
Establishing optimal room pricing at your hotel is the foundation for a successful business and underpins the practice of hotel Revenue Management.
But, there is a lot to consider when devising an effective hotel pricing strategy, it can be hard to know where to start.
First, let’s take a quick look at hotel Revenue Management and where a pricing strategy comes into play.
What is hotel Revenue Management? And why is it important?
Hotel Revenue Management, is a strategic and data-led approach to pricing rooms and services with the aim to maximize total hotel revenue.
It factors in numerous variables such as demand, competition, customer segmentation, and distribution channels.
Revenue Management is critical to the commercial operation of a hotel for a number of reasons, such as:
It can provide a competitive advantage through the understanding of trends and market behavior, enabling you to outperform competitors
Through the use of demand forecasting it can help you plan operations more efficiently, leading to cost savings and improved guest satisfaction
Hotel rooms are a perishable commodity - unsold rooms don’t generate revenue if empty - Revenue Management ensures consistent occupancy
Revenue Management enhances your profitability!
By adjusting prices based on the variables mentioned above you can maximize your revenue per available room (RevPAR), leading to sustained profitability.
As a result, getting your room prices right is arguably your biggest priority when it comes to Revenue Management, so it pays to put an effective strategy in place.
Hotel room pricing strategies that you should be aware of
Unfortunately, a universal hotel Revenue Management approach that suits every property doesn't exist, but there are certain strategies that work better than others, especially as a smaller independent hotel.
Your property should have a tailored pricing strategy that fits its unique needs, but there are common industry practices that can be honed to compliment your business and improve performance.
Below is a non-exhaustive list of some established room pricing strategies that may prove useful:
1. Cost-plus pricing
This is a traditional method where you calculate all the fixed and variable costs of running your hotel (everything from food and beverage to energy bills), then add your profit on top of the total cost by placing a mark up on each room.
It is a straightforward approach but the glaring issue with this strategy is it doesn’t take into consideration two of the most important elements of Revenue Management - market demand and your competition. If you utilize a cost-plus pricing model, there is a strong chance you are missing revenue opportunities over high demand periods.
2. Market-based pricing
You won’t be the only hotel in your market, so it’s worth keeping an eye on your competitors’ rates. By doing this you can accurately set room prices in line with market trends.
You can boost your bookings by offering competitive rates, or enhance profits by pricing higher due to superior services.
However, this puts too much emphasis on your competitors. It may eat away at your profits by leading you into a price war. It also doesn’t take into account the customer perception of your hotel, what if your competitor offers an inferior product?
3. Value-based pricing
It’s not all about price - it’s also about your brand, more importantly, the value associated with your brand.
With value based pricing, you determine room pricing based on how the guest perceives your hotel.
For example, if you manage a luxury boutique property you’ll know that the key message is to “never lower prices”. The problem is the perceived value of your offering changes depending on your guests’ buying behaviors and their needs at any given time.
4. Open pricing
Open pricing offers a more strategic approach for hoteliers, enabling the independent customization of rates across various distribution channels, distinct room categories, and specific dates, thereby maximizing revenue potential with more precise inventory management.
Open pricing is more complex than other pricing strategies and requires frequent monitoring and adjustment, which is often automated with a sophisticated Revenue Management System (RMS).
RMSs are typically more prevalent within group and chain hotels, given their complexity and the substantial training they necessitate due to intricate system rules and extensive reporting features.
Consequently, this strategy is unlikely to be the most suitable option for smaller independent properties.
5. Length-of-stay pricing
As the name suggests, this strategy requires you to adjust your rates based on a guest’s length-of-stay (LOS).
For example, a person staying only one night might be charged a higher rate per night, while someone planning to stay for a week might get a lower rate per night.
This way, you can make more money from guests who want short stays and are willing to pay more, while still attracting guests who want longer stays but at lower rates.
This strategy also helps you better manage room availability but to use this strategy, you need to understand your customers' behavior and be able to change room prices quickly based on demand.
There are some drawbacks, however: length-of-stay pricing can sometimes be tedious to manage and restrict your options when building a tech stack, as not all systems support this kind of pricing.
6. Discount, incentive and loyalty based pricing
Discount pricing involves reducing the regular price of a room to make it more appealing to potential guests.
While incentive pricing include promotions and package deals to guests who book directly with your hotel rather than going through a third party. Loyalty pricing on the other hand is where you provide more attractive prices to your loyal customers, incentivising repeat stays.
As a rule you will offer discount room prices and promotions to guests who book their stay in advance or during off-peak seasons when demand is low. This encourages more people to book rooms, helping the hotel fill up its rooms rather than leaving them empty.
Again, for discounts and promotions to be effective you need to understand your customers' behavior and market demand.These should be in place at the right time and targeted at the right people to increase bookings without losing too much revenue.
7. Guest segmented pricing
Guest segmented pricing is a strategy where you set different prices for different customer groups, or "segments".
These segments could be based on many factors, such as age, location, purpose of visit (business or leisure), or booking channel. For instance, you might offer lower rates to business travelers who often need rooms during the week, while charging higher rates to leisure travelers who typically stay over the weekend.
Different groups of customers have different levels of price sensitivity and reasons for wanting to stay. By tailoring prices to each segment the aim is to charge the customer the highest price they are willing to pay.
Once more, for this to work you need a thorough understanding of your segments needs and behaviors, and be able to respond rapidly to changes in demand.
8. Dynamic pricing
Dynamic pricing is an increasingly popular strategy as it is highly flexible. Room rates are not fixed but are adjusted based on market demand, competition, time of booking, customer behavior, and other factors that can influence booking patterns.
Prices change dynamically (hence the name) using real-time data to optimize your revenue and maximize occupancy rates, by taking into account all of the elements above, to deliver the most accurate room prices for any given time.
For example, during periods of increased demand, it's possible to elevate your room prices to make the most of the Average Daily Rate (ADR). Conversely, in times of reduced demand, you can decrease your rates to enhance room occupancy.
It’s simply not feasible to collect, collate, analyze your data to deliver effective dynamic pricing before the data is outdated.
That’s why there are now intuitive tools, created specifically for independent hoteliers, which leverage AI-driven rate recommendations to easily allow you to maximize your bookings and revenue with automated dynamic pricing.
9. Value-added pricing
This is a strategy where you charge higher prices by offering additional services or experiences that enhance the value of a stay. Instead of competing purely on price, you compete on the overall value you provide to guests.
Value-added pricing allows you to differentiate yourself from competitors and attract guests who are looking for more than just a room for the night.
For this strategy to be successful, you need to understand what additional services or experiences your guests truly value and ensure the price of them is justified by the additional value they provide. This can prove difficult due to ever-changing guest preferences.
A closer look at how to apply dynamic pricing at your independent property
There is no one size fits all approach to room pricing but at Lighthouse we firmly believe dynamic pricing is the most effective strategy for smaller independent properties.
In such a fiercely competitive hospitality landscape the flexibility of dynamic pricing allows you to capture the right customer at the right time, at the right price - maximizing your RevPAR, leading to improved profitability.
Pricing Assistant by Lighthouse is the new pricing recommendation tool built for independent hoteliers, which easily automates dynamic room pricing at your property.
With tailored and transparent AI-driven room price recommendations, you can unlock more revenue opportunities while saving time.
It instantly displays priority opportunities and price recommendations for up to 365 days in the future.
You can say goodbye to manual updates, countless hours in administrative work and manual pricing guesswork, so you can spend your time where it matters most.