How Do You Price To Maximise Revenue?

Pricing correctly for each target market is vital but never use price alone as the reason to persuade prospects to use your hotel.

Pricing Challenges

Your pricing policy is one of the major influences on your profitability. Set your prices too high and prospects will think that you are too expensive for the benefits offered; too low and customers may think that there is something wrong.

In an ideal world you would take your costs of doing business, estimate your likely occupancy and then work out an acceptable room rate. If you did this exercise I suspect that your room rates would be at least 30 per cent higher than your closest competition. During your investigation of your competition you will have established where you fit and what your headline rates should be. Hopefully if you combine the tactics in the previous section with some of the techniques in this section you will find some opportunities to close the gap, so that you actually do make some money.

The internet has had a big influence on hotel pricing, mostly due to the universal availability of your prices. There are no secrets anymore, so every decision you make must be consistent and, most of all, to your long-term advantage. However there are a great number of opportunities for the independent hotel to level the playing field with their chain compatriots. Here we will look at some areas where your policies need to be certain.

Pricing Psychology

There are many well-known metrics that companies take into account before arriving at pricing decisions. Many of them apply to manufacturers and to retailers of goods. Hotel services are very different, in the same way that airlines and car hire companies have sales opportunities that are lost if not consumed immediately.

You are in a business where you cannot just take your costs of production and add a margin. You have limited supply and must maximise your opportunities when they present themselves. Here are some factors relevant to the hospitality business that you should take into account when setting your rates and prices.

Reference Pricing

This is where your customer has a general expectation of a price level that seems reasonable and fair. Now the difficulty here is that you have no control over where they get their information to develop their expectations. In some ways this is to the benefit of the chains, since if your prospect knows the Hyatt in Birmingham, then they will have a good idea of the price of a Hyatt in any other location. When assessing your value for money, customers look at current and past price influences and the price of similar hotels.

At its most basic, if you have been quoted £ 100 online, made a booking and turn up outside what looks like a flea pit, you will feel inclined to get straight back in the taxi. On the other hand, if a concierge welcomes you and the hotel looks like a five star property you will congratulate yourself on securing a bargain.

Relative Prices

It is not the actual price of your hotel that is important. More influential is the perception of a price difference, either since last time a similar purchase was made or against a competitor. This serves to emphasise the importance of surveying the competition and being realistic of the price differences that are justified by your service and facility differences.

Perceived Value

No one would seriously contend that the hotel business is all about price. Mind you, by the behaviour of some companies you’d think that they had nothing else to offer! There is a huge range of hotel offerings, all at various prices. Guests pay £ 500 rather than £ 50 presumably because they feel that they get the value that they want.

The price that customers are prepared to pay is based on their perception of value. The whole of your marketing effort is directed at maximising this perception in the mind of your prospects. This is the basis of all brand advertising, where the intention is for you to perceive the value to be greater than its non-brand alternative, just because of the brand image.

Perceived value is usually described as a trade-off between quality and price. Your customer makes a perceived value judgement based on comparison of the actual benefits received with the actual sacrifices (price paid) endured. At the same time the customer compares the value received with the perceived value of other alternatives.

Unfortunately customers are often not in a good position to judge the true worth of a service, so you need to help them. You need to boost the perceived value by manipulating the customer’s frame of reference.

It is vital to focus on the value of the service in relation to the rack rate, so that the temporary price promotion is seen as offering great perceived value.

There is always a debate about the wisdom of including breakfast in your room rates. Branded budget hotels do not include breakfast in their rates because they claim that customers want a choice about whether to take breakfast or not. On the other hand, Express by Holiday Inn does include it in their rate. Most small hotels and pubs with rooms seem to include it. It really depends on your market. I have found that business travellers prefer to have the choice, and if you include it in the rate you then have an argument when they don’t take breakfast. Leisure travellers are most likely going to have breakfast anyway so you might as well include it.

To increase the perceived value you should only use photographic images that place you in a good position relative to your competition.