Hotel pricing is heavily influenced by consumer behaviour. As a revenue manager, there are various factors that have to be considered when deciding the distribution strategy.
Today, guests are opting more for online reservations for two primary reasons. One, growth in both internet and mobile penetration has made online bookings an easy and convenient reservation method. Two, competition in the industry has created an environment for discounted pricing that consumers can easily avail. In order to appeal to this segment, revenue managers must adopt dynamic rate management techniques. Good budgeting is the foundation for great rate management. Integrating positioning, market segmentation, rate parity along with the assumption of demand period components, can provide the opportunity to establish a realistic revenue goal.
Many a time, the budgeting process is based on increasing revenues by a certain percentage, year on year. That approach leads to disaster because many factors, including global and economic conditions, need to be considered to accurately project revenues and expenses. An approach that encompasses positioning, collaboration, market segmentation and proper rate establishment combined with well-founded budgeting to evaluate each guest, will allow the revenue manager to generate results that create best daily revenues for both a short term and long term payoff.
Let’s look at how dynamic pricing can be an important tool for revenue maximization.
What is dynamic pricing?
It is a price-to-market technique where rates are adjusted based on the demand and supply pattern. In India, we see this model already functional in the airline sector. Flight ticket prices fluctuate depending on the number of seats sold on a specific flight. That’s why ticket prices rise closer to the date of departure.
Why hotels should adopt a dynamic pricing strategy?
In the hospitality sector, dynamic pricing model had been adopted by a few global hotels such as Marriott and Hilton in the early 2000s. However, more and more hotels are now adopting this model including hotel chains such as Taj properties, ITC and Leela. It is being seen as a strategy to offer cost-based pricing during off-seasons to cover their operational costs, while hotels can charge higher room rates during peak seasons to maximise revenue.
In fact, dynamic pricing is becoming a very popular model between hotels and travel companies. Here dynamic pricing is realised as the percentage of discounts hotels offer on their best available rate to travel companies. According to a survey report by GBTA, some travel companies feel that dynamic pricing is the best cost-saving proposition particularly in cases where they don’t drive sufficient volume to qualify for a corporate discount.
How to overcome the challenges of dynamic pricing?
While dynamic pricing is emerging as one of the major trends of revenue management, there are still several challenges that hotels face which is stopping it from being adopted on a large scale. For an efficient dynamic pricing system, the revenue manager has to be at the top of his game at all times. There are two parts of dynamic pricing – arriving at a daily time-based pricing mix and forecasting a long term price strategy.
Also Read: Hotel Sales- Revenue Model
To achieve the former, revenue managers should have access to a responsive revenue management system with an integrated business process that allows them to track important metrics such as occupancy, ADR, channel performance, room availability and customer demand real-time so that pricing decisions can be made quickly. Coupled with a strong distribution system where rate updates and packages can be published real-time across all channels will not only boost yield but also provide for transparency in hotel rate strategy.
Arriving at a long term pricing strategy can be a bit more complex. Revenue managers need to be able to assess customer demands and booking patterns from the previous years and predict the same for the future. An efficient long term pricing strategy, where revenue managers can show the predicted volume of business in the coming year and the forecasted room rates per room type and season, can be a great way to win the trust of travel companies and encourage them into entering a dynamic pricing business model. But if such predictions turn out to be incorrect, the hotels business can really take a hit.
However, with advanced technology, revenue managers can now resort to business intelligence applications that not only record data year-on-year but can also translate them into understandable trends and patterns for revenue managers to take agile decisions. Assisted by reliable prognostic analytic applications, revenue managers can not only forecast budget and price trends till the last available inventory ahead of time but also automate the revenue process by setting their top and bottom-line objectives. This simplifies the challenging process of dynamic pricing to a great extent and also allows for the revenue managers to capitalize on changing marketing conditions real-time and stay ahead of the competition.