How Hotels Can Determine The Right Pricing Strategy

June 21, 2016 Janel Clark

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In a previous blog post on how to best understand guests, SnapShot COO and co-founder David Turnbull discussed how hotels can use data to both better understand and better serve guests. In this blog post, our Head of Education, Janel Clark, takes it a step further, exploring both traditional market segments, newer, more dynamic models, and how to develop the best pricing strategies. 

Segmentation: Then and Now

In order to understand hospitality today, it is first necessary to understand how hotels segment their business. After a few minutes of trying to sort it out, a few of us might feel inclined to ask, “Why do we segment our markets in the first place?” The answer is different guests want different things, and are willing to pay different prices to get what they want. Consequently, by properly segmenting potential guests, we can be more efficient with our booking and cash flow, and take a different approach in marketing, pricing, and demand generation for each segment we have. 

To properly catorgize segments, variables like geography, demographics, and behavioral profiles can be correlated with guest booking for a clearer picture. In contrast, when we look at the old way of segmentation, it is not uncommon to find hotels with 60% to 70% of their business tracked under just one segment. This is where the common market segmentation principle of MAAS (Measurability, Actionability, Accessibility & Substantiation) can be employed to broaden hotels’ segmentation. With booking behaviors and costs of acquisition factored in, hotels can better understand and acquire new guests in a profitable way. The key is to focus on the valid, profitable segments, and then to grow slowly. 

 

Demand Segmentation: Tomorrow’s Benchmark

Next, let's look at channels as they revolve around segmentation. First and foremost, hotel managers should know that achieving proper segmentation involves dealing with each channel separately. Once each channel is categorized it is far easier to optimize, and then later order by categories if needed. This is especially important as it is how your hotel will eventually distribute rooms and rates, and how you will market your hotel.

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With new channels growing at an ever increasing rate, the opportunities for marketing and sales through different channels will increase, too. Examples of this could be TripAdvisor adding direct reservations, offers of last minute rates through applications like HotelTonight, or AliTravel adding new distribution and payment methods. 

The number and variety of booking conduits grows daily. Right now this is especially true in China but is quickly becoming true in other markets, too. As more channels emerge, it will be come more and more of a challenge for hotels to keep their PMSs, CRSs, and other platforms and their respective data organized. 

At this point, managing a hotel’s demand is just fundamental for every manager. Knowing which distribution channels should be activated to increase demand and knowing which segments they bring with them and how flexible the hotel can be with prices managers need to understand all of this. Understanding the real cost of distribution is already considered by some to be the "holy grail" of increased revenue, so those who get a head start now will benefit in the near future. 

 




 

The Pricing Strategy

With proper segmentation established, we must now look at how to create the right pricing, and the influence of micro-pricing decisions. Once you understand differential pricing and start to implement segment pricing, it'll be easier to acheive optimal revenue and the healthiest business mix.

But before we tackle the specifics of segment-based pricing, we need to establish a foundation for the pricing structure, which over time will reveal how high or low a property can go in those segment prices. 

Just a few years ago price elasticity was impetus enough to quickly increase room reservations. When a revenue manager did not see the reservations pick up for a certain date, he or she could lower the price and provide an instant remedy. Today, with user generated content, mobile and other technical considerations, plus the increasing complexity of distribution algorithms, there are more factors to take into account. These factors don't just effect OTAs with commission overrides, they are valid for every channel. The key is to look at them as a matter of Price versus Value (via reviews) compared to Visibility (via advertising). These work for your brand.com website, your OTAs, GDS and every other channel as well. It is here that adequate hotel demand management tools can deliver the right information to manage demand. 

With this in mind, segment-specific pricing can now be implemented for defined segments with corresponding rate plans. These can include:

Best Available Rate (BAR): The lowest non-restricted rate bookable by all guests. This rate is available to all customers at a segment level and can change several times a week up to several times a day. The BAR is considered the rate and transient segment upon which all other rate plans are calculated.

A Negotiated Rate: A restricted rate that has been set through an agreement between the provider and an entity such as a corporation or government. Negotiated rates apply to a specifically defined group or category of travelers for a specified time period, after which the rate no longer applies and must be renegotiated.

Tour Operator Rate: Basically follows the same principles as the negotiated rate, however it will typically apply a deeper discount in return for specific volume commitments and/or additional marketing. Tour Operators are traditionally focused on the leisure traveler. 

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So what can we do with this? 

Through tying your hotel pricing strategy to segmentation, you encourage the continued development of the unique characteristics of each segment. This avoids cost cannibalization where the wrong customer accesses the wrong rate. When building a pricing structure, hotels should allow customers to “segment themselves” with indicators such as Day of Week, Length of Stay, and Advanced Payment, ideal ways to create further segmentation with a BAR-orientated Transient Segment.

Hotels that make the best of traditional market segmentation, while introducing new segments properly, will be enabled to create a more perfect price/revenue result.