What is a hotel pricing strategy?
A hotel pricing strategy is the art of maximising the revenue of your hotel by setting different rates based on market demand, room types and guest segments. A good pricing strategy is simply one that sees you charge the maximum that a guest is willing to pay.
While it may seem daunting to develop and maintain a room pricing strategy at your small accommodation business, you don’t have to be a revenue management expert to make a good start.
By taking a methodical approach and gaining an understanding of some of the key pricing concepts and tactics, you’ll be able to quickly boost the profit of your business.
So let’s take a look at some tips, rules and hotel pricing strategy examples!
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Why is pricing important in hotels?
Your hotel is a business, and businesses must make money to survive and thrive. If you set your prices too low you may struggle to cover costs. If you set your prices too high you may fail to secure the amount of bookings you need to get by.
A good hotel pricing strategy places your room rates right in that Goldilocks zone: not too low, not too high, but just right.
How does hotel pricing work?
Hotel prices are very susceptible to the forces of supply and demand. When demand is high and supply is low, such as during peak periods like Christmas and school holidays, a hotel can charge far more for its rooms. When demand is low and supply is high, a hotel will have to charge less, or get a little creative with deals, in order to attract the few travellers that are currently looking for a room.
How to calculate hotel prices
The first thing to note when considering pricing at your property is that there is no one-size fits all approach. How you determine your rates will ultimately depend on a number of factors, including:
- The size of your property and how many rooms you have
- Your destination and specific location
- Your local competitors
- Your target market
- Any unique selling points that make you stand out
Once you have all this information on hand, you can start to apply it to a pricing strategy.
A second crucial point to remember is that to truly manage revenue effectively, you’ll need to adopt different strategies and different rates throughout the year. This will ensure you can maximise profit and that you don’t get caught out by changing trends or fall behind your competition.
For instance, you might want to adjust your rates when:
- There’s a change of season or demand (e.g summer might be your busy season)
- A cultural or leisure event is happening
- A corporate conference is in town
- You notice a change in competitor rates
- Your availability decreases / occupancy increases
Hotel pricing compliance
In order to stay on the good side of both your customer base and the authorities, you need to ensure that room rates and other charges are accurately and consistently applied across all your different booking channels.
Most OTAs get their hotel partners to sign rate parity agreements which state that you, the hotelier, cannot undercut the rates offered by the OTA without breaking their hotel pricing compliance terms.
Your rates must be free of surprise charges and hidden fees – the price shown at the beginning of the booking process should be the price charged at the end of the booking process (minus add-ons and upsells).
Seasonal and promotional rates
Any seasonal or promotional rates should be accompanied by clear conditions including explicit deal dates and rules around rain checks.
Always clearly state the currency that the prices are displayed in. This is particularly important for widely used currency names like ‘dollar’ and ‘peso’.
Compliance with regulatory standards
Ensure your hotel pricing abides by rules and regulatory standards. These can differ from country to country, and even region to region, so do some research as to what your responsibilities are. It may be worth speaking to an expert in order to gain some clarity.
Small hotel pricing strategy examples
Before you decide on a hotel pricing strategy, you need to ensure you can accurately forecast demand and track changes in your local market. This data will enable you to make smart decisions throughout the year.
If you need help keeping track of your property’s performance and the competition, consider using reporting and insights software.
With all that in mind, here are three pricing strategies you could set at your property as a foundation:
1. Value-added hotel pricing strategy
This means you will set your prices slightly higher than your competitors but winning guests over with more extras and add-ons to their booking.
2. Hotel discount pricing strategy
Useful when you’re in a low season and need to boost occupancy by discounting your base rates. You’ll need to make up the additional revenue through other services such as food and beverage.Cost-based strategy
This involves calculating all the costs of running your property and then pricing your rooms based on the amount of profit you want to make. Of course, you need to take into account which costs are constant and which costs vary.
3. Seasonal hotel pricing strategy
This involves adjusting your rates on a quarterly or half-yearly basis based on your forecasted demand, raising rates for the busy periods and lowering them in low periods, and using promotions and packages to boost bookings.
While these strategies may be fine as a starting point, they can’t be relied upon as a ‘set and forget’ pricing strategy if you want to maximise profit at your business.
That brings us to…
4. Dynamic pricing strategy
Dynamic pricing means changing room rates daily or even within the day based on real-time demand and market fluctuations. In high seasons especially, demand and prices can change frequently.
Typically, pricing is not about what your room is worth but what value you can get out of it. That’s why dynamic pricing is so important, because it allows you the chance to maximise your profit margins on every room at your property.
It’s managed most easily with the help of a tool that can gather market intelligence and suggest optimal pricing for you.
Clever hotel room rate pricing strategy
Outside of any major pricing strategies you set, there’s plenty of smaller room rate tactics you can apply that may help you win additional bookings or incentivise guests to spend a little more.
What is the best hotel pricing strategy? Here is a list of hotel room pricing models for you to know:
1. Psychological pricing
While a nice even rate of $200 per night may be easier for you, a consumer will find the rate $199 more appealing. It seems illogical but quite often accurate, and it also allows you to market rooms as ‘under $200 per night’.
2. Segmented hotel room pricing
There’s always some budget-conscious travellers who are going to look for the cheapest price possible, and luxury travellers for whom money is no object. However, the vast majority of travellers are going to be middle-market guests who are looking for a nice room that offers good value. To capture as many bookings as possible, set your basic room price to the cheapest market rate, while pricing your mid-level rooms at the basic rate of most of your competitors.
3. Hotel package pricing
Packages can allow you to earn more per booking than you would if people just booked a basic room. Packages might include wine and chocolates, or a welcome basket that includes luxury toiletries, snacks and water.
4. Segmented guest pricing
By knowing what your most common guests are motivated by, you can set rates to maximise bookings and revenue. For example, if you are a hostel which caters to millennial travellers, you will likely want to create a pricing strategy that allows you to offer low base rates and extras that enable you to earn more per traveller.
5. Competitive pricing
Sometimes occupancy is the key, so you just need to price-match or beat your competitors on price to get guests through your door with the promise of a better experience.
6. Weekend pricing
If your bed and breakfast is located in a particularly popular weekend destination, you can establish higher rates for Friday, Saturday and Sunday nights every week.
7. OTA-led pricing
If you rely heavily on OTAs, you may want to consider the pricing strategies that work best for them as you develop your B&Bs rates and revenue management strategy.
8. Group pricing
You might consider offering a group pricing or package pricing discount for bookings above X number of rooms, as these big reservations can be great for the bank balance, and it’s usually more efficient to deal with one big group of say 10 travellers than 10 individual travellers.
What is the leading hotel pricing trend?
Perhaps the one of the most interesting strategies of all though involves setting rates specifically for travellers booking on their mobile device…
Mobile as a channel for online travel booking is constantly growing, and accommodation booking accounts for a majority share in the mobile travel booking market.
Just check out these stats we found:
- The number of smartphone users nearly doubled between 2014-2018
- North America is leading the mobile travel bookings market with over 40% share in the revenue in 2020.
- Some 63% of consumers in the US even say that it’s extremely important for them to use a smartphone when planning a trip.
- Of those who were vaccinated, 53% carried proof of vaccination on their smartphones.
- 72% of mobile bookings happen within 48 hours of last-minute Google searches.
- Over 2017–2021, global retail mobile-commerce sales grew from $1.4 trillion to $3.6 trillion.
- Skift believes mobile travel sales account for about 30-40 percent of online travel sales and 15-25 percent of total travel sales globally.
So the evidence is there to sell some of your rooms with mobile-exclusive rates. This will allow you to:
- Capture more last-minute bookings
- Encourage more direct bookings
- Speed up conversions
- Give you additional customer data
- Add a layer of flexibility to your pricing strategies
By Dean Elphick
Dean is the Senior Content Marketing Specialist of Little Hotelier, the all-in-one software solution purpose-built to make the lives of small accommodation providers easier. Dean has made writing and creating content his passion for the entirety of his professional life, which includes more than six years at Little Hotelier. Through content, Dean aims to provide education, inspiration, assistance, and, ultimately, value for small accommodation businesses looking to improve the way they run their operations (and live their life).