Value added pricing: Strategy and examples for hotels

What is value-added pricing?

Value-added pricing, also called value-based pricing, is a strategy that sees hotels set their prices based on what customers believe the room or service is worth. The major difference from other pricing strategies, such as cost-based pricing, is that value-added pricing isn’t based on what the room or service costs your hotel to deliver (although this should always form a consideration to ensure that you don’t lose money).

Swiss watches are a classic value-added pricing example. Between materials, parts and labour, the cost of producing high-end watches isn’t that significant. But the reputation of Swiss watch manufacturing is such that a Rolex or Patek Phillipe can be sold at an incredible markup, and the customer will still feel as though they are getting value, despite the price being divorced from the cost of creation.

What can be the impact of value-added pricing for hotels?

A value-added pricing strategy grants you the opportunity to make far more money than any other pricing strategy.

If guests hold your hotel in high regard, you can charge more for the pleasure of staying there. It doesn’t much matter if your costs are low or the hotel next door is charging far less – your reputation means that you can earn more bookings and make more money regardless.

How does value-added pricing work?

Successful value-added pricing strategies are built on a foundation of reputation. You need to carefully craft how your hotel is perceived amongst potential customers. When that perception is positive, you drive demand that allows you to charge more.

There are two main ways you can enhance your reputation:

• Through branding and marketing: Focus on the concept of quality in your marketing materials to justify your higher price. Identify the thing you do better than other hotels and tell the world. Invest in quality content, like high-end professional photography.
• Through ratings and reviews: Solicit reviews from happy guests, and reply to a good number of them, particularly those that are negative or indifferent. Remember that negative review replies are an opportunity to show potential customers who you are.

Value-added pricing examples

Let’s imagine two very similar properties sitting side by side: Hotel A and Hotel B. They have the same layout and they target similar demographics. Hotel A has been in business for decades and is set in its ways. Hotel B is newer and sees an opportunity to enhance its reputation and implement a value-based pricing strategy.

Hotel B invests in branding to present itself as a luxury option. It invests in professional photography and videography to put itself in the best light. It invests in marketing to spread the word about the high-end guest experience it offers. And it carefully curates its online reputation by encouraging and responding to ratings and reviews.

Over time, Hotel B transforms itself into the high-end option of the two. Potential guests perceive quality, and are thus prepared to pay more. Eventually, Hotel B charges $100 more per room per night, and manages to secure more bookings at that rate, despite having similar costs to Hotel A.

How to create a value-added pricing strategy for your hotel

Value-added pricing is based on customer perception. As such there’s no simple, easily quantifiable formula for it.

To work out value-added pricing, most hotels will begin with either the average daily room rate (ADR) or break-even point for a given room, then add to a profit margin based on what they believe a customer is willing to pay.

How do you find out what the average guest believes a room is worth? One way is to simply ask. Send out a survey to your customer database asking which of your features and amenities they value most, and how much they believe each is worth on its own. A view of the ocean might have a perceived value of $40 per night, a private hot tub $100. You can then use the results of this survey to add the value of included amenities to a room’s ADR.

Another option is to check what competitors are charging for luxury rooms and amenities, although this begins to become more of a competitor-based pricing strategy.

Why should my hotel use a value-added pricing strategy?

Implementing a value-added pricing strategy can be a deeply revealing and rewarding process, and there are many reasons that it may be the right move for your hotel. Value-added pricing can help you to:

• Increase profit: If your hotel is held in high regard, value-added pricing can see you make more money on every booking!
• Identify your strengths: The process of crafting a value-added pricing strategy is identifying what you’re good at, enhancing those strengths even further, and telling the world about them.
• Understand your customers: You need a deep understanding of your customers to set accurate value-based pricing, and this knowledge can also help you to better cater to their wants and needs.