Unit 6: Pricing
- the importance of pricing
- how can we set the price?
- price discrimination
- pricing matrix
- OTA, opaque, wholesale partners and group pricing
Hotel pricing before RM
Prices were quite fixed
Little product differentiation
Little variability in demand (3 seasons a year)
*Still in some hotels... they do not apply RM.
Pricing
Strategic pricing: is the annual process of deciding and establishing which rates and prices will be charged for your products.
Operational pricing: is about deciding on a daily/weekly basis which particular price of your rate you charge per each product depending on the demand
3 different methods. We must consider the 3 approaches for the hotel industry
Cost-based pricing
Competition based pricing
Demand-based pricing
Charge a mark-up over the cost.
COST + MARK-UP % = FINAL PRICE
- Penetration pricing
- Skimming pricing
- Market price
Charge a lower price than your competitors
It might be useful for new entrants or when your demand is too low.
It might have long-term negative effects
ECONOMICS RECAP
SHORT RUN
LONG RUN
Operating
Exiting
Open
cost of exiting the market, is the TOTAL REVENUE
benefit of exit is THE TOTAL COST
Exit iff: TC (BENEFIT) >TR (COST) =D
TC/Q > TR/Q = ATC > ADR (if this happens you exit)
Shutdown
Cost of shutdown = TOTAL REVENUE
Benefit of shutdown = VARIABLE COSTS
Shutdown iff = VC > TR
VC/Q > TR/Q = AVC > ADR
in the short run, you open if and only if ADR>AVC
In the long run, you only remain in the market if and only if ADR>ATC
Charge a higher price than your competitors
Many customers believe that a higher price equals higher quality. Yet, you need to really offer something better that your competitors
You need to innovate and create value for your product
Many small hotels that cannot differentiate from their competitors use this strategy
Charge same price as your competitors > average price for at least one of your products
You need to have an approx idea on how is the demand for your product
Elasticity concept: the effect of change in price on the quantity of demand
PRICE ELASTICITY OF DEMAND = % CHANGE IN QUANTITY DEMANDED / % CHANGE IN PRICE
Pricing considerations
The greater the need the less is the elasticity
Leisure travelers have a more elastic demand than business ones
The elasticity of demand is higher in the long term than in the short term
How to get an estimate of our demand?
Historical Data per segment (PMS)
Experiments
Surveys
Qualitative techniques
How to set price
consider the three approaches
Cost
Competitors price
Maximum willingness to pay
Psychological sales techniques
Effect of useless price points
Ending a price with 9
Price font size
Different price per each product
Selling the same good at different prices to different buyers
How to price discrimate?
Per segment
Per versions of the product
Per distribution channel
Leisure/Business, adult/young, foreign/local
Single / double / suite
Single+breakfas/Double+breakfast/suite+breakfast
Official website, OTA, Tour-operator
Creation of products
Product: combination of price and quality
Products need to be differentiated among them and they need to create value.
Products need to deliver value to the customer (satisfy his/her needs), reflect the willingness to pay and be profitable for the hotel
Rate fences
Guests need to feel that they are buying different products when they pay different prices.
Rate fences are characteristics, conditions or rules that create product differences
They need to be useful for separating customers with high willingness to pay (WTP) from those with low WTP
Rate fences (phisical)
Location
View
Furniture
Amenities
Size
Rate fences (transaction-related)
lead time
quantity of purchase
flexible cancellation
Rate fences (guest-related)
Age
Affiliation to an institution or group
Frequency or volume of consumption
Rate fences (distribution-related)
geographical critiria
Distribution channels
From fixed to dynamic pricing
Fixed prices-Prices per season-Promotional price using fences-Best Available Rate-Floating BAR
BAR: Best Available Rate
Lowest available rate for a given date
Rates for other products adjust (a % of the BAR)
A hotel can have many different BAR, the lowest BAR is applied when the occupancy is low and when is high you apply a high BAR
for each type of room you have a different rate and the price varies depending on the rate fences
You can have different pricing matrixes for each season
Rack rate
it is the maximum rate that you charge in your hotel. It is the official rate.
Pricing matrix definition
Include different BAR levels in order to change the price depending on the actual demand
For each BAR, set a different price per each product (room)
Check that it makes sense the change in price across the different BAR levels and products
Some experts recommend to use a maximum of 12 BAR levels
Review your historical data to adjust prices and BAR levels
Strategic pricing vs. Operational pricing
Strategic pricing - rate structure (pricing matrix)
Operational pricing - choose a specific BAR depending on your strategy
OTA Pricing: Usually 2 types of contracts
Agency models (commission based): the OTA charges a commission to the hotel (15%-25%)
Merchant model: OTA negotiates a discounted rate with the hotel and the OTA adds a markup
Opaque Pricing
LOW DEMAND = Big discount + secret name
Wholesale partners pricing
Hotel signs contracts with TTOO
This contracts consisted of fixed rates (per season) and were assuring and allotment of rooms per date
These contracts usually specify that if x days before the check-in date the wholesale partners has not sold all the rooms, the hotel can sell them (release date)
Traditionally these wholesale partners business models were B2B. Now they also engage in B2C--- problems for the rate parity
Non-yieldable segments
Are all the bookings you cannot reject even if you could sell at a higher rate on those dates due to your contract clauses such as the Last Room Available (LRA) clause
A LRA clause states that we cannot reject a negotiated rate for a room if we still have available rooms in our hotel (independently of the forecasted demand)
Be careful when you negotiate these contracts
First best contacts with wholesaler partners
Dynamic rates
No LRA clauses
Do not allow B2C in the contract
Allotment to wholesale partners only in off-season periods
Group pricing