Tactical Pricing – Mitigating Unintended Consequences

Hotels annually identify their pricing strategy based on their costs, forecast, business mix and opportunity. For the lucky few that operate a unique, non-competitive product (i.e., a luxury hotel in a market dominated by economy hotels; a boutique hotel with minimal function space in a large city center; etc.), pricing can be as simple as a few rate tiers with minimal discounting. However, for most of us, hotel rates require deeper consideration based on the varied business mix – particularly in the luxury segment. Not all customers are willing to buy a suite at the retail rate; nor is it necessary to consistently fill the hotel with heavily discounted wholesale prices. The magic is in this mix.

Business mix is critical when establishing prices. There are a number of factors to consider when identifying how to price a type of business:

·?????? Negotiated Per diem. What is the company’s rate range and demographic? For instance, if the hotel is identifying VIPs vs. managers, higher rates (and premium room types) may apply.

·??????Geographic origin. Rates that are intended for travelers from afar are generally higher than those that are local.? Resident rates (in Hawaii or Florida, for instance) typically require a government issued ID for access but are publicly posted; corporate rates negotiated globally can be challenging to offer for stays from company branches in local jurisdictions.

·?????? Bulk volume. The more volume an account brings, the higher the anticipated discount. These often include additional concessions from the hotel, be them at a hard cost (ie, breakfast) or soft cost (ie, last room availability).

·?????? Group/Convention needs. Groups may require function space and meals, a large bulk room purchase over a short period of time, and specialty room types for VIPs and planners.

·?????? Competition and Amenities. If other hotels offer similar services and amenities in your geographic area, cautiously position your pricing to be realistic yet not over or under priced to lose opportunity.

In all of this, hotels can set targets of the volume of each type of business or account to achieve their annual budget. Sometimes this may be contrary to hotel owners, or to unexpected business conditions, which often can force an unsuccessful strategy – or tactic – that undermines the hotel’s success and positioning. These tactics should be carefully considered to ensure the overall strategy is achieved.????

Some of these situations are relatively common – be it a strategic reduction by a key corporate account, a canceled group, physical changes to the surrounding area resulting in reduced demand, lack of investment in a hotel’s physical space or personnel, and so on.??? When these occur, and demand wanes, hotels often result in quick discounting to bring business back.

Here are some considerations to take into account for these common strategies:

OTA Outreach. Often the first strategy is to reach out to friends in the online space and run a discount. What is the additional cost to the hotel? Is the discount truly being passed to the customer or is it taken by the OTA to pass on to other distributors, undercutting negotiated – or the hotel’s direct – rates? Who are these customers, and will they be willing to spend more on property, or go to a fast food restaurant near by????

Direct Discount. Hotels will go onto their booking engine and enter a quick discount to bring in customers. Does this damage the hotel’s overall value perception to customers willing to buy higher rates?? Will loyalty customers be upset when they see a public rate that is lower than what they should naturally get? ?What about premium agency value added programs – will they be undercut, and how does this impact the relationship with the hotel??? Finally, will this drive down prices across the competition – and start a price war??? Will this undercut any corporate negotiated rates?

Flash Sales.?? A common option is to participate in an unfenced flash sale to drive quick bookings at low prices and put “heads in beds.”? Does this damage the hotel’s overall value perception to customers willing to buy higher rates? Or does this drive the customer to look for you only on such sites – and shift the booking channel to a less profitable one???? How does this impact your loyalty customers – are you matching the price????

Value Added Package Discounting. Hoteliers may consider a nominal discount, and then add additional offers such as breakfast, spend credit, amenity, parking, etc.???? Additional products are not free and can add up to be costly – this reduces the profitability of the product.? Additionally, what about premium agency value added programs – will they be undercut, and how does this impact the relationship with the hotel????

Tactical pricing can be effective, but needs to be carefully handled to achieve the overall strategic objective.? Follow these true tried rules:

·?????? When offered unfenced, Price Match the rate across unfenced business types – that means a 15% discount on your direct channel should also be made available in the GDS and any brand channel. This also means that you offer this to OTAs, in which case, carefully inventory manage this.

·?????? Use the loyalty program to fence the opportunity, allowing you to exclude OTA distribution. A further, better option is to require a prepayment to reduce attrition of higher rated business.

·?????? Consider the impact to negotiated rates. If your discount impedes on a corporate rate, peg the corporate rate to be equal to the discount. That ensures the corporate customer sees their value and gets access to the discount.

·?????? Agency Value Added Programs and any negotiated groups should not be offset by the discount. For instance, a 25% discount for a three night stay could make the Premium Agency Rate that is set to the retail price with a $100 credit and breakfast too expensive.? A discount lower than a group rate can direct customers to “book around” their contractual rate, causing the group to pay expensive attrition clauses if they do not hit the minimum.

·?????? Do further fencing such as minimum lengths of stays, prepayments, strict cancellation policies, numbers of people (ie, requiring 2 adults) and working with dedicated demographics that require ID (i.e., AARP, AAA, etc).? Another option is to randomize days, which is particularly effective for heavy discounting.? This reduces? customer expectation of always finding these rates.

·?????? Work with the loyalty provider and bring in more award nights/stays. Customers are required to redeem their points that they’ve earned.?? While often these are more costly, they can help bring in business at least to offset the hotel’s marginal cost (that is, the cost of selling one more room – excluding hard costs such as hotel security, lobby lighting, etc)

Discounting should be inventory controlled, allocating an expectation that is carefully managed.? Lastly, discounting is a tactic – not a strategy. If you regularly offer a 20% discount publicly, review your overall pricing direction – it is likely you are priced too high.

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