Key aspects to consider when creating the pricing strategy

28 September 2021
Hotels make too many mistakes in their pricing that upset guests, drive commoditization, and stop hotels from long-term success. Revisit the pricing strategy based on new research.

The most common pricing tactic for hotels is to follow the competitors' pricing. Shop the competitors' rates and adjust your rates to the same level. Unfortunately, this pricing method is terrible, and being a follower means that you will never beat the market. However, for those with no idea about pricing, following the competitors' pricing will keep the hotel afloat even if it is below the fair share of the market.

A well-thought-out pricing strategy is a key to beating the market and capture a higher market share than the fair share. Here are some ideas based on a recent article in the September-October 2021 issue of HBR.

Constant price changes can backfire

Many hotels use sophisticated pricing algorithms that rely on artificial intelligence to manage price updates, calculating the price primarily based on demand. However, constant price changes can alienate guests, undermine their loyalty, and damage brand reputation.

It gets worse. Research by neuroscientists shows that pain centers in the brain are activated when people see an excessive price. That knowledge is probably unknown to all the hotel revenue management systems. When demand is high, hotels tend to heavily increase their rates, creating pain for their valuable guests. With the help of OTAs, it will be a painful experience for the guest to see how all hotels in a destination during high-demand days use a version of surge pricing, sometimes of several hundred percent. Hotels prioritize short-term revenue with little regard for guests' perspectives and their long-term loyalty.

Changing rates based on supply and demand tells guests that the value of an overnight stay is mainly related to whether it is available or not - not how well it solves the guest's problems or performs relative to competitors. Unfortunately, many potential hotel guests have by now learned how to game the system to get the lowest prices. Hotels made gaming possible due to discrepancies between different distribution channels and mistakes made by revenue managers or systems updating rates and availability. As a result, upsetting guests try to beat the system will drive commoditization and intensify the race to the bottom. Airlines is a terrifying example of this.

Do not hand over the pricing to systems

The pricing strategy is vital for success, so, therefore, the board of directors should make the final decision about the strategy and the framework. An essential part of this decision is to understand the message that a price sends to the guest. Once there is a clear direction, the commercial manager should be responsible for the implementation. The revenue manager will monitor the revenue- and pricing systems daily and overturn any of their decisions that risk alienate guests.

Every hotel should be aware of the two weaknesses of pricing algorithms. First, it cannot understand the behavioral and psychological effects of price and price changes on guests. Second, it lacks the long-term perspective to ensure compliance with strategy, building customer relationships, and creating guest loyalty.

Hotels need to manage price settings and messaging proactively and strategically to avoid commoditization, leading to higher price sensitivity, undermining price-value relationships, and hurting the brand reputation. Hoteliers tend to pay attention to review scores for their hotels, but they often miss the connection between the score and the price.

Short-term pressure or long-term success

Hotels are under constant short-term pressure to fill those rooms daily because an empty hotel room is a lost revenue opportunity. Unfortunately, the short-term stress often sends a message of unfairness, manipulation, or greed. Black-out dates in a corporate agreement are a typical example where greed outweighs a long-term customer relationship. Closing corporate rates during peak demand is another example. Undercutting fixed corporate rates with a lower BAR during low demand days is very hard to understand for guests and leads to questions about the value of the corporate contract. 

The HBR article has a lot of good advice that would work well for hotels. This article is a must-read for top management and revenue managers to learn how to avoid upsetting guests and damaging the hotel brand.