Hotel Pricing Strategies: Using Room Types as a Strategic Yield Tool
The rooms of your hotel are one of the most powerful tools you have at your disposal as a revenue manager. It allows you to segment and position the hotel product, differentiating yourself from the competition. If segmented correctly it also allows you to build a revenue management strategy based on a comprehensive demand based yield or rate grid.
Room Type Segmentation
In a previous article on our blog we already discussed creating multiple room types to improve the commercial positioning of your hotel. Using your rooms to merchandise your hotel, will result in auto-upselling by guests, we concluded.
But there is more to it. It allows you to build up a comprehensive rate grid with a multitude of price points. Having a wide range of room types at our disposal, with a well defined product variation, allows us to reach different buyer (aka potential guest) budget level.
Let’s be realistic, not everyone has the same level of money available. And some people are simply looking for the best rate, while others are willing to pay a little extra to get a bit more. If you are questioning this just look at the cell phone or car industry. We almost all have a different type or model, all with a different price. There is a psychology behind it …
Let them auto-upsell themselves … Choice will increase your ADR!
This exercise, easily adds 5% to your top line room revenue … we have tried it again and again over the last decade, always with success …
Fully Dynamic Pricing
In the early days of revenue management yield managers used to work with price BAR levels. However this practice in the age of dynamic pricing is a bit outdated. It limits you to work only within a predefined set of rates.
But what if there is demand to sell your rooms can sell at a higher price? Or what if you need to go lower during distressed periods?
We prefer with a fully flexible pricing matrix, which allows for any rate (and of course you can set a minimum if you feel this is necessary). Working with an open pricing grid, allows us to find the balance between supply and demand with any rate possible.
Auto Yielding to Push ADR
The advantage of having multiple room types with different rate levels is that as the category sells out, your pricing jumps automatically to the next level. This replace the need for the old-fashioned rate levels. In essence your room-types become your rate levels. So if you get a wave of reservations, the system will do its work for you, and increase your average room rate.
Overbooking Room Types to Drive Occupancy
But you can also decide to use your room categories to capture extra occupancy in a low demand period. You can decide not close your basic room categories, and oversell them to capture extra volume. This way you don’t have to adjust your pricing, and stay-through rates are not up and down for each day of the week.
If you are using a revenue management system you should account for this in your room type overbooking levels. Most of the PMS’s we work with have a yield grid as well, where we can set the overbooking level for each room type day by day. I.e. setting a room category to 150% allows us to overbook it by 50% of the inventory for this particular room category.
Room type supplements are another pricing tool that can help you drive the REVPAR of your hotel. The difference in price between rooms should not be linear throughout the year. To maximize your revenue of your hotel, you need to maximize the revenue on all your room types.
This means you need to sell them for the top price when you can, and sell as many as possible at the same time. Rate increments can be configured in either percentages (%) or by value (€/$) supplements. Either could work for your hotel. And you can set them up based on the following parameters:
Weekend vs Weekday (day of week)
The important thing is to constantly review if at each base rate level, all your rooms are priced correctly and are converting at the desired pace. If a particular room type is not selling, logically you should analyze and adjust.
Supplements require constant focus and attention. It is a job never complete …
The Tetris Game
It is virtually impossible to sell exactly the amount of rooms you have in each category. So you will have to start playing Tetris game to get to 100%.
There are different ways to achieve this. We talked before about overbooking room categories. This is a viable option of course to reach 100% (or 95%+) occupancy.
Especially when you reach high occupancy over a week, it is hard to have the same room category available for stay-through. You can also upgrade reservations, to open up a room category to which you could sell at a higher price if your system does not allow for overbooking room types.
The Tetris game requires constant communication between the revenue manager and front office / reservations team of the hotel.
Upgrading for free could help you generate extra revenue, by maximizing occupancy. Still don’t forget to try and upsell people at check-in regardless to get a bit more incremental room revenue.
Tweaking Again and Again
Perfection does not come in 1 single round. It is about tweaking. To reach optimal REVPAR the same applies. The difference between a good and great revenue manager you will see in who goes the extra mile, and take results beyond …
Once you have reached your target or high occupancy for a particular period or date, you might still have some rooms to sell. The Tetris game explained above is just one of the steps that can be taken.
At Xotels we have a saying; “A beautiful hotel is a full hotel.”
What does it take to sell the extra few rooms to reach 100% occupancy, beyond the amazing 98% you have reached. That is the spirit we are talking about …
To increase the revenue potential of your hotel you need to think in terms of disruption. Unfortunately many in this industry are risk averse, and stay within the comfort zone of the set-out strategy.
Sometimes, by changing the base rate by only €2, can have a crucial impact on the last-minute booking pace, allowing us to outperform the compset.
Or instead of overselling lower room categories, can you decrease the supplements for your superior room types or suites, to sell more of them. We should ask ourselves, what sells better a medium room category at a normal price, or a suite at an aggressive price?
Anything to help push your ADR up a few dollars or euros.
Upselling Pre and On Arrival
Once we are done selling, we are not done yet. After everyone has booked their room, you need to engage your guests and see if you can upsell them to a higher level and increase your average room rate. You can do this by pre-arrival email campaigns. But the front desk team also needs to be incorporated. If you have oversold room categories, we need to actively identify which guests we can upsell.
And don’t just upsell rooms, think of breakfast, parking, spa, late-check-out … there are plenty of opportunities to increase your top and bottom line.
The Final Word
We have covered quite some points on hotel pricing. It is key to understand that you are never done. You need a strategy in place which is aligned to identifying opportunities to improve your hotel’s financial results. But also a performance culture across the entire team to support it.