If you charge higher prices than your competition you will get a better RevPAR.
22nd April 2015
This blog reviews the results and conclusions from research by Cornell University Centre for Hospitality Research into Competitive Hotel Pricing in Europe and gives some hints and tips on how to use the information to improve the revenue management and performance in your hotel.
Price Elasticity is a myth
The traditional wisdom is that the lower price will increase bookings and so occupancy, which will increase Revenue and hence RevPAR. Although the research shows this is true to some extent the amount of gain in occupancy from lower prices does not increase revenue sufficiently to result in a better RevPAR performance consistently. This implies that the number of customers who react to lower or cheaper prices are low, which begs the conclusion, are hotel customers more loyal than we think they are? The key to getting the price right seems to be to understand your customers and offer value. And by value that does not mean cheap.
Price Fluctuations not beneficial
The research draws the conclusion that price fluctuations do not have a positive impact on better RevPAR. Other research in the past has indicated ‘that extensive price fluctuations will diminish revenue performance’. This seems to indicate that hotels that move their price frequently rather than as part of a pricing strategy may not be making the best use of their time. I have thought for some time that lots of movement in a hotels price may be confusing to the guest. Again the message given by a hotel’s pricing decisions needs to be part of a clear strategy.
One of the key conclusions is ‘price setting should be part of a hotel’s overall strategy and that pricing should reflect the hotel’s positions in providing customer value and a given cost.’ This means that a hotel or group of hotels needs a clear vision as to their value and how that is communicated to the customer.
The result of the research shows that hotels that positioned themselves with higher ADR’s compared to their competitors experienced higher relative RevPAR’s. The researchers concluded ‘this result may indicate the benefit of signalling value through a higher price to spur demand.’
Independent Hotels challenge
The research compares the results in chain and independent hotels. This research shows that chain hotels priced up to 10 percent above the competition did not experience a significant drop in occupancy; however that was not true for independent hotels, which did experience occupancy losses. So independent hotels need to be more cautious with higher prices than the competition unless they have a clear advantage that the customers value and for which they will pay.
Effect of recession
The research was carried out using data from a 10 year window, so they were able to compare periods of strong economic performance with periods of lower economic performance. This showed that broadly the results were the same, i.e. ‘hotels that had a lower price position relative to their competitor set, average percentage differences in occupancy rose, while RevPAR declined.’ So in a recession dropping price to gain market share does not work. All that happens is that all hotels in a market place achieve lower revenues. If demand in a market place has dropped then the hotels in that market place all just get the same share of a smaller pie and dropping price just reduces the size of the pie further.
So when a hotel is setting its prices picking the higher end of their range rather than the lower will improve revenue despite small drop in occupancy. It is obviously important to test this by trying different strategies and seeing what results in better revenue and performance for your hotel.
This article was posted in hotel pricing
, Hotel revenue management. pricing structure
, Revenue Management
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