Richfield Hospitality Blog

Breaking the Hotel Pricing Model

May 1, 2015

By: Ryan Davis, Vice President of Revenue Management at Richfield Hospitality

Spring is in full swing and with the summer rapidly approaching, there comes an increase in demand for most markets. As hoteliers, we hear the words “increase in demand” and instantly look to increase published rates; however, this might not always lead to the most successful yield strategy. Finding the right mix to maximize ADRs, while maintaining occupancy levels, is critical during these times. BAR contribution, which is the percentage of BAR revenue contributed to total room revenue, should be at 30% or more during these high demand periods. Raising published rates will maximize ADRs, but typically will hurt occupancy levels and BAR contribution, while feeding room nights into the discounted segments. The way we, as hoteliers, have always approached pricing strategies during high demand periods might not be the best way to maximize inventory yields. Breaking away from saying “that is the way things have always been done and how the market does it” is a calculated risk revenue leaders need to take.

Recently, I was on a call where the team was reviewing the pricing strategy for an upcoming graduation weekend. When the inventory calendar rolled over for this set of dates, the market rates were at $450 per night and up. Now that the dates are approaching, the market rates are steadily declining as revenue leaders start panicking to fill in remaining inventory. This begs the question: What if you never needed the panic button? As the team started looking at historical STR data it was clear that this was a repeating market condition. The market always came out swinging with its confidence bat only to strikeout at the bottom of the ninth, with the bases loaded, down by three. Historically, the market sold out with an ADR in the range of $275-$325, meaning the contribution on the $450 per night was relatively low for most properties. While it was too late to use this knowledge for this scenario, it is one example that I run into every day as a revenue leader, and one that we constantly get wrong in the hotel industry.

In the above example, with the historical knowledge, the normal hotel pricing model needed to be broken. Knowing that the market panics, and market ADRs come in at the $275-$325 range, the property would have seen higher BAR contribution by pricing at this range as soon as this inventory calendar opened. Using price elasticity to determine the relative responsiveness to demand – based on the price – is critical in not selling too low at the beginning, or too high as the property approaches a sellout. Ensuring an elasticity factor of positive one or greater is achieved while testing price increases once certain occupancy thresholds are reached. By doing so, the property is able to maximize remaining inventory yields.

All too often we are faced with the above scenario and, more often than not, we go with the market perception instead of the consumer perception since this is the way it has always been done. It is easy to throw the $450 rate out there and hope for the best, but it is a profitable risk to work towards that $450 with a strong occupancy base under you. Achieving this base means putting the best published rate out there, which will build occupancy through BAR, but also looking at a well-thought-out channel strategy to assist – all of which leads to a higher pricing confidence. This channel strategy could include group, package pre-sale and/ or BT strategies to layer in this base. The challenge becomes to throw out the market shop report and use other tools and resources available to develop a strategic channel strategy. The market might call the property crazy, but we will see who is holding the market share at the end of the day.