A common objective of a hotel can be just to survive. Companies that are troubled by too much capacity, heavy competition or changing customer needs set survival as a prime objective, in the short term survival is more important than profit. Hotels can often use this strategy when the economy slumps. Whereas a manufacturing company can reduce production to meet demand, a 200 room hotel still has 200 rooms to sell a night, although that demand may have dropped to 100 a night. However the hotel can attempt to reduce the impact of low occupancy by cutting rates and trying to create the best cash flow possible under the conditions at the time. This strategy directly affects the immediate competition of the hotel and sometimes the whole industry. However competitors within the hospitality industry are highly aware of price changes and will generally respond if they think they may be threatened. The result of this is that not only does occupancy fall, but also room rates fall and therefore profits fall. If a survival pricing strategy is used, it should be carefully monitored, in a small town for example the effects of this strategy could be considerable. However if it is a hotel in a larger town the company may want o use their marketing skill to compete with other hotels rather than cut the hotels prices. To a hotel, which has a good marketing strategy, it can make sense to them to let competitors reduce rates attracting the budget conscious customers, leaving more profitable business for them, especially if the hotel using a survival strategy has a small market share.
Current profit Maximisation
Hotels want to set a price that will maximise current profits. The Hotel estimates what demand and costs will be at different prices and then chooses the price, which will produce the maximum current profit, cash flow, or return on investment. This looks at current financial outcomes rather than long-term performance. For example, a company may buy a poorly operating hotel at a low price. The objective becomes to turn the hotel around and make a profit, and then sell it. If there is a successful turnaround the owners may receive a good capital gain.
Market-Share Leadership
Other hotel companies want to make sure they have a dominant market position. They believe that a company that has the largest market share will eventually have low costs and high long-run profit. Therefore prices are set as low as possible. For example when the Marriott opens a new hotel, the company strives to be the market-share leader in its class, as quickly as possible. Marriott will open a new hotel with cheap rates and then six months later will charge double that rate. The low rates created demand, and as the demand increased, low revenue business was replaced with higher. This strategy uses price and other elements of the marketing mix to create the awareness of better value than the competition.
Product-Quality Leadership
The Ritz Carlton, for example has a high construction cost per room. Other than high capital investment per room, luxury chains have a high cost of labour per room. Their hotels require well-qualified staff, and a high employee/guest ratio to provide luxury service. Therefore they must charge a high price for their luxury hotel rooms’ to maintain their position in the quality/luxury hotel market.
Costs set the basis for the price a hotel can charge for its product. The hotel has to set a price that covers the costs for producing, distributing and promoting the product. Apart from covering the basic costs the price also has to be high enough to provide a rate of return for the owners or the investors of the hotel. Therefore a hotel companies costs can be an important element in its pricing strategy.
Costs take two forms, fixed and variable.
Fixed costs, which are sometimes known as overheads, are costs that do not vary with production or sales level. Therefore whatever its output the hotel company must pay bills each month for rent, interest and managers salaries. Fixed costs are not directly linked to production level
Variable costs vary directly with the level of production, for example a banquet function in a hotel has many variable costs; each meal may have the same content, starter, main course and dessert. In addition to the food items, the hotel has to provide linen for each guest. This is a variable cost because the amount depends on the amount required. Therefore the total cost is the sum of the fixed and variable costs, the hotel must then charge a price that will at least cover the total costs at a given level of sales.
Hotel managers sometimes forget that customers are not concerned with a business’s operating cots; they seek value. Costs have to be monitored carefully. If it costs the company more than competitors to produce and sell its product, the company must either charge a higher price or make less profit.
Hospitality companies are now developing sophisticated models and software to better understand costs and their relations to price. These look at room labour costs, advertising, special promotions, and associated costs.
External Factors Affecting Pricing Decisions
External factors that affect pricing decisions include the nature of the market and demand, competition, and other environmental elements.
Market and Demand
Event though cost set the lower limits of prices, it is the market and demand that set the upper limit. It is both the consumer and companies who balance the products price against the benefits it provides. Therefore before setting prices there must be an understanding of the relationship between price and demand for a product.
Cross Selling and up selling
There are many cross selling opportunities available in the hospitality industry. A hotel can cross sell food and beverage; room service, executive support services such as a fax and a range of retail products. Up selling is also part of effective yield management. Through the training of sales and reservation employees to continuously offer a higher priced product, rather than settling for the lowest price.
Pricing in Different Markets
Most hospitality operations operate in monopolistic competition or oligopolistic competition.
Monopolistic competition, the market consists of many buyers and sellers who trade over a range of prices rather than at a single market price. A range of prices can therefore occur because sellers can differentiate offers to the buyers. The physical product can be varied in quality, features or style. Buyers therefore see differences in seller’s products and will pay different prices. This allows the sellers to develop offers for different customer segments, and besides price, they can freely use branding, advertising and personnel selling to set the different offer apart. Because there are many competitors, each firm is less affected by competitors’ marketing strategies.
Oligopolistic competition the market consists of few sellers, but they are highly sensitive to each other’s pricing and marketing strategies. There are only a few sellers because it may be difficult to enter the market. But each seller is highly aware of competitors’ strategies and moves.
Cost-Based Pricing
This is the simplest method of pricing; this is adding a standard mark-up to the cost of the product. Food and Beverage management often use the cost-plus method to decide wine prices. This is a popular method, because sellers are more certain about costs than about demand. Connecting the price to cost simplifies pricing, so managers do not have to adjust as demand changes. Also because many food and beverage operations tend to use this method, prices are similar, and price competition is minimized.
Break-Even Analysis and Target Profit Pricing
Break-Even pricing is another cost-orientated approach; the company will try to determine the price at which it will break even. Some companies will use a variation of break-even pricing called target profit pricing, which targets a certain return on investment. Hotels use the concept of contribution margin to set rates when demand drops. Hotels will set low rates, rationalising so they are covering their variable costs. This can be effective if it creates additional demand. However some hotels try to steal business during good times by cutting rates.
Value-Based Pricing
More companies are basing their prices on the products perceived value. Value-based pricing uses the buyers’ perceptions of value, not the sellers cost as the key to pricing. This type of pricing means that the marketer cannot design a product and marketing programme and then set the price. The price is considered with the other marketing-mix variables before the marketing programme is set. The company uses the non-price variables in the marketing mix to build perceived value in the mind of the buyers, therefore setting the price to match the perceived value.
Pricing Strategies
New Product Pricing Strategies
The pricing strategies of a product usually change as the product evolves; the following strategies exist for pricing new products;
Prestige Pricing
Hotels that want to position themselves as luxurious or elegant will enter the market with a high price that will support this position. Clubs may charge a cover charge to attract a certain type of clientele and create an image of exclusiveness. In each case lowering the price would reposition the business, resulting in a failure to attract the target market.
Market-Skimming Pricing
Price skimming is setting a high price when the market is insensitive to price. This can make sense, as lowering the price will create less revenue, for example the owner of a hotel in a small town can set high prices if there is more demand than rooms. Price skimming can be an effective short-term policy, however a negative point is that competitors will realise that the customer will pay the higher prices, and therefore enter the market creating more supply and eventually reducing prices. Competitors seldom use this method for an extensive period of time in the hospitality industry because of the ease of entry.
Market-Penetration Pricing
Instead of setting a high initial price to skim of small, but profitable market segments, other companies set a low initial price to penetrate the market quickly. This attracts many buyers and therefore obtaining a large market share. However there are conditions that favour setting a low price. The price must be highly price sensitive so that a low price produces more market growth, there should be economies that reduce costs as sales volume increases, and the low price must ensure and help keep out competition.
Existing –Product Pricing Strategies
Product-Bundle Pricing
Sellers who use the product bundle pricing strategy combine several of their products and offer the bundle at a reduced price. For example hotels sell specially priced weekend packages that include room, meals and entertainment or they offer commercial rates that include breakfast and a newspaper. Price bundling can promote the sale of products consumers may not usually buy, but the combined price must be low enough to convince the consumer to buy the product. Benefits of this strategy include the ability to transfer surplus reservation prices to different components of the packages depending on the customers’ requirements. The second benefit of price bundling is the price of the core product can be hidden to avoid price wars or the perception of having a low quality product.
Last Minute Pricing
If a hotel room is not sold for a particular night the sale and profit of that room is lost forever. The unsold rooms from hotels create a market for the last minute sale of rooms. The use of revenue management helps considerably to reduce this problem, but many members within the hospitality industry such as small hotels do not use yield management systems. Private companies or consolidators acquire excess rooms and create packages to sell at discount rates to the public. Sometimes rooms or packages can be sold for 50% discount from the original price.
Other pricing methods include psychological pricing, which use aspects such as prestige, reference prices, round figures and ignoring end figures. Hotels can also use promotional pricing. Hotels will temporarily price their products below list price, and sometimes even below cost, for special occasions, such as introduction or for festivals. Promotional pricing gives guests a reason to come and promotes a positive image for the hotel.
Setting Accommodation Prices in a Hotel
Setting the initial price rates for accommodation within a hotel is one of the most important factors to consider for a manager. With the correct rates and pricing strategies, a hotel has a high chance of reaching maximum profit levels quickly and effectively. The advertised room rate is a reference point that establishes the consumer’s perception of price and quality within the establishment. There are several types of pricing that can be commonly found in the hotel industry:
Rates by Room Type : This is the most common type of pricing used by hotels, especially in larger establishments where there are a number of rooms with different specification. Single rates are set according to room characteristics such as size, view, floor and facilities. For example, a hotel may have five types of room; single, double, executive single, executive double and family. A different rate would be set for each type of room, increasing as the size or standard of the room increases. An executive room may have extra facilities or accessories within it, for example gold plumbing in the bathroom or a mini bar. The rate for this type of room would be higher than for a normal room due to the extra commodities within it designed to increase the guest’s pleasure. The guest is paying extra for added “luxuries” which would not normally be found in the standard room. The rooms with a lower rate provide the guest with the basic requirements needed to meet expectations of that particular establishment. These expectations may differ depending on the quality of the hotel, and rates are usually designed to comply with the needs of the type of guest.
The location of a hotel is likely to have an impact on the room rates for different types of room. For example, a hotel situated near a popular tourist destination is likely to have a higher room rate for family or double rooms than perhaps a hotel in a business district, where the demand for these types of room would be less. Similarly, a hotel situated in a business district is likely to have a higher rate for single or executive rooms than the hotel located in an area where the leisure market is more dominant.
By classifying price rates by room type, explaining the difference to the potential customer is made easier as there is something that can be used to measure value against perceived expectations. There is also a greater chance of improved revenue, as rates can be adjusted to suit current trends. However, this type of pricing only works where there is more than one room type, and is operationally difficult to manage.
Top-Down Pricing : This pricing method is common in hotels that have a widespread target market. When a customer calls and requests a room they are quoted a rack rate. If this price is higher than the customer is willing to pay, a lower rate is offered until it is accepted, or the quoted price reaches the hotel’s reservation price. The average room rate is only 60% of the rack rate in a hotel, and only roughly 9% end up paying the set rack rate.
This method offers the chance of maximum revenue per room, as by stating a rate high initially, the consumer may end up paying close to what they were willing to pay in the first place. In the absence of a universal hotel classification system, having a rack rate offers the merit of being an effective indictor of quality. In practice however, the hotel industry, as with several other branches of the travel trade, sells a significant volume of business through group or packaged deals, often at discounted rates to match demand with supply. Therefore, the rate achieved for letting bedrooms will depend on the extent of discounting by the hotel and mix of business it achieves. Top-down pricing may also lead to the customer feeling alienated, and the system is often easily worked by people who know the method to get the cheapest deal possible.
Example of top-down pricing:
Rates with “Fenced Discounts”: There are logical, national rules and restrictions that are designed to allow customers to segment themselves into appropriate rate categories based on their needs, behaviour or willingness to pay. The main segments are individual business, group business, individual leisure and group leisure, and typical discounts given are trade, seasonal, volume and location. Other common alterations to price include holiday package deals, co-operative rates for tour wholesalers, weekend rates, business rates, frequent user rates, family rates and conference rates. Examples of “rate fences” can be seen in the following table:
(Horesta, R.,B., 2000)
It can be questioned whether it is ethical and fair to the consumer to change rates based solely upon the booking characteristics or willingness to pay. However, the use of this type of pricing structure is based upon factors that the guest can control, and although there are opportunities to approach maximum revenue potential, there are risks involved as well. This type of system is also difficult to manage effectively, as care needs to be taken to keep track of rates and discounts given.
Conclusions
The Future
“Whether they like it or not, UK hotels have a massive product problem and are ridiculously overpriced, as virtually anyone who travels across Europe will tell you!”
(Edward Appleton, Managing Director
Brand: New! Marketing Week, 20th June 2002)
Hotel companies such as Hilton are now promoting money saving offers and product tie ins. Holiday inn are aiming their advertising around the positive experience that will be gained from staying in their hotels. Travel Lodge are now selling all rooms for £39.95 attracting different travellers because of the good, clean modern accommodation.
Strengths
1) The market is strongly segmented, with a wide range of hotel types at various price points.
2) Room rates have now been improving since the late 90’s.
Weaknesses
Cost bases have risen as quality improves
Opportunities
The growth of the older population means that there is more leisure time available to tem and they also have more disposable income to spend.
Threats
The success of budget hotels and the prices they charge may affect the established upmarket hotels
The introduction of the Euro has led to a transparency in hotel rates across European countries, allowing visitors to compare rates and look for cheaper rates in each country. However individually owned hotels with a more personal service, are in many cases are much more expensive. The introduction of the Euro has other implications for the sector as the UK is viewed as a relatively expensive destination for tourists from European countries.
Taking these factors into consideration, it can be seen that pricing within a hotel is one of the most important aspects of the operation. Consideration must be taken when deciding on strategies and pricing methods to set rates, as the wrong methods may lead to a decrease in the number of guests who will choose to go elsewhere.
Bibliography
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Wearne, N., & Morrison, A.,(1996); Hospitality Marketing; Butterworth Heineann Limited
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Seaton, A.V., Seaton & Bennet, M., M., (1997); Marketing Tourism Products: Concepts, Issues and Cases; International Thompson Business Press
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Kotler, P., Bowen, J., Makens, J., (2002); Marketing for Hospitality and Tourism; Third Edition; Prentice Hall
