The hotel industry is a street corner business and there’s more competition than ever. It’s not just from the hotels next door and on the other side of the road anymore. Now there are online travel agencies like Priceline and Expedia and newer and even mobile booking sites selling rooms on your street corner and in your hotel.
Revenue may be climbing, but so are commissions and other marketing fees. Recent studies have shown customer acquisition costs are rising faster than revenue, meaning your profits are shrinking. The reason? Those online and mobile booking sites that may be helping fill your properties are also taking a huge cut of the action. And new intermediaries and other marketing costs are compounding that problem, leaving your piece of the profits even smaller.
If you’re wondering where your profits have gone, it might be time to explore how you’re pricing your hotel. Here are seven pricing mistakes that are costing your hotel big money.
1. Selling out too soon
This is one of the biggest and costliest mistakes a hotel can make. And it’s easy to see why. Selling out and filling up your hotel is the ultimate goal, right? If every room is filled, you’ve done your job and are making money.
But are you making as much as you could be? Or should be? Probably not if your hotel is sold out months, weeks or even just days ahead. It may seem counterintuitive, but it’s reality.
Consider: If a 100-room hotel sells out with every room sold for $100 on average, it has generated $10,000 in revenue. If instead you increased rates $10 for every 10 rooms you sold, and you still sell out, you’d generate an additional $4,500 with an average daily rate of $145 (instead of $100). If you increased rates $5 instead of $10, you’d generate an extra $2,250 with an average daily rate of $122.50. In both circumstances, even if you didn’t sell those last 10 rooms, you’d come out with more revenue than if you sold all 100 rooms at $100.
For dates with unconstrained demand—days where you know you’re going to sell out or get close—the goal should be to incrementally raise rates as the date approaches to slow down bookings so you have rooms left all the way until that date. In an ideal situation, you want to sell your last room the night of that date to a customer desperate to stay there and one happy to pay a premium price to do so. You can ensure inventory remains by yielding up rates along the way to slow bookings to make sure a room is available for that guest who really wants to stay at your property on that specific date.
Think about the airline industry. If you want to get the best possible price for a flight, when do you book? You book as far in advance as you can. If you have to book the day before leaving, you fully expect to pay a premium and are happy to have that option. The same should be true in the hotel industry, and consumers should understand the further out they book the better deal they’ll get. Many hotels are already doing this, the airlines have been for years and other industries are following suit. Consumers already understand and appreciate this concept.
If someone has to travel on a specific date and your hotel is the most convenient and/or the favored choice, you want to make sure you have a room available. The traveler may be coming in for an interview or important business meeting, to visit a sick relative or for a wedding. But if you sold your last room two weeks before, the desperate traveler is out of luck. By slowly raising rates as demand increases and supply decreases, you keep rooms available for those consumers who really want to stay at your property.
2. Not changing your rates
Another revenue-losing mistake is not changing the rates for the rooms at your hotel. If your rates are static—they never change throughout the year—you are not reaching your true profit potential. As outlined above, your rates should change to reflect supply and demand and ideally maintain a steady pace of bookings leading up to each and every day.
If your room rate is always $100, no matter the day, time of year or amount of bookings you’ve already got on the books, you’re missing revenue opportunities. If your rate is $100 on a busy day—let’s say there’s a big sporting event in town and every hotel is sold out or soon to be— and you’ve only got 10 rooms left a month out, your rates should have been much higher up to that point, meaning you have underpriced your hotel and lost potential revenue. And those last 10 rooms could and should sell for much higher than $100, because you want to make sure you have rooms left up until the final day.
The opposite is true, too. If your rates are $100 on a day when you’ve only got 10 rooms booked out of your 100-room hotel a month out, you’ve overpriced your hotel and missed out on bookings and revenue you could have had by lowering the price and increasing occupancy.
Rates should be adjusted as much as possible from low to high leading up to each and every day based on the pace of bookings and projected demand. Most hotels have different pricing for different days and seasons depending on their location and demand patterns.
A hotel heavy on leisure business may have higher weekend rates and lower weekday rates, capitalizing on vacationing travelers. A hotel heavy on business travelers should be opposite, with higher rates during the week and lower rates on weekends when most business people are at home.
Hotels located in areas with seasonal business, like the beach or near ski slopes, may have different prices for the different seasons when those local attractions are more popular.
The more price points you can offer, the more business and revenue you can capture. If your rate is $100 and someone is willing to pay $120, you’ve lost $20. If you’re rate is $100 and no one is booking your hotel, you’re missing out on potential bookings and revenue you could have with lower prices. Understanding the relationship between supply and demand and pricing accordingly is the key to maximizing revenue and profits at your property.
3. Pricing by “gut feel”
In both scenarios described above, a key part of understanding how to price your hotel comes down to having an idea of how much demand you have for each day. The more sophisticated you can be with your forecast, the more successful you can be with your pricing.
If you’re relying solely on “gut feel” with no analytics behind the hunch, you’re bound to make mistakes and miss revenue opportunities. If you find yourself saying, “I remember this weekend last year and it was crazy busy, so I’m going to set the rates really high this year,” you’re risking an empty hotel and huge revenue losses. Especially if you continue to ignore a lack of bookings and hold your rates based on that gut feel. Perhaps there was an outside influence the year before that created the surge in demand—a concert or a convention that filled rooms—that isn’t on the calendar this year.
Hunches, gut feels and guesstimates are never a better idea than using actual data and analysis. A forecast should start with historical data, pace of bookings and competitive information. If you’re only relying on reports from the property management system, you’re not getting a complete and accurate view of historical and future demand. The more datasets you can include, the more accurate and profitable you can be. Look for customer-centric data and local information for more insight into your market, from social media and review sites to weather forecasts and other local factors like air traffic that could drive or diminish demand.
Whenever your gut is telling you something, take a deep breath and pause, pull up the spreadsheet and data you have available and take a look at the information. Then adjust your pricing.