The primary reason so many hotels and chains continue to revenue manage using a fixed-tier best-available-rate (BAR) pricing approach is its simplicity. It’s easy for hotels to implement and then manage. But that simplicity is also the exact reason it’s not the best choice.
With a fixed-tier revenue management strategy, hoteliers set the BAR, typically the lowest public price you’d find on the hotel’s website, and all other rates adjust accordingly, usually based on a percentage difference from the BAR. For example, if the BAR is set at $100 for any given day, the loyalty rate might be 15% less, OTA package rate 35% less, all the way down to opaque channels like Hotwire that might be discounted 45%. If the BAR goes up or down, so do all the other rates.
You set one price and everything derives from that and you’re done. Clearly the benefit of this methodology is its simplicity, but the disadvantage is the loss of potential revenue. Money is without question being left on the table. Look at this basic demand curve, showing the relationship between price and quantity sold:
The six blocks represent revenue captured from tiered pricing, but the static price points limit a hotel’s opportunity to capture everything in between (the triangles where there are no price points). The more price points you have available for your demand, the closer you get to capturing the entire opportunity for revenue.
The detriment of this fixed-tier strategy is worsened by hotels managing the other segments (OTAs, loyalty members, groups, opaque channels, etc.) as percentages benched off the BAR. The hotel is missing the opportunity to use differentiated pricing applicable to different behaviors exhibited by people booking from other channels. Is someone booking through an OTA automatically only going to accept paying 35% less? Maybe they’d be willing to pay 30% less. Maybe even 20%.
The other pitfall with this strategy is when a hotel misses high on a group rate established in advance. If there’s a rate parity clause in the group contract, as is often the case, the hotel can’t publically sell rooms for less than that agreed upon rate. Then the hotel must keep the BAR above that, and all the other segment prices fall in line accordingly.
Now the hotel has artificially (and automatically) inflated all other rates because it has made one mistake on a group rate. In that instance, the public BAR is gone and there’s no fixing it, but why give up on all the other discrete segments. You should still be able to revenue manage those and can recover from the original mistake.
To capture as much money as possible, hotels should be determining the right rate for all the different segments of their business every day. Hotels need not be slaves to a structure that won’t optimize their revenue anymore.
Modern revenue management systems should provide free-floating pricing derived for each individual segment. Hoteliers shouldn’t be afraid of more complex revenue management, because the process can remain just as easy and comfortable, but far more profitable.