Post Pandemic Pricing Strategies for Hotels and Resorts

Easy on the throttle! The Covid pandemic of 2020-2021 has brought the tourism industry to its’ knees. Individual hotel owners have lost millions of dollars, big brands, hundreds of millions and the airline industry with its’ paralyzingly low variable costs has lost billions.

The good news is that the countries that have taken an aggressive position with getting their citizens vaccinated, are now looking to the end game where business reopens, and people get back to the business of living. With this, we are all expecting to see an enormous amount of pent-up demand. But what should we consider in trying to find the sweet spot between optimizing revenue per available customer and eroding our value proposition?

We have a responsibility to our stakeholders to optimize their asset, but we also have a responsibility to our guests to treat them fairly in the pricing process. Sherri Kimes et al conducted a study back in 2007 on familiarity of pricing practices and perception of fairness by potential guests. Their findings revealed that “framing and fencing condition had strong effects on perceived fairness when respondents were less familiar with a pricing practice. However, when familiarity was high, neither the framing nor fencing condition effect was significant”. (Kimes/Wirtz Cornell Quarterly 2007)

Today guests are so used to booking online that they understand the basics of demand related dynamic pricing.  However, I would suggest that each revenue team needs to consider three things when managing the pent-up demand heading their way:

Identify your most valued customer

For those with CRM’s, identifying your long-term customer value (LTV) will be a relatively easy thing to do. Isolate those guests with the highest average annual spend (all revenue sources). Ensure that these guests are sent a pre-offer which rewards their loyalty. Use a reference price to illustrate the value.

In the table above, you can see that the pricing strategy rewards both the property and the LTV guest. The incremental rates associated with the other guest bookings also some breaks but with proper fences. The loyal guest is rewarded with only an advance booking fence and a savings of nearly a hundred dollars compared to the other non-restricted rate.

Monitor Index Balance

As discussed for many years, index balance between market share and rate share are especially important KPI’s. These indexes only reflect how well you did relative to your competition. However, a significant imbalance between market and rate indexes indicates that the team played the demand conditions less than optimally. Normally, we use a 10-point spread as a baseline.

In this example, the subject hotel was too aggressive with rate. Is this a good thing? Does it really matter? To answer these questions, you would need to have a particularly good understanding of your competitive sets pricing competency and how they segmented demand to come up with their business mix and pricing strategy. While a great many revenue teams will have a good general sense of this, the best way to know objectively is to use your reputation management tool. Compare your value index (the value score from your reputation tool divided the average of your comp set score) with your competitive set value indexes. What do these indexes tell you about how successful your high demand strategic pricing was for the day, week, or month?

Rely on your value indexes

Listening to what your guests are saying goes a long way in the hotel pricing game. An Oxford Economics survey conducted over the past months indicated that as of March over 80% of Americans say they had plans to travel in the next 120 days. They also understand that owing to the pandemic they will likely have to pay more because of demand.  But perception of fair pricing depends on “how much more”?

Most of the current reputation management tools available have an area where you can see a value score for a guest stay. When taken cumulatively, for a predefined time period (weekly, monthly, STLY, STLM) this KPI can shed light on what the consumer is thinking about your value proposition. The example below shows the value index for table in Index Balance.

When analyzing value indexes, it is important to note that the baseline one should be looking for is an index between 98-104. Anything lower than 98 indicates erosion of the value proposition, anything above 104 points to potential pricing power. In the example above, balancing their Market to ADR indexes likely would have resulted in higher value scores.

Of course,  these things cannot be examined in isolation. But this is a good starting point for a revmax team discussion. The good times are going to come around very soon, but easy on the throttle!