While the hotel industry is truly unique, when it comes to price optimization, there’s a lot we can learn from outside industries. To help hotels develop a dynamic pricing optimization strategy that maximizes future profit, we examine industries from airlines to retail. And we find plenty of takeaways hoteliers can incorporate into their revenue management practices for greater success.
In the 1970s, airlines were the cutting-edge adopters of revenue management technology and among the first to implement dynamic pricing optimization. Today, airlines reign supreme in this area, adjusting rates multiple times a day in response to fluctuations in supply and demand. Many airlines also calculate total lifetime values of each passenger, using that data to generate incremental revenue through personalized offerings before, during, and after a flight.
Takeaway for hotels: Just as for airlines, demand is the biggest factor affecting your rates. Optimize pricing through accurate forecasting that accounts for daily, even hourly, fluctuations in demand. In addition, a revenue optimization platform that communicates with your other systems lets you determine who your most valuable guests are, so you can offer rates and upsells based on that value.
Cruise customers are primarily leisure travelers, and the majority tends to want to lock in vacation plans well in advance. Therefore a cruise revenue manager often uses a practice known as “reverse yielding,” where a cruise revenue manager fills as many cabins as possible at a higher fare well before departure, then lowers pricing to fill remaining cabins closer in, when demand is weaker. This is particularly effective because cruise lines restrict refunds within a month or so of departure, preventing customers from canceling and rebooking at the new lower rate.
Takeaway for hotels: Hotel rooms are also priced based on demand. Hotel operators can use reverse yielding to fill distressed inventory. Because hotel customers can typically cancel and rebook a room less than 24 hours prior to arrival, hotels must employ rate fences, such as opaque booking channels that conceal their brand and avoid diluting revenues through direct channels.
Many retailers use a reference or contrast pricing strategy to make a particular price point seem more appealing. For example, say a window provider comes to your home, records all the details required for your new window, and announces the price will be $1,000. While your mind balks at this rate, the salesperson swiftly reminds you the company is running a “50% Off” sale and your price will only be $500. With a sigh of relief, you sign the paperwork without hesitation. (Fascinating TED Talk from behavior psychologist, Dan Ariely, on this concept!)
Takeaway for hotels: You can increase upsells by including strike-through pricing and featuring side-by-side comparisons within the booking process. Highlighting additional amenities customers receive when choosing a higher-priced suite over a standard guestroom can be effective as well. Some customers are willing to pay more when they feel they’re getting a better value for their money.
Sharing economy titan Airbnb has experienced explosive growth, building a multibillion-dollar business in record time. Initially though, Airbnb’s bottom line was hurt by underpricing. Property hosts didn’t have the ability to adapt to shifting market conditions or account for the multiple factors necessary to optimize rates. So, the company employed advanced artificial intelligence (AI) and machine learning (ML) to streamline operations and help hosts optimize their dynamic pricing strategy for any given day.
Takeaway for hotels: Hotel legacy systems are often technically deficient and lack integration with other systems. Hotels can use data-driven revenue management (RM) software powered by AI and ML to quickly respond to real-time changes in market conditions, generating optimal prices each day.
In analyzing price strategy among other industries, a consistent theme throughout is the use of revenue optimization technology. And with only about 3 percent of hotels globally currently using RM technology, we have a ways to go in this area. To gain and maintain a competitive advantage, hotels need to change the way they approach pricing optimization, turning a critical eye toward total revenue management practices and the infrastructure used to support them.