Pricing in Hotels: A Comparison of Generic and Guest-Based Pricing
27 July 2023
Hotel management is multi-faceted, and each decision carries significant weight. One of the most pivotal decisions is setting the right price policy for hotel rooms. A hotel's pricing strategy can be the difference between empty rooms and a bustling, thriving business.
In hotel pricing, two primary strategies stand out: generic room pricing and guest-based room pricing. Each approach has unique advantages and challenges, and their applications can significantly impact a hotel's bottom line, guest satisfaction, and competitive standing.
Generic room pricing, the more traditional model, sets a standard room rate, providing simplicity and predictability. On the other hand, the newer and increasingly popular guest-based room pricing strategy allows for a more personalized approach, adjusting prices according to the specific needs and willingness of the guest to pay.
In this blog post, we will delve deep into both these pricing strategies, offering a detailed exploration of how they work, their pros and cons, and the circumstances under which they can be most effectively utilized.
Generic room pricing
Generic room pricing is a traditional and widely-used strategy in the hotel industry. In this approach, hotel rooms are viewed and sold as commodities, regardless of who the guest is. The core principle of generic room pricing is that as long as the guest pays the current market rate, the hotel is indifferent about who occupies the room.
How to set the room rates
In this model, the pricing is primarily determined by market conditions and competitor rates. The hotel closely monitors the going rates of similar accommodations in the area and prices their rooms competitively. As a result, room rates under this model are inherently dynamic, fluctuating by the demand for accommodation and the ups and downs of competitor rates.
The focus here is to ensure the rooms are always occupied rather than trying to cater to individual guest preferences or willingness to pay. It's a more standardized, impersonal approach that has proven effective, especially for large hotels or those in highly competitive markets. Generic room pricing can be applied to any hotel, from a generic budget hotel to a generic luxury hotel.
Advantages of Generic Room Pricing
The primary advantage of generic room pricing is its simplicity. The hotel sets the room rates based on the market and competitor rates, which apply to everyone. This approach can be less administratively complex and easier to manage, as it can be automated and managed by any revenue management system and does not require intricate manual data analysis or pricing adjustments for each individual booking.
Another advantage of this model is its predictability. Since the rates follow market trends, both the hotel and the customers have a clear expectation of what the room rate will be. This can help hotels budget and forecast and the guests to plan their expenses.
The generic room pricing model is also particularly beneficial for large hotels or those in highly competitive markets, where the primary aim is to maintain high occupancy rates. It can efficiently attract many guests and ensure rooms are consistently booked.
Disadvantages and Challenges of Generic Room Pricing
One of the main disadvantages of generic room pricing is the lack of personalization. Every guest has unique needs, preferences, and willingness to pay. This model does not consider these individual factors, which could lead to missed opportunities for maximizing revenue.
The generic room pricing model also risks pricing too high or too low relative to demand. The hotel may struggle to attract enough guests if the room rate is too high. On the other hand, if it's set too low, the hotel could leave money on the table, especially during high-demand periods.
Furthermore, because generic pricing heavily relies on competitor rates, a hotel using this strategy might find itself in a race to the bottom, constantly trying to undercut competitors. This can erode profit margins and may not be sustainable in the long run.
Lastly, this approach could lead to a commoditized view of the hotel's offering. If rooms are viewed purely as commodities, it might be more challenging for a hotel to differentiate itself beyond pricing, and this could limit the hotel's ability to build a distinctive brand or provide exceptional customer experiences.
Guest-Based Room Pricing
Guest-based room pricing is a refined strategy in the hotel industry, deployed by hotels seeking to attract distinct guest categories that align with their unique offerings. The philosophy driving this approach posits that attracting the right guests is integral to enhancing the hotel's overall concept, ambiance, and financial performance.
The primary focus of guest-based room pricing is to attract guests who are likely to spend significantly on rooms and other ancillary products and services. This might include guests who value luxury, exclusivity, or an experience that aligns with the hotel's unique brand.
How to set the room rates
Under this pricing model, room rates are tailored primarily based on Hotel Differentiators such as unique attributes, features, or services that distinguish a hotel from its competitors. They range from exceptional dining experiences to unique architectural designs or unparalleled service standards. The rates are set to reflect these differentiators and align with the expectations of the targeted guest categories that value them.
Rates are less influenced by Market Demand Fluctuations. Unlike generic pricing strategies, guest-based pricing is less influenced by competitors' rates as it instead thrives on the hotel's unique differentiators. However, there is still a good reason during high overall demand at the destination for these hotels to increase their rates to skim the market and maximize revenue. The difference is that these hotels may not significantly decrease their rates like their competitors during low demand. Instead, they focus on attracting the selected target groups by offering additional value-adds, such as complimentary services or unique experiences, to maintain a high value and exclusivity perception.
Guest-based pricing, therefore, adopts a meticulous approach, selecting guests that not only fit their targeted guest categories but are also likely to spend significantly on rooms and other services. The ultimate objective is to achieve guest satisfaction, resulting in repeat business and word-of-mouth recommendations, which leads to more significant revenue over time despite potentially lower occupancy rates.
Advantages of Guest-Based Room Pricing
Potential for Increased Revenue: By implementing a guest-based pricing strategy, hotels can increase their revenue. This approach involves price discrimination, wherein guests are offered different rates based on their unique needs and willingness to pay. This means a hotel can capture the maximum price each guest is willing to pay rather than a one-size-fits-all rate.
Catering to Guest's Specific Needs: Guest-based pricing enables hotels to provide a more personalized experience. By analyzing data about each guest, hotels can better understand their specific needs, preferences, and budget. This understanding can then be used to tailor the price and overall guest experience, thereby enhancing guest satisfaction and potentially leading to repeat business.
Brand Differentiation: This approach allows a hotel to differentiate itself from competitors. A hotel can position itself uniquely in the marketplace by targeting specific guest segments and tailoring their pricing and services accordingly. This can be particularly beneficial in competitive markets where hotels are vying for the same customer base.
Disadvantages and Challenges of Guest-Based Room Pricing
Need for Detailed Guest Data: One of the main challenges with guest-based pricing is the need for detailed data about each guest. Hotels need sophisticated systems and processes to collect, analyze, and use this data effectively. This could involve investments in technology and data management skills.
Potential for Perceived Unfairness: If not managed carefully, guest-based pricing could lead to perceived unfairness among guests. A higher price point can create envy among guests that cannot afford to stay at the hotel. Transparency and communication about the differentiators that guests pay for are crucial to managing these perceptions.
Risk of Over-Complexity: Guest-based pricing can become complex to manage manually, but some revenue management systems can assist in setting the correct rates, especially in larger hotels with many guests.
Data Privacy Concerns: As guest-based pricing relies heavily on collecting and analyzing personal data, hotels must be careful to comply with all relevant data privacy regulations. Data privacy breaches could lead to legal penalties and damage the hotel's reputation.
Comparison of the Two Pricing Strategies
Key Differences
The generic room pricing and guest-based room pricing strategies each offer their unique set of advantages and pose different challenges.
- Approach to Pricing: Generic pricing operates on a one-size-fits-all approach, pricing rooms based on market conditions and competitor rates, whereas guest-based pricing tailors rates to individual guests based on their specific needs, preferences, and willingness to pay.
- Revenue Generation: In the generic pricing model, revenue generation is primarily tied to occupancy rates. The more rooms filled, the more revenue earned. In contrast, guest-based pricing focuses on revenue per guest, maximizing earnings by capturing the highest price each guest is willing to pay.
- Data Requirements: Generic pricing requires less intricate data, focusing mainly on competitor pricing and market trends. However, guest-based pricing relies heavily on detailed, personalized guest data, necessitating advanced data collection and analysis systems.
- Guest Perception and Experience: Generic pricing treats all guests equally, potentially simplifying the booking experience but offering less personalization.
Considerations for Hotels When Choosing a Pricing Strategy
When choosing a pricing strategy, hotels need to consider several key factors:
- Target Market: The nature of the hotel's target market plays a crucial role. If the hotel aims to attract a wide range of guests, generic pricing may be more suitable. However, guest-based pricing might be more effective if the focus is on a specific type of guest (e.g., luxury travelers or business executives).
- Nature of Competition: If the hotel is in a highly competitive market with little differentiation among offerings, generic pricing might be necessary to compete on price. However, guest-based pricing could capitalize on these differentiators if the hotel offers a unique experience or service.
- Access to Guest Data: The availability and ability to process detailed guest data is critical for guest-based pricing. Hotels with sophisticated CRM systems and data analysis capabilities may be better equipped to implement a guest-based pricing strategy.
- Ability to Implement Dynamic Pricing: Guest-based pricing requires dynamically adjusting prices in real time based on each guest's data. Hotels must assess their technological capabilities and the potential cost of implementing such a system.
- Brand Positioning: The pricing strategy should align with the hotel's brand positioning. If the hotel wants to position itself as an exclusive, high-end establishment, guest-based pricing could help reinforce this image by providing personalized experiences.
Hoteliers are very practical thinkers, so why not mix the two approaches? That is a wrong decision because once a hotel has started to attract generic guests, the other guests will disappear since they wanted something unique in the first place, where meeting other guests of the same peer category is an important differentiator.
Emerging Trends and Innovations in Hotel Pricing
The hotel industry is constantly evolving, and pricing strategies are no exception. New technologies, especially Artificial Intelligence (AI) and Machine Learning (ML), are changing how hotels determine room rates.
AI and ML can potentially revolutionize both generic and guest-based pricing strategies. These technologies can analyze large amounts of data quickly and accurately, enabling hotels to make more informed and strategic pricing decisions.
Generic Pricing
AI can provide a more sophisticated and accurate analysis of market trends and competitor rates, enabling hotels to set prices more effectively. Machine learning algorithms can also predict future trends based on historical data, allowing hotels to anticipate changes in demand and adjust their prices accordingly. Revenue Management Systems are already good at driving toward maximizing occupancy in hotels by capturing as many rooms as possible at the market rate. There are settings in the systems to set thresholds, but the principle is to capture any guest willing to pay and fill up the hotel.
Guest-Based Pricing
AI and ML can be particularly powerful for guest-based pricing. They can analyze a vast array of data about each guest to estimate their willingness to pay. They can also consider a guest's past behavior, online browsing habits, and social media activity. This can allow for much more accurate and personalized pricing. Hotels are slowly beginning to sell everything online, such as making reservations at hotel restaurants, spas, and golf tee times and offering B2B customers to buy meetings and events online. Guest-based pricing works well when a potential guest can add products and services to the original reservation. With the help of AI and ML, guest-based pricing will be the way forward for hotels that have differentiated themselves and want to maximize profitability.
Conclusion
This exploration into hotel room pricing has led us to some pivotal conclusions. Far from being a static or universal approach, hotel room pricing can be shaped by various strategies, each carrying a distinct potential for success. Two main pricing models dominate the industry: generic room pricing and guest-based room pricing.
Generic room pricing, founded on market trends and competitor rates, provides simplicity and predictability and can easily be automated. It ensures consistent room occupancy by keeping pace with the market. However, while successfully maintaining a status quo, this strategy can limit a hotel's growth potential. By conforming to market rates, hotels miss opportunities to maximize revenue and distinguish themselves from their competition.
Guest-based room pricing, in contrast, presents a strategy that positions a hotel for market leadership. A hotel can personalize its offerings by focusing on the guests likely to spend more on rooms and other services, thereby attracting and retaining a high-spending clientele. This strategy, while possibly leading to lower occupancy rates, can maximize the total revenue by increasing the earnings from each guest.
Emerging trends, especially Artificial Intelligence (AI) and Machine Learning (ML), are revolutionizing hotel pricing strategies, notably enhancing guest-based pricing. These technologies enable more dynamic and personalized pricing by analyzing extensive guest data for preferences and willingness to pay, predicting demand patterns, and automating pricing optimization. This sophisticated approach bolsters revenue and heightens customer satisfaction, which is vital for the success of a guest-based pricing model. However, the effectiveness of AI and ML hinges on robust data collection and management systems. As such, the future of hotel pricing holds exciting prospects, particularly for guest-based pricing, as technology continues to reshape the industry.
In conclusion, while generic room pricing keeps a hotel competitive, guest-based room pricing propels a hotel towards market leadership and revenue maximization. I encourage hotel owners and hoteliers to consider these pricing strategies and involve their revenue managers in creating the most successful strategy.
I also invite your thoughts and experiences on this topic. Whether you're a hotelier who has adopted these strategies or a revenue manager who has experienced daily work with pricing, your insights will contribute to developing hotel room pricing. Please share your comments in an email to me at anders@demandcalendar.com