Once upon a time, in the good old days, pricing strategies were relatively simple and distribution channels were relatively limited. Customers had fewer booking options, and the market could not respond rapidly to shifts in demand or supply. Today, the opposite applies, and revenue management is a key element in the operation of any hotel. To maximize profits it is essential to sell the right room to the right customer at the right price – and this inevitably involves increased levels of complexity.
The first step is market segmentation. Customers are all different – they travel for different reasons, they have different demographic backgrounds, different incomes, different tastes, and different behaviour patterns. They want different things and they are prepared to pay different prices. Furthermore, they will book their hotel accommodation through different channels. The challenge for any hotel is to categorize and identify the client base, and then use the right channels to target the right customers with products and prices which will generate the maximum revenue levels.
The second issue after market segmentation is that of distribution costs. You must fully understand the real costs of distribution if your revenue management strategy is to be effective. During quiet periods you will need to increase demand levels by opening up additional distribution channels which are able to target those marginal customers who may be attracted and persuaded to travel by lower prices; however, you must be careful that you’re not simply lowering the price to those business travellers who might willingly pay the full rate because they have no choice but to travel.
When demand is high, perhaps when your city is hosting a major event which attracts large numbers of visitors, you may wish to sell predominantly through channels which have a low distribution cost while also raising price levels since demand is so strong. When rooms can be sold easily, it is important not to sell them via channels which impose higher costs.
Much of the differentiation in the products and prices offered to the various segments can be made through strategies such as imposing minimum stay restrictions, cancellation fees as opposed to free cancellation, pre-paid rates, or the addition of extra benefits such as breakfast or unrestricted use of hotel facilities. All of these techniques work in addition to the usual variation between room categories, and the differences in pricing will to a certain extent allow the hotelier to optimize both the client mix and the revenue accrued.
All of this is a far cry from the situation twenty years ago, when fixed prices were the norm and concepts such as dynamic pricing and rate parity were yet to become commonplace. Since the late 1990s, however, the level of complexity has been ramped up rapidly, leaving revenue managers to optimize prices, promotions and channels in real time.
One positive consequence of this increased complexity is the fact that the data required for effective market segmentation is much richer than was the case a few years ago, and the thus the data patterns discovered can be used to refine strategies in hitherto unseen ways. The pace of change in the field of revenue management is relentless, and with it the arrival of new opportunities. It may appear daunting at times, but the need for carefully constructed and highly responsive pricing strategies cannot be ignored.
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