Relation Between Room Pricing and Revenue

Success of a hotel depends, to a large extent on pricing, particularly of rooms. A well-designed hotel pricing strategy can do wonders by giving a strong push to the hotel revenues. How you arrive at an appropriate pricing and what kind of strategy you use is an important issue. Appropriate pricing strategy is an important step towards hotel revenue maximization. To a consumer the price may be a plain number, which the hotel may quote differently at different times and to different people. But reality is different! Ashok Malkani, on delving deep into the hotels’ room pricing strategies, finds that the reality is not what the layman imagines. Though, of course, one aspect which almost everyone knows is that the most important factor is the demand and supply balance.  
    
With the recent dispute between the Federation of Hotel & Restaurant Associations of India (FHRAI) and the Online Travel Aggregators (OTAs), MakeMyTrip and GoIbibo, about the discrepancies that they indulge in as far as room rates of their members are concerned, brings the focus on Hotel Room Rates which are the major source of revenue for these properties. 

It has to be realised that though F&B contributes significantly to the revenue of the hotel, the room rent and occupancy formed the crux of the earning. Deciding on the price of the hotel rooms is an onerous task, especially for those who are not able to invest in specialist Revenue Managers and are bombarded with varying opinions from numerous sources. 

Almost all revenue managers realize the importance of maximizing room revenue. So what would be the best strategy for increasing the revenue? 

Sucheta Jadhao, Director of Revenue, Sofitel Mumbai BKC, iterates,” When it comes to profitability in the hotel service industry, the right pricing of rooms is directly collateral to increasing room revenue. Forecasting and analysis of past records is the first step to understand how the pricing of rooms has been fluctuating in the past accounting year. Post a detailed understanding of the room price trends over a period of time, appropriate strategies such as personalised and inclusive packages, encouraging longer stays, discounted rates for direct booking and segmented room pricing can be applied to optimize room pricing.

Seasonality effects refer to the demand variations that are caused by different times of the year. Assessing and leveraging seasonal demand is a significant parameter for room pricing and consequently to maximize room revenue. Considering a steady increase of travelers for business and leisure as people wish to escape monotonous daily routines and travel more with families; hence, the peak season for hotels when prices can be increased, is festivals, vacation times like year-end, and when the weather is pleasant, like winters. 
 
Thus planning different accommodation packages such as weekend staycation, Diwali package, business package and others proves to be a significant strategy driving guests through discounted rates and pleasing inclusions. An important way to maintain revenue and profitability during off-season times is to pre-plan the whole year and make room pricing decisions based on these analyses. Based on this research, Sofitel Mumbai BKC maintains profitability by collaborating and hosting national and international food festivals bringing in authentic cuisine from home destinations such as Amritsar, Kashmir, Singapore, Vietnam and more. These events increase footfalls into the property all year round.”

Palash Swarup, Director of Sales at Hilton Garden Inn Gurgaon, affirms, “Rooms Revenue Management plays a major role in identifying different segments along with rates which can perform during different seasons. It is imperative for the hotel to understand market dynamics during each season and maintain rates as per demand basis. The hotel can also increase their room occupation and revenue by resorting to seasonal contracting with their corporate clients to maintain traction.”

Derek D’Souza, Executive Assistant Manager, Hotel Marine Plaza, Mumbai reveals, “Room strategies based on sound revenue management drivers that encompass a market share driven approach during non peak periods and an increased yield driven approach during peak periods would be considered as the most ideal pricing strategy. October to March is considered peak season, where hotels generally price higher although you do have the festive periods such as Diwali and Christmas to be mindful of.

Profitability for the year is averaged out in terms of budgeting, however extra diligence on HLP expenses does have a greater emphasis during leaner times.” 

Fixing Room Rate

There are several aspects which act as determinants for fixing room rate. The main considerations are: 
• Location
• Hotel rating/standard
• Competition
• Demand

As occupancy/demand increases and supply (room availability) decreases, lower rates are closed and only higher rates are available. Hotels today need a base of business in order to cover operational expenses. Selling all rooms at the same rate rarely produces good occupancy or a good average rate.

Several hotels follow the principle of offering the same product at different prices to different types of customers. FHRAI has highlighted the fact that OTAs offer same hotel rooms at different rates. Revenue managers around the globe are of the view that while “open market” prices should be subject to a rate parity strategy,  prices for corporate segments could be lower, especially if they commit to a certain number of rooms, or a certain number of meals. Another option would be to sell multiple rooms to travel agents for a lower rate, so the travel agent can include the rooms in packages.

So what, in reality, what are the methods adopted by different hotels to fix room rates?  

Derek disclosed, ”We prefer to have rate parity across all mediums of selling, however unfortunately we do see undercutting and cash back offers these days from several OTA’s that lead to distortions in price. This does create animosity among the seller channels, not so much from the customer who ideally gets the best deal, however it’s not one that is desired as it affects the unit’s ability to sell through its own website leading to cost implications through increased commissions from the OTAs.

We offer better rooms rates if they are booked directly. It does make better business sense to discount through your own website as the net yield still works out better as compared to bookings that come through an OTA after factoring the payout by way of commission which is way too high.”

Sucheta conceded, “Certain hotels offer discounted rates on some travel websites in order to secure more travel bookings. However, reputed hotels have a policy of a uniform rate across all websites to eliminate any discrepancies for the hotels. We, at Sofitel Mumbai BKC have rate parity, wherein all OTAs will have the exact same rates from our end, however if any discount is visible it’s extended by the OTA as a part of their promotion. Additional offerings from the hotel are only considered to the Accor members where the benefits are extended for their loyalty to the brand.

“A large section of hotels follow uniform pricing policy across all online distribution channels as this ensures streamlined facilities such as convenience in up-gradation of rooms, better room preferences and improved customer service for issues related to booking and any other issues during the stay. To minimize additional charges of OTAs, hotels are increasingly providing better room rates and turning towards a rate disparity strategy to encourage direct bookings. Offering consistent rates across all online platforms instills a transparency and loyalty factor amongst guests. Considering that any revenue manager would want direct bookings in order to decrease dependency on OTAs. However, OTAs help hotels reach new markets, fill vacant inventory and increase brand awareness thus considering rate disparity wasn’t ethical. At Sofitel Mumbai BKC, we offer the best available rates as per the guest requirements whether the guest books directly from the hotel or from any other channel.”

Palash states, “The principle of offering the same product at different prices to different types of customers is followed by almost all city hotels and reason behind the same is flow of travel between Jan – Dec wherein hotels experience high demand during Jan to April and then September to December where hotels have opportunity to maximize. I do not think that it should affect reputation of the hotel as the corporate traveler also benefits due to the fluctuation in rates.”

Package Deals 

Several hotels also offer “package deals”. What are these and how beneficial are they for increasing the revenue of the hotel?  

Derek disclosed, “Package deals are offered by way of a bundled one or one that can be built on (customized). A bundled deal (pre determined) could have inclusions such as a meal, transportation, complimentary give a ways as well as discounts on services offered at the hotel among many others.  A non bundled one is where the choice is left to the customer while booking where each service can be offered at a discount and the customer is given the option to build on his room rate by picking a service that he is likely to use. 

These offerings help as you cross sell services of the hotel, creating a bit of stickiness thereby increasing the overall RevPor/RevPag (Revenue per Occupied room/Available Guest) of the hotel.

Room rates are also adjusted to the length of the stay. A  Long stay rate is generally more favorable as it brings in a sustained revenue stream over a period of time, buffers the hotels in way of guaranteed revenue and there a higher likelihood of other services being utilized such as laundry/meals etc. Shorter stay rates are more dynamic, market driven and can be elastic, given market conditions.” 

Sucheta reveals, “A ‘package deal’ is a combination of multiple services offered by the property to the guest at a reasonable and convenient rate. Today, guests plan every element of their trip much ahead, through smart phones and the Internet. Package deals such as staycation offers are particularly trending, where guests are looking to experience exotic aspects of their stay. 

Package deals at Sofitel Mumbai BKC have been effective in proving the fact that the hotel is beyond only rooms, thus leading to revenue optimization by effective usage of all the facilities of the hotel.

Compared to increasing the rate of rooms, leveraging the length of stay of guests is also an important criterion to consider while assessing room revenue. Based on high or low demand, the duration of the stay of guests can be adjusted to gain maximum optimization out of available rooms. Considering consumer behavior, the guest will always expect to obtain higher discounts with increasing length of stay, however from the supply side it depends on the available inventory.  For example: if a guest is staying for four nights during a peak time, room rates will be increased and vice versa during lean periods. This will also aid in overall fewer unused rooms. In our latest rate architecture different percent discount is given depending on the length of stay, longer the stay higher the percent of discount.”

Palash concurs and adds, “Package deals are beneficial mostly over weekend in a city hotel or if the same covers a travelers budget as provided by his or her company. However package or bundle pricing works well for leisure properties. 

A better length of stay always attracts better pricing as certain costs can be equally divided across the stay to reduce the impact on per night costing.”

Upselling for Better Revenue

Upselling or encouraging customers to upgrade to a better room is another way of increasing revenue. In hotel, upselling is a technique to maximize hotel revenue from occupancy and increase the average daily rate (ADR). The importance of upselling has increased over  recent  years,  because  of  changing methods  of  booking  rooms,  various distribution  channels  of  marketing, bargaining power of customer, etc. For this increased importance of upselling techniques  to  maximize  ADR,  a  kind  of motivation  is  required  among  each  and every  employee  of  a  hotel.

Sucheta explains the term “upselling”: “Upselling refers to suggesting a higher end version of the hotel room than what the guest maybe interested in. It is a strategic tool to increase room revenue all year round. At Sofitel Mumbai BKC, we seek to understand guests’ requirements and only recommend rooms that are the best fit for their expectations. Hotels should place genuine alternatives before the guests and provide all available options to the guests with respective features of each room and let the guests decide. The best way to encourage guests to upgrade their rooms is to give them additional service options that enhance their primary purpose of visit. The staff should be prepared in advance with the guests’ preferences, exclusive offers and the right use of available facilities to effectively upsell hotel rooms to the guests as well as convince them to extend their stay.”

Palash is of the view that “Upselling depends on 2 factors – does the upgrade price fall in the budget of the traveler and if that fulfills his demands of inclusions. If both the factors fit well, then yes upgrade is beneficial to both the parties.”

Derek disclosed, “Salient features of each room are identified and staff are trained to pitch the same, given the profile of each guest. Over the counter signage displays as well as positioning the next room category online when a lower category is booked are other ways adopted by hotels.”

Selling URIs and Other Strategies
 
Marketing directors and revenue managers, in particular are continuously learning to put pieces of the puzzle together which will enable them to predict the rooms which will remain unsold at the end of the day. Numerous challenges arise for selling the unsold rooms inventory (URIs) particularly with a plethora of distribution technology, which complicates the process of directly reaching the guest. 

So how does one predict the URIs on a day-to-day basis and what are the essential strategies that the hotels adopt to increase the sales of their rooms? 

Sucheta declares, “We at Sofitel Mumbai BKC, regularly calculate available and unused rooms for our sales research and records. We have a dedicated sales team that ensures all rooms are adequately utilized. We also regularly check the rates of our competition and analyze and forecast the future scenario based on city events and happenings as well as highlight the low demand dates and accordingly create strategies based on the same.

As far as increasing room sales is concerned, I may mention that while there are high room sales during peak seasons, it can be a challenge to maintain room sales otherwise. During such a period; e.g. weekdays, it is essential that a geographical landscape study is conducted to identify potential customers willing to visit the hotel and book a stay. Also maintaining a journal of regular travelers and reaching out to them with attractive deals and discounted travel packages contributes to hotel room sales. Since the city of Mumbai is a financial central hub to the nation, it witnesses a great number of international travelers looking for a leisure retreat post business. The luxury hotel hosts exquisite art exhibitions, events such as the Blues in Jazz and similar for art aficionados along with authentic national and international food festivals for guests to experience a variety of exquisite cuisine at their outlets, which increases hotel sales. Along with guests travelling from outside the city, it is important to position the property as an ideal venue for meetings and conferences for nearby businesses.”

Palash asserts, “A hotel would generally know its occupancy levels based on trend and demand; hence they would plan accordingly, to place the inventory. As far as URI is concerned – that depends upon demand in the market, supply and market conditions (occupancy levels in the other hotels or comp set). High demand with limited supply and high occupancy of comp set will demand higher rates and vice versa.”

He adds, “For increasing room sales one must acquire new accounts and develop on the already existing accounts. We, at Hilton Garden Inn, Gurgaon, strongly believe in this. On a day to day basis, revenue management process would help a hotel to maximize.”

Derek declares, “Understanding market conditions, hotel positioning, competition pricing and your own individual pace of bookings are some of several other variables that are used to determine price.

These days where information is so freely available, each day brings in its own set of challenges with the mix of variables used in determining price alternating considerably. One size fit alls is out and dynamic pricing given markets conditions is the new priority that brings about the desired results.

At Hotel Marine Plaza, Mumbai, some of the several strategies that we adopt for increasing room sales are: distribution, cross selling, marketing tie-ups, content management, social media, direct bookings, revenue management.”
 
In other words it may be stated that once a Revenue Manager is aware of both the internal and external supply and demand factors, he can then start to forecast more accurately as to how each market segment will perform each week and set rates accordingly.

There can be little doubt that pricing is critical to the success of all hotels and a well-designed hotel pricing strategy can do wonders by giving a strong push to the hotel revenues. What is important is how you arrive at the appropriate pricing and what kind of strategy you choose.          

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