The primary goal of hotel revenue management is to sell the right room to the right guest at the right time. Hotel revenue managers are responsible for identifying and setting room rates that are both profitable to the hotel and appealing to guests. They use a variety of hotel pricing strategies to target customers, drive demand, and boost hotel performance. Depending on a hotel’s unique needs, goals, or changes in market conditions, revenue managers may employ multiple pricing strategies at the same time.
In this blog post, we explore various hotel pricing strategies and how they work. We discuss when hotel revenue managers choose to implement specific pricing strategies and why, as well as the role rate management plays in hotel performance. From rate level distribution and occupancy-based pricing to discount codes and upselling techniques, we look at pricing strategies to fit every property and market.
Explore 14 game-changing hotel pricing strategies
1. Demand-based pricing
Setting room rates based on travel demand is known as demand-based pricing. Demand-based hotel pricing strategies rely on historical data to review past occupancy, revenue, room rates, average guest spend, and other valuable metrics. Combining prior demand data and future forecasting reports, hotel revenue managers track previous trends, anticipate future booking patterns, and set hotel room rates accordingly.
What events, booking patterns, or spikes in demand can you expect to repeat? Does travel in your market pick up around the holidays, or does it slow down? Are their major colleges or universities nearby? Do move-in dates, sporting events, summer break, or visitor weekends impact travel demand in your area?
Partner past performance reports with future forecasting data to identify occupancy trends at your property. Use this information to identify your property’s peak, off, and shoulder seasons.
- Peak season: Highest demand
- Off-season: Lowest demand
- Shoulder seasons: Medium demand
Identify potential sellouts, high-demand dates, and opportunities to increase room rate without displacing demand. Institute LOS restrictions over special events to maximize occupancy and ADR. Establish room night and rate caps for groups, negotiated rates, and other discounts during hotel peak and shoulder seasons.
2. Rate parity pricing
Rate parity is a hotel pricing strategy that involves keeping hotel room rates consistent across all platforms and distribution channels. Hotel room rates appear the same on the hotel’s website, OTAs, and other booking platforms. The transparency of a rate parity strategy can help businesses build credibility with their audience. When customers see the same hotel rates advertised across the board, they may view your property as more dependable or trustworthy.
While rate parity can solidify a hotel’s reputation with customers, poor parity management can be harmful in the long run. As third-party booking sites charge fees and commissions, hotels that engage in rate parity lose revenue to third-party sites when guests book through OTAs instead of the hotel directly. Because many popular OTAs require partner hotels to participate in a rate parity strategy, participating hotels should develop strong direct booking strategies to offset potential losses.
3. Occupancy-based pricing
Occupancy-based pricing is a dynamic hotel pricing strategy that revolves around changing occupancy levels. Hotels that use occupancy-based pricing strategies tend to raise room rates as occupancy levels rise. Revenue managers can optimize room rates manually or automatically using integrated hotel rate management software.
Integrated revenue management systems are able to catch real-time occupancy changes and adjust room rates accordingly based on rules and regulations set by the revenue management team. Hotels with integrated PMS and RMS systems may see rates optimize multiple times leading up to an arrival date. Same-day rate optimizations are also common, especially if the property is close to a sellout.
4. Optimized rate level utilization
Hotels with integrated PMS and RMS systems can design a structure of tiered room rates and automatically optimize hotel rack rates with the help of real-time occupancy and demand data. By automating rate level optimization, revenue managers are able to sell the right rooms at the right price without manually optimizing room rates through tedious, error-prone processes.
Revenue managers set a rate structure in the RMS. This structure provides the automated system with a range of rates it is able to sell in the future. Each level in the structure indicates a different room rate, with the lowest rate level (typically 0) indicating the highest room rate the system can sell. For example, a hotel utilizing four rate levels may have a rate structure that looks something like this:
- LV0: $159
- LV1: $149
- LV2: $139
- LV 3: $129
In this example, the RMS is free to move between levels 1-4 (unless the hotel has restricted rate levels), offering rates between $129-$159 based on market demand, occupancy, and availability. Integrated revenue management systems track real-time booking updates and occupancy changes across all hotel distribution channels and adjust rate levels as needed to capture more revenue without sacrificing occupancy.
Establish multiple rate levels for each room type at your hotel, and design unique rate structures for various travel seasons. Peak season rates should be significantly higher than off-season rates, with shoulder season pricing falling somewhere in between. Design a rate structure that drives growth but keeps your hotel’s room rates in line with the market average. Track rate changes across the comp set and restrict levels as needed to remain competitive.
5. Market segmentation pricing
Rack rates, or open market rates, may be subject to rate parity restrictions, but hotels can harness discounts and negotiated rates to drive more business from target market segments. For example, revenue and sales directors may negotiate discounted annual corporate rates in exchange for guaranteed room night production. Offering a discounted negotiated rate to a popular business may reduce the revenue and ADR for each individual room night, but the increase in room night production could boost occupancy and RevPAR.
Create coupons, discounts, packages, and other special offers designed to appeal to different types of hotel guests. Review your market mix to identify target market segments and develop a pricing strategy for each low-performing segment.
6. Day of week (DOW) pricing
Can you pinpoint weekly travel patterns in your market? Do you have a high percentage of LNR or CNR travel during the week, pulling down the hotel’s weekday ADR? Do occupancy rates trend higher on Tuesdays than Wednesdays?
If your hotel is located in an area that sees a shift in travel demand or ADR between weekdays and the weekend, implement a DOW pricing strategy to optimize hotel ADR. Establish hotel pricing strategies and implement booking restrictions informed by weekday and weekend booking patterns.
7. Competitive pricing
Hotels are in constant competition, both against themselves and comparable hotels nearby. While revenue managers strive to grow occupancy, rate, and revenue year after year, they also work to keep their hotel rates in line with competing hotels in the market. Hotels that increase room rates with the sole goal of improving YOY numbers run the risk of displacing business, sending travelers to more affordable hotels in the area.
Competitive hotel pricing focuses on the comp set’s performance; it involves tracking rate, group, demand, and occupancy levels. Hotels use competitive set data when establishing their own room rates to ensure that unreasonable prices aren’t driving business to the competition.
8. Penetration pricing
Penetration pricing refers to the process of offering initially low rates to grow occupancy and then raising room rates as availability dwindles. Hotels initially offer low rates in order to penetrate the market and drive hotel occupancy to reach a certain level. After meeting the desired occupancy threshold, hotels introduce higher rack rates and begin to restrict discounts, optimizing the revenue potential of remaining available rooms.
9. Discounted and promotional pricing
Promotional codes and discounts can be used to target underperforming market segments, encourage guests to join hotel loyalty programs, and drive direct bookings. After checkout, reach out to guests who booked their reservation through a third-party website. Contact the guest via email and offer a discount for booking their next stay with the hotel directly. While an over-abundance of poorly-managed discounts can negatively impact a hotel’s bottom line, they can drive business and grow revenue when used strategically.
10. Length of stay pricing
Factoring length of stay (LOS) into a hotel pricing strategy can help revenue managers strategically direct guests to book beneficial stay patterns. Hotels may choose to offer LOS and extended-stay discounts based on a guest’s arrival date, departure date, stay pattern, or the total number of room nights in a booking. They also may implement booking restrictions, such as minimum night stay requirements or strict cancellation policies, to deter unfavorable stay patterns.
For example, a hotel looking to increase occupancy on Monday and Tuesday nights may offer LOS discounts for reservations for the following booking patterns:
- Saturday check-in: 4+ nights
- Sunday check-in: 3+ nights
- Monday check-in: 2+ nights
Consider weekday and weekend demand changes when implementing LOS restrictions to avoid harming ADR over high-demand dates. If your hotel lags in weekday occupancy, but consistently performs well every weekend, it may be beneficial to offer LOS discounts for reservations that include multiple weeknights, even if they overlap with the weekend.
Protect the integrity of high-demand weekend rates by creating LOS pattern restrictions that offset high weekend rates with deeper weekday discounts. For example, weekday discounts may reflect a 15%-off BAR with weekends only offering a 5% discount. The deeper weekday discount will still provide guests with an appealing average nightly rate while protecting high-demand weekend rates.
11. Flex rate and semi-flex rate pricing
Create flexible rates that allow guests to save money on their booking in exchange for agreeing to a stricter cancellation policy. Hotels may include various flexible cancellation options to promote need dates, restrict flexibility during special events and blackout dates, and offer their most flexible room rates outside of lengthy booking windows.
Create a system of tiered room rates that tie the most flexible cancellation policies to the highest room rates. Guests who are certain of their travel plans can trade the ability to cancel for a steep discount on room rate, while guests who are less sure can choose to pay a higher room rate in exchange for a flexible cancellation policy.
Before implementing a flex/semi-flex rate structure, host a training session with hotel guest service staff. Ensure every front desk team member knows how to make flex-rate reservations, how to identify flex/semi-flex reservations in the system, and where to find the corresponding cancellation information. Detail the appropriate policies and procedures for enforcing cancellation restrictions, penalties, and overcoming guest objections.
Effective hotel upselling revolves around understanding your guests and offering additional services or products that appeal to them. When a guest is in the process of booking a reservation, whether online or through the front desk directly, hotels have the opportunity to upsell and drive additional revenue to the property. Before completing a booking, hotels that engage in upselling practices may entice a future guest to make additional purchases, such as:
- Ancillary services (i.e. spa services and valet laundry)
- Upgraded room options (i.e. standard room to suite)
- Hotel packages (i.e. anniversary or bachelorette)
In partnership with Phocuswright, iSeatz, a tech company that provides “brand-driven ancillary booking solutions,” conducted market research to study the ancillary purchase habits of business travelers. Their report, Business Travelers and their Demand for Ancillary Services, found that 70% of responding business travelers were interested in “purchasing more than core hotel products such as on-site dining, retail sundries, and transportation solutions.”
Upselling is one of the most frequently utilized hotel pricing strategies because it works by driving additional revenue from current customers as opposed to capturing and converting a new customer. With so many travelers interested in ancillary purchases, hotels that fail to upsell could be missing out on valuable revenue opportunities.
Upselling and cross-selling are similar, but while upselling involves prompting a guest to spend more on an existing purchase, cross-selling happens post-purchase. After guests book a reservation, hotels may send a follow-up email with additional offers that customers can purchase in addition to their original booking. Hotels may cross-sell ancillary hotel services, additional products, and experiences, such as a guided walking tour or tickets to a nearby attraction.
14. Hotel package pricing
Strive to sell more than just hotel rooms. Create appealing booking packages that include high-quality products, services, meeting space, or access to local experiences with a room reservation. While purchasing a package is more expensive than booking a room rental alone, it should be more affordable than purchasing each component individually.
Design and offer appealing booking packages that entice your target audience. Put your own spin on classic package options, like a honeymoon or spa package, or design your own — incorporating branded promotional items and offers unique to your area. Include dining credits, welcome gifts, in-house retail discounts, or a variety of other quality offerings in hotel packages.
Get started putting these hotel pricing strategies to use
Whether your hotel is located in a bustling metropolis or nestled in the quiet countryside, establishing an effective hotel pricing strategy is vital for success. With your property’s occupancy, rate, and revenue goals in mind, identify which hotel pricing strategies and room rate management style fit your property best, and act accordingly.
Up next, we teach you how to respond to guest reviews in a way that helps attract guests to your property, even when rates are high.