HOTEL PRICING

HOTEL PRICING

TRADITIONAL APPROACH
The single most important criterion of success
in any business, including hotels, is profit.The
purpose of this article is to discuss the importance
of hotel pricing and its influence on
yield or revenue management, especially in
terms of profit generation, and because of inherent
dangers to the industry worldwide, integrity
of the established pricing structure.
Historically, price has been determined by the
triangular relationship of cost and demand in
the context of competition (see Figure 7.3).
The actual pricing structure is developed with
one of these three components as the deciding
factor while the other two play supplementary
roles.

Figure 7.3 Three Forces of Pricing

The traditional pricing strategy was
largely cost-driven. Many hotel operators
tended to favor the rule-of-thumb method.
This approach, also called the $1 per $1,000
rule, states that hotels should charge approximately
$1 per night for every $1,000 of room
cost, based on an average 70 percent occupancy.
Although popular in its day, the calculation
of cost was commonly misunderstood
(see Hanson, 1995). Another widely used
quantitative method was the Hubbart Formula,
developed in the late 1940s as a
guideline issued by the American Hotel Association.
It focused on computing an average
room rate that would cover operational costs
and yield a reasonable return on investment
(ROI). These quantitative methods are fairly
static and therefore suited for a stable economic
environment. Qualitative pricing approaches,
such as percentage increase of
previous-year rates adjusted for inflation,
payroll increases, and new cost of supplies,
reflect more realistically the projected cost.
Other qualitative techniques are less ex-
act but, by being competition-oriented, they
offer more flexibility. The Pied Piper or
Follow-the-Leader method uses competition
as the basis for rate setting, while the Gouge
’Em approach tries to lure business away
from other properties by undercutting their
prices. If there is no competition to speak of,
Hit or Miss fluctuation of rates tied to profitable
occupancy levels could be employed.
The drawback of competition-driven pricing
is its sole focus on rate comparison, ignoring
differences in operating expenses and customer-
perceived value. An effective approach,
therefore, calls for a mix of methods
adjusted for different situations (see Table
7.3).The fundamental question remains:What
should be the driving force in formulating a
sound pricing strategy? In today’s dynamic
business environment, which discards the traditional
view that market demand for room
rates is largely inelastic, demand orientation
seems to provide the best fit.

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