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An In Depth Review of Hotel Room Pricing Models

Introduction

It is every business manager’s goal to achieve maximum profitability in the hotel industry. This review aims to explore the models used by hotel managers use to decide, settle on and manage hotel room prices; complexities or flexibilities associated with them thereof. Pricing of a hotel rooms can be empirical; in that, it can be based on the observable qualities of the hotel room, furniture, and services offered by the hotel. Hotel room pricing can also be conceptual and entirely derived on figurative value based on an individual’s perspective (Lin & Lee, 2013). These models are as provided below:

Forecasting-based pricing

Revenue management is an important aspect of the hotel industry in order to maximize profits. While no study addresses the benefits of forecasting in the hotel industry, Lin & Lee (2013) recognize that accurate forecasting is an important practice for good revenue management and that technology is the most important aspect of forecasting. Their observation of the airline industry concludes that accurate forecasting resulted in 0.5% to 3% increase in revenue. Forecasting is a widely applied technique used in the analysis of variations in booking hotel rooms. It involves the collection and analysis of hotel reservations and bookings data over a long period of time. The analyzed data is then used to predict trends, which influence hotel pricing. The Cornell university school of hotel administration conducted research on choice hotels and Marriott hotels with an aim to establish the accuracy and stability of forecasting as a method of managing revenue. In their findings, they concluded that because of the large observations data, managers should be specific on which type of data to use study; the period and seasons to be included in the forecast in order to predict revenue impact, which hence would be used to determine and adjust hotel prices in the future (Lin & Lee, 2013).

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Competitor-based pricing

This model implies the pricing of hotel rooms based on rates of other hotels. This is only important and applicable if the respective hotels are of the same social caliber and offer the same packages and room services (Li & Jain, 2016). If hotel managers are not able to fully differentiate their services from their competitors in terms of quality or are unable to offer additional unique services, then competitor pricing can be put into consideration. Competitive pricing has disadvantages in that; it may be challenging small and establishing hotels to adjust prices easily and not run out of business. Larger hotels and longer established hotels are more resilient to hotel room adjustments (Li & Jain, 2016). Managers therefore must put into consideration that this pricing technique does not apply in all markets. In advantage however, competitive pricing promotes hotel room bookings where pricing is the only consideration clients have. Competitive based pricing is strategy to appeal price sensitive customers and can be urged as an externally focused pricing. A major pitfall in competitive pricing is that a given hotel can have information on another hotel’s pricing, which they can use to change their prices as well to match the competing hotel; however such pricing is highly customized and in the end uniformity may be weakly scheme to that hotel (Li & Jain, 2016).

Guest –dynamic based pricing

This model involves proper study and understanding of hotel guests’ and dynamics related to their stay. Bayoumi & Aziz (2013) explain that by observing client’s gender, their professions, social status, purpose of their visit and general preferences in relation to services offered, hotel managers are able to decide on the cost of hotel rooms charged. Guest pricing requires the ability of managers to fulfill different customer needs, managers use this method to accommodate clients with a minimum budget and clients willing to spend more by providing several hotel room options to carte for different needs. Masiero & Pan (2015) state that, while this model is an intrinsically complex and an idiosyncratic task, it is the only pricing model that relies entirely on the willingness of a guest to pay. As much as hoteliers decide room rates, customers assign value to goods and services they offer, as such, this is therefore a qualitative based approach to hotel pricing. Taylor, (2010) denotes that merely letting guests know that hotel rooms vary in price is not enough to improve bookings as customers base pricing on the quality of services offered.

Occupancy-based dynamic pricing

This is a demand based pricing adjustment technique and has been applicable over the years especially to increase and reduce hotel room prices. It is applicable on the principle that during high seasons, managers can increase hotel room prices to accommodate customers who are several in numbers and during the low seasons managers can reduce hotel room prices to encourage booking still accommodate the less number of customers at competitive prices while still gaining profits. This is a quantitate approach to pricing that used by hoteliers in relation to their services. Dong & Ling (2015) observed that most hotels derive clients from tour operators and while the system is occupancy based pricing technique is applied by the hotel, its operation is done by the tour operators. A major impact on this pricing method is overbooking which has significant implications on the management if the hotel has overbooking policies. This method of pricing influences directly on the hotels reputation and may have cost implications arising from compensation of customers reaction to denied service (Hwang et al., 2009).

Hanks & Noland (2002) emphasize that while it is unclear if hotels should offer discounted prices to longer staying hotel guests; it is rather understandable of them to expect such discounts. Managers use length of stay pricing technique mainly as a price adjustment technique; based on the length of a client’s stay, they may receive a price packaging which could be higher or low if compared to single night bookings of the same day. As fairness cannot be established by hotel guests over this pricing technique, acceptance is entirely based on customers flexibility and buying traits. The most notable shortcoming of length of stay based pricing technique is that it disregards other variables, which may be of economic significance (Santos & Rey-Maquieira, 2015).

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References

Bayoumi, A. E. M., Saleh, M., Atiya, A. F., & Aziz, H. A. (2013). Dynamic pricing for hotel revenue management using price multipliers. Journal of Revenue and Pricing Management, 12(3), 271-285.

Dong, Y., & Ling, L. (2015). Hotel overbooking and cooperation with third-party websites. Sustainability, 7(9), 11696-11712.

Hanks, R. D., Cross, R. G., & Noland, R. P. (2002). Discounting in the hotel industry: A new approach. Cornell hotel and restaurant administration quarterly, 43(4), 94-103.

Hwang, Johye, and Li Wen. "The effect of perceived fairness toward hotel overbooking and compensation practices on customer loyalty." International Journal of Contemporary Hospitality Management (2009)

Li, K. J., & Jain, S. (2016). Behavior-based pricing: An analysis of the impact of peer-induced fairness. Management Science, 62(9), 2705-2721.

Lin, C. J., & Lee, T. S. (2013). Tourism demand forecasting: Econometric model based on multivariate adaptive regression splines, artificial neural network and support vector regression. Advances in Management and Applied Economics, 3(6), 1.

Masiero, L., Heo, C. Y., & Pan, B. (2015). Determining guests’ willingness to pay for hotel room attributes with a discrete choice model. International Journal of Hospitality Management, 49, 117-124.

Mattila, A. S., & O'Neill, J. W. (2003). Relationships between hotel room pricing, occupancy, and guest satisfaction: A longitudinal case of a midscale hotel in the United States. Journal of Hospitality & Tourism Research, 27(3), 328-341.

Santos, G. E. D. O., Ramos, V., & Rey-Maquieira, J. (2015). Length of stay at multiple destinations of tourism trips in Brazil. Journal of Travel Research, 54(6), 788-800.

Taylor, W. J. (2010). How hotel guests perceive the fairness of differential room pricing.

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