Hoteliers, like the rest of the population, are greeting the new tax year against a testing backdrop of rising inflation across the board. Higher energy prices plus rising labour costs and the return of 20% VAT on 1 April, to name just a few, all add up to the need for hoteliers to also increase their own prices – across the board, from room rates, to F&B and wider services and amenities.
Unquestionably, hoteliers will need to charge higher prices to manage the impact of inflation on their bottom line and stay in business. However, the age-old challenge of higher prices is a fall in demand and market share. So how can you maintain bookings and revenues whilst also increasing prices and what are the factors that need to be considered to achieve this?
Take an informed and strategic approach to price increases.
To minimise the impact of a potential drop in demand and revenue which is often the end result of higher prices, one of the best times to increase prices is during busier periods, when demand is good. The knock-on effect of rising inflation, rising Covid cases and challenges at airports all point to a positive outlook for a strong domestic staycation market once again this summer season. With that in mind, you can and should plan accordingly for a price rise which guests also typically expect to see during the peak summer months. For those guests still keen to play it safe both for their health and their wallets but also still keen to have a break away, the domestic leisure market is expected to prove a valuable source of bookings and revenues in the months ahead. To make the most of this opportunity, you need to have a clear understanding of when there is likely to be an increase in demand and adjust (increase) prices in line with these peaks. The extended Jubilee Bank Holiday weekend in June and end of July following the end of the school term are solid starting points to keep in the pricing model diary.
2. Be prepared to reduce prices when demand is set to be low.
On the other side of the coin, during quieter periods when demand is low, you will need to be prepared to reduce prices so that they are low enough to capture market share, but not so low you end up operating at a loss. By any estimation a drop in price is not ideal, however if the end result is bookings and revenue which you might not otherwise have had if you had not reduced your price, then it is certainly worth reviewing. It is also worth bearing in mind that bookings now can lead to return bookings in the future. So, some shorter term pain for a longer term gain.
Whether increasing prices during busier periods or reducing prices during quieter periods, the important point to remember is that in both cases you need to make an informed and qualified decision. Accurate and live demand data both from your own booking figures and competitors will enable you to have really solid visibility of the market as early on as possible so that crucially, you can make adjustments to your pricing sooner rather than later and as a result, capture more of the market and revenue for a longer period.
3. Keep an eye on your data
Sometimes your initial assumptions prove to be wrong. Demand could surprise you, either higher or lower than expectations. The important thing is to stay agile with your pricing and adapt as soon as you see that demand is either higher or lower than expected. By doing this, it means that you can start with prices on the higher side with confidence that you can reduce in time if you find that you were too optimistic. An automated pricing system can help you adapt quickly to changes in demand and optimise your revenue from your remaining rooms.
4. Stem the tide of variable costs with price increases.
You have an extensive catalogue of variable costs as part of your day-to-day operations. Whether it be heating, cleaning or F&B supplies, these variables are all seeing an upward trend in terms of costs. As a result, the cost of hosting a guest in a room is higher and the squeeze on profit margins is tighter. With this in mind as well as demand data, you need to ensure that higher variable costs are also given due consideration as part of your pricing model and any pricing decision you make. It is not unreasonable to raise your base price in response to rising variable costs but to have a positive impact on profit, any rise in a base or minimum price must be at a rate that is over and above the rate of inflation.
This can be illustrated with an example, for a UK hotel based in the popular leisure destination of the Isle of Wight. The domestic market outlook is positive, so the starting prices across the board have been increased by 5% since last year. Hand in hand with this was an increase in the maximum price, because last year the maximum price was often paid and the guests were still leaving great reviews. Increased variable costs also resulted in an increase of 10% in the minimum price so that low season prices were also higher. This means that they are not always full in low season but at least the bookings they receive are profitable. Because they are watching performance, they know that even if demand is lower than expected, there is still the flexibility to reduce prices in good time to get full occupancy in the busy summer season. So far they are on course for their best summer ever in terms of revenue.
No doubt there are challenging months ahead but with the right market insights you do have the opportunity to strike the right balance when it comes to building an effective and profitable pricing model.
By Ari Andricopoulos, CEO, RoomPriceGenie