What price should I charge?

Q: I was reading an article online last month about UK hotel prices rising twice as fast as the global average. I haven’t put my prices up by much in the last three years (only about £8), but I wonder if I am doing myself out of potential profit? How do I know what I should be charging?

A: Pricing is a really interesting and often thorny subject, because there simply is no hard and fast rule to setting room rates. There are lots of things you’ll need to consider, not least whether a price increase will affect your marketing and occupancy, but I agree, there is also no point undercharging and undermining potential revenues.

You haven’t told me much about your hotel, so much of what’s included here in a general guide, but you shouldn’t have problem adapting it to your own scenario.

COMPETITION – The first thing to understand is that larger hotels are likely to be more focussed on the occupancy rate, artificially lowering prices to ensure full rooms and maximise guest spend during the stay. For independents, this isn’t always possible, so don’t necessarily focus on a price competition – it’s likely your customers and theirs will be selecting a hotel for different reasons anyway.

MYSTERY SHOP – Mystery shopping does not just have to focus on your own property, but can focus on your competitors too. Look to engage brutally honest friends, or a professional company to call each of the hotels and find out prices, and potentially even get them to stay over, assessing the full value. It’s also worth logging on to sites like TripAdvisor to help you understand and potentially plan the ‘package’.

COST YOUR OWN MODEL – Sorry if I’m teaching grandma to suck eggs, but make sure you know your break-even points and profit margins inside out. Preferably, assess these on a sliding scale, looking at how adding one bedroom occupancy affects fixed and variable costs. Once you know this, it’ll mean you have a good awareness of your starting base and what is the absolute minimum you can earn on the room itself.

FIND YOUR COMFORT ZONE – you know your business and what you are happy to sell. If you think it might be too expensive, or you’re worried you might be greedy, then you probably are. Vice versa also applies and the mystery shopping might open your eyes to potential price increases.

Once you’ve put these things together, you should have settled on a comfortable price, and then you need to turn to the marketing. So many hotels I work with have a year-round flat rate, which to me seems bonkers. There are a few things you need to get sorted:

• Work on your average stay – The best way to ensure you don’t miss out on extra revenue is to increase your average stay, and this will also help you compete with larger hotels on the ‘list price’. Look at off-peak packages, or extra days at half price, partner with local businesses for an off-peak but quirky package, or run a loyalty incentive. Whatever you do, work to increase the incentive to stay, and stay longer so you benefit from extra spend and reduced price sensitivity.
• Benefit early bookers – Airlines have got their model spot on, charging more the closer the date looms; hotels seem to do the opposite, encouraging punters to book last minute. Change that around and ensure customers get a better deal the further in advance they book. This does mean getting your packages sorted early, having a good promotional and content schedule working well in advance, but you’ll have the stay guaranteed and can charge more to those who book later on. Win-win.
• Seasonality – Look at your market and previous booking patterns closely. For example, Cornwall hotels will be fully-booked all through the summer months, yet through winter it can be like a ghost town. There’s no reason it should be – the beaches are still beautiful, the fish still fresh, the area still accessible, yet they put their focus totally on the months which are set to be busy anyway. Look at major cities on the other hand and whilst they are likely to have business all year round, Christmas and New Year for shopping, markets and celebrations are likely to be a peak time. Look at your own market and set prices slightly higher for peak times – it’s about supply and demand – and add incentives for traditional lull periods.

Don’t forget, in the age of the internet and online booking systems, it’s really simple to change prices on an almost daily basis; if you test your price out and see a short-term drop in bookings and revenues, you know you’ve set it too high. If you can’t keep up with demand, then you’ve set it far too low. Pricing is not an exact science, but persevere and learn year on year what has worked and what hasn’t.

This feature first appeared in the October 2014 issue of Hotel Owner.