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Creating a Pricing Strategy for Your Property

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Posted by Alex Gaggioli
August 29, 2016

Introduction

Creating and managing an effective pricing strategy is an important and tedious task for any property. In order to find a pricing strategy that works well for you takes time, but today there are more resources available than ever before. A combination of general pricing tactics, coupled with a competitive analysis will help you implement a pricing strategy that works well for your property.

Use Your Competition

One of the first steps in determining your pricing strategy is looking at your local competition. Thanks to the incredible growth of OTAs and online technology, your competitors’ pricing strategies are on full display. While their exact strategies aren’t laid out for you, you can draw several conclusions from doing a bit of research.

When you look at your competitors’ rates, it’s essential to make sure you complete a well-rounded assessment, according to Hotel News Now. When doing research on your competitors, you need to consider several different factors that go into the rate you see online. Some common factors include seasonality, current occupancy, historical data, promotions, and local events. Each of these factors influences rates differently and we suggest taking a look at each to determine how different properties adjust their rates.

Seasonality

Seasonality pricing affects almost every property. Most properties experience some sort of high and low season in which prices rise and fall accordingly. Whether your property experiences dramatic seasonal increases and decreases or has a consistent stream of bookings all year, it’s important to understand how your competitors price throughout the year.

Occupancy

Your property’s current occupancy should influence your rates. We suggest implementing some sort of yield management strategy that is similar in nature to your competitors’ strategies. Some markets are extremely reactive to occupancy percentages, and others are not. Strategically look at your competitors’ rates and availability when it’s likely they have higher occupancy percentages. It may take some time to effectively gauge how each of your competitors reacts to changes in occupancy.

Historical Data

Historical data will help you make decisions both in long-term and short-term situations according to Hotel News Now. In the short-term, historical data will enable you to respond to small trends affecting the market right now, such as events and holidays. Historical data in the long-term will help you determine trends that affect your property consistently like seasonality.

Know Your Place

Use your competitors’ rates and do your best to determine their strategies, but always understand your place in the market. No property is exactly alike and therefore, it’s important to analyze how the differences affect pricing. Price and rates should go hand-in-hand. If a neighboring property offers much lower rates because they have fewer amenities, then you shouldn’t feel obligated to match them solely based on the fact it’s priced lower.

Decide Your Strategy

After you take a look at your competitors, you should decide on a foundational strategy for your business. Cornell published a great guide on the different tactics properties can implement based on their goals. Before you choose a strategy, identify your offering to gauge your unique value in the marketplace. The price matrix below creates a basic outline for what businesses offer. High price-high quality to low price, low quality, your property should fit into one of these generic squares. Understanding your offering and what you provide the market is the first step to creating a pricing strategy that works.

Cornell Pricing Matrix

Different Types of Pricing Strategies

Price Skimming

Pricing skimming involves entering the market at a price that is far higher than your competitors. It is supposed to signal to potential travelers that what you offer is superior to your competitors. Price skimming is popular when a business or service is first entering a market and it allows you to gauge how the market will respond to pricing. If your property can live up to its high price tag, then a price skimming may work for you.

But beware, skimming doesn’t always work and potential travelers may not believe your property is worth the higher price tag when there are cheaper alternatives. The most important factor with this strategy is to live up to the price tag’s expectation. If you don’t, you’ll either suffer from lost bookings or unhappy guests.

Price Matching

Price matching involves setting some, but not necessarily all, of your rates to match the competition. The goal here is to attract a large percentage of your competition’s market to consider your property. Using this strategy, you should still offer some rates above or below other properties depending on your offering to capture other pieces of the market. Cornell says this strategy allows you to compete with other properties without having to implement an undercut strategy.  

Undercut Strategy

An undercut strategy is one where you identify a room or package that competes with neighboring properties and then offer it for a much lower price. It does not involve offering all your rooms or packages for lower prices but usually includes one or more packages. The goal is to attract attention for a specific room or offering to lure new customers in.

This strategy can be tricky because you don’t want to operate at thin margins. But, the payoffs can be great if you end up attracting new customers to your property. If your property exists in a market very receptive to low pricing this strategy could work well.

Price Penetration

Price penetration is the opposite of price skimming. The goal here is to enter the market at the lowest price and become the low-priced leader in your market. When entering a new market, price penetration often helps get people in the door and make them aware of the new property. While price skimming sets itself apart by offering very high prices, price penetration is designed to gain attention for the opposite reason.

Price penetration is a good way to gain valuable attention, but it’s also tricky. It’s almost always easier to lower a price than to raise it. Unless you plan on offering your rooms or beds at a low rate forever, it might be difficult to raise your prices in the future. It also may cause your competition to lower their prices, thus creating an endless cycle of competing over the lowest price, which means competing on lower margins.

Surround

A surround strategy involves offering a higher and lower price than your competitor, but not the actual price. So if your competitor offers a room at $100, you offer one room at $115 and one at $85. You surround the competitors’ first available rate with a lower price to attract price-conscious customers, as well as customers looking for more. The best way to implement this strategy is to offer less to customers who want to pay $85 and include extra amenities to those willing to pay $115.

Conclusion

Pricing is one of the most tedious tasks a property owner or operator must address. There are endless theories on what works best for each property, but it all comes down to understanding what you offer. Once you understand what you offer and can make an accurate comparison to neighboring competitors, you can identify a strategy and its tactics. Identify your distinguishing factors, study your competitors, and experiment with different pricing strategies.