The significance of considering competitive hotel rates in revenue management: An economic perspective

In the ever-evolving hospitality industry, revenue management plays a crucial role in maximizing profitability and ensuring sustainable growth for hotels. By applying economic theory to this practice, hoteliers utilizing revenue management not only can optimize revenue generation, but also achieve economies of scale, earn market share, and foster long-term success.

Along Charles Darwin’s theory – survival of the fittest – those who do not adapt will have a tough time to compete, and eventually perish. As part of operating in a market economy, one fundamental aspect of revenue management is setting competitive hotel rates.

This article aims to delve into the importance of using competitive hotel rates, relative to the hotel’s perceived brand value and product market position, in revenue management and explore how economic principles can guide this strategic decision-making process.

Understanding Competitive Hotel Rates

Competitive hotel rates refer to the prices set by a hotel that are designed to attract its preferred market segmented guests, while maintaining profitability. These rates are determined by considering a range of factors, such as location, market demand, current availability, competition, seasonality, customer preferences, and the hotel’s cost structure etc.

While it may be tempting to set higher rates to maximize short-term revenue, understanding the economic implications of pricing decisions is essential for long-term success. The same way goes for the temptation for setting too low rates in the hunt for occupancy or push for higher total revenue (TRevPAR) – it can however have devastating long-term undermining effects on a hotel’s brand positioning.

The Role of Supply and Demand

At the core of economic theory lies the relationship between supply and demand. The hospitality industry operates within this framework, where the demand for hotel accommodations fluctuates based on various factors, including travel patterns, events, and economic conditions. By analyzing demand patterns and adjusting rates accordingly, hotels can strike a balance between attracting guests and optimizing revenue.

Setting Competitive Rates for Occupancy Optimization

Optimizing occupancy, considering total available market demand, is a critical revenue management objective. To achieve this, hoteliers must carefully consider the price elasticity of demand. Price elasticity measures the responsiveness of demand to changes in price, relative to competition. In a price-sensitive market, a decrease in rates can lead to a significant increase in demand, resulting in higher occupancy and overall revenue. Conversely, in a price-inelastic market, lowering rates may not yield the same demand response. By understanding the price elasticity of demand, and its relationship to its competitors’ rates at any given time, hotels can strategically set competitive rates to optimize occupancy and revenue.

The ability to calculate a hotel’s price elasticity versus its competitors is a built-in logic in Atomize’s pricing algorithm and this sophisticated way of considering comp set data has been a success factor for Atomize customers in order to find the balance of maximizing occupancy, average daily rate (ADR) and revenue. The upper-scale hotel property Opus 16 in Bergen, Norway is a great example of exactly this.

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Opus 16 in Bergen, Norway

 

Price Discrimination and Revenue Segmentation

Economic theory also supports the concept of price discrimination and revenue segmentation, enabling hotels to cater to diverse market segments. By offering differentiated rates based on factors such as customer demographics, length of stay, booking channel, and time of booking, hotels can capture additional revenue from various customer segments. Price discrimination allows hotels to extract the maximum willingness to pay from different customers while avoiding leaving revenue on the table.

Competitive Analysis and Market Positioning

A comprehensive understanding of the competitive landscape is crucial when setting hotel rates. Analyzing competitor pricing strategies, market and price positioning, and unique selling points can help hotels establish a competitive edge. Economic theory suggests that a competitive market tends to drive prices toward marginal costs. By comparing rates with competitors, hotels can ensure their prices are attractive to guests while still generating profits.

Please note, in the quest for optimal pricing, it is not suggested to follow the competitive rates. However, to understand the relative price sensitivity versus your competitive rates, to ultimately project market demand for your hotel’s guest segment, is imperative to be able to model and set optimal pricing. Hence, if a hotel brand results that it can generate pick up X at a Y% price to its competitors – this insight helps to enable it to assess and model its relative demand and performance at, for instance, Z% premium price versus its competitors.

Zedwell Piccadilly Circus is an example of another hotel property in the heart of central London where comp set data is essential to consider. Zedwell has more than 700 rooms which means they offer a huge inventory in a very competitive landscape.

criterion hospitality

 
Zedwell Piccadilly Circus (part of Criterion Hospitality) in London, UK.

 

The Impact of Reputation and Customer Loyalty in relation to price

Reputation and customer loyalty are significant drivers of demand in the hospitality industry. Economic theory recognizes the value of customer relationships and the potential for repeat business. Competitive hotel rates can positively influence customer loyalty, as guests are more likely to return to a hotel that offers fair pricing. Furthermore, positive guest experiences resulting from competitive rates can lead to positive word-of-mouth and online reviews, further boosting demand and revenue. In the end, the market price at any given time should ideally reflect the relative service level and overall guest experience verus the competition. Essentially, according to basic economic theory, premium products can in general more easily justify a premium price.

Unveiling the Dynamics of Competitive Hotel Rates in Revenue Management – a conclusion

In revenue management, setting relevant competitive hotel rates – considering the price elasticity versus competitors’ prices is crucial for hotels to maximize revenue, achieve market share, and ensure long-term success. By applying economic principles such as supply and demand, price elasticity, price discrimination, competitive analysis, and cost considerations, hoteliers can make informed decisions when establishing rates.

Understanding the interplay between these economic factors enables hotels to strike a balance between attracting guests, optimizing occupancy, and maintaining profitability in an increasingly competitive industry. Ultimately, the strategic use of competitive hotel rates in revenue management serves as a powerful tool for driving revenue growth and fostering sustainable business development.

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