Demand-based pricing in hotels: definition, benefits and practical examples
by Beonprice - 26 October, 2022
One of the most important elements of an effective revenue management strategy is offering the right prices. Pricing can be based on cost, competition, or demand. Or, ideally, a combination of all three factors. It’s also about adapting your rates to market fluctuations so that you offer the right price, to the right guest, at the right time. This is what’s known as demand-based pricing.
In this post, we are going to discuss what demand-based pricing is, and how using this pricing strategy can boost the revenue that your hotel generates. We will also look at a few examples to help you understand how the strategy works in practice.
What is demand-based pricing in hotels?
As we just mentioned, identifying the right price for your rooms means taking into account three important factors: the operational costs associated with selling a room, the prices that your competitors are offering, and fluctuations in demand and consumer behaviour. The most important of these three elements is, arguably, demand. How many potential guests are currently looking for accommodation, and what are they willing to pay? This is what’s known as demand-based pricing.
Demand-based pricing is all about sourcing and analysing the right data so that you understand your target market and adapt your room prices accordingly. In order to get a full picture of this, you need to take a number of factors into consideration:
- The experience and quality you are able to offer
- Specific levels of demand at any given moment in time
- The occupancy levels of your competitors and the prices that they are currently offering
- Your budget and required ROI
- In the case of returning guests, what they paid for a room in the past
- Market fluctuations and whether it is a peak or off-season
- The level of revenue you will generate for each guest
Essentially, it’s about interpreting the expectations of your target market, understanding what else is on offer, and establishing a price that reflects the value that you are able to provide. In other words, what guests are willing to pay for what you have to offer. And this will fluctuate constantly depending on the level of demand at any given point in time. It’s all about having access to the right historical data, such as past occupancy rates and average guest spend, then making accurate demand forecasts and adjusting your pricing strategies accordingly.
How can demand-based pricing benefit your hotel?
Here are some of the biggest benefits of using a demand-based pricing strategy in your hotel:
- It can help you generate more revenue by targeting specific market segments in line with anticipated demand.
- You can adjust your inventory and supply chains in line with forecasted booking behaviour, helping you better serve your guests and boost customer satisfaction.
- Certain demand-based pricing strategies (namely, price skimming, which we will discuss shortly) can provide you with higher margins as you offer higher rates to early adopters.
- Other demand-based pricing strategies (namely, geo-based pricing, which we will also discuss in this post) can help you identify geographic regions that would be willing to pay more for the same experience than others.
Examples of demand-based pricing in hotels
Demand-based pricing can take a number of forms. The most common examples are price skimming, geo-based pricing, and yield management. Let’s take a look at these three examples of demand-based pricing in a bit more detail.
Price skimming is where you establish a higher rate when you launch your business, then gradually lower it over time. The main objective of this strategy is to generate a buzz around your product and promote the idea that you are offering something of high value.
Positioning yourself as expensive might seem counterproductive, but it can actually help you attract more affluent markets and early adopters to your business by creating a sense of anticipation and expectation around the value that you have to offer. Then, as your reputation builds and you begin to recoup the costs associated with your initial launch, you can lower your prices so that they are more in line with those of your competitors and, ultimately, you can attract a larger market segment.
Price skimming is used a lot with electronic devices, the iPhone being a prime example. When a new model is released, it is sold at a high price, which reassures consumers that they are purchasing a top-quality product. Then, over time, this price is lowered until the next upgraded model is released, again at a higher price. This creates the illusion that the consumer is always getting the best quality on the market.
Geo-based pricing involves researching different geographic regions in order to determine how much each specific area would be willing to pay for a room in your hotel. For example, guests from countries with a stronger currency are far more likely to pay a higher price than those from lower-income regions.
This strategy is used a lot by OTAs. They analyse the behaviour of consumers from different countries and regions, then determine prices according to average spending habits and booking behaviours.
The final example of demand-based pricing we are going to discuss today is yield management. This is where you offer a room at a higher price the closer it is to the arrival date, and this is a perfect example of how the concept of supply and demand works.
This strategy is used a lot in the airline industry where prices fluctuate greatly depending on demand and proximity to departure. The idea is that as time is an important factor and supply is likely to be scarce, consumers will be willing to pay a premium to secure their last-minute purchase. It’s all about taking advantage of that sense of urgency and adjusting your price in line with the higher price that late adopters are willing to pay.