How to get your rate structure to the next level: Agile Pricing
by Julia Rey - 4 February, 2021
How to get your rate structure to the next level: Agile Pricing
Move to the next level in your pricing management thanks to technological tools that provide flexibility and allow mixed models.
One of the aspects that concerns us most in Revenue Management is the creation of a dynamic and efficient rate structure, which allows us to make our product attractive to a greater number of potential customers by segmenting our offer.
In this article we explain how you can go a step further in the development of your rate structure, to design a profitable, efficient and sustainable strategy in the long term. We tell you how the Agile Pricing methodology can help you improve your processes and get the most out of your rates.
What is Agile Pricing and how does it help you improve your results?
Agile Pricing is a working methodology in Revenue Management that allows us to evolve from a rigid pricing structure model to a more efficient and profitable flexible model.
First of all, we will need to diagnose and evaluate the level of maturity of our pricing management, through the definition of two parameters:
Price freedom or level of flexibility in pricing: to what extent our way of working allows us to adjust the selling price to what each market segment is willing to pay.
Number of managed rates: how many rates we use as the basis of our rate structure and how many others are linked to these by adding a supplement or discount.
This analysis will allow us to identify our position in the Agile Pricing matrix. From here, we have the opportunity to take steps in the direction of an increasingly advanced Revenue Management development and a more efficient pricing management:
Basic RM: You work with a simple rate structure, using price levels, a master rate and the rest derived from this.
Medium RM: You move towards a mixed rate structure, increasing the number of master rates and reducing indexation, while moving towards open pricing.
Advanced RM: You rely on inventory management and segmentation to be able to manage a fully open rate structure with as many master rates as possible.
To progress in your position within the matrix you need to know the strengths and weaknesses of your rate structure, and draw up a development plan to move towards a more advanced model.
How to develop your rate structure
Build your Rate Plans efficiently
A Rate Plan represents a rate and its sales conditions in the different IT systems used for its management (RMS, PMS, Channel Manager,…) It is made up of different elements:
Meal Plan (RO, HB, FB)
Cancellation policy (Flexible, semi-flexible, non-refundable,…)
Restrictions (MLOS, CTA, CTD,…)
Please note that each Rate Plan will generate several Rate Codes, one for each type of room and occupancy offered for sale with that rate plan.
Think about the options you have in your property for each element and build your Rate Plans efficiently, having enough of them to get the most out of your product, but not so many that their management becomes a thorough and exhaustive task. The types of rates available and their conditions must be adapted to the product and the market, and understandable to both your team and the customer.
Decide whether to use price levels or open prices
Working with price levels is the traditional model: we pre-establish levels or ranges and the price jumps from one level to another as the booking curve changes. It is an inflexible model that limits the possibility of adjusting to the optimal selling price at any given moment, as it can be between two levels. However, it is an easy to use structure and operationally it is very intuitive to manage prices and distribution with simple tools.
Currently, the trend in Revenue Management is moving towards the application of open prices, i.e. not restricted to preconfigured levels. This way, we can set the right price for each segment within our competitive setat any time, without being limited or conditioned to business rules or operational restrictions, thus taking advantage of the full potential of our pricing strategies to capture demand.
If you are in transition from one model to another, you will need technological tools that allow you to work with a mixed pricing structure.
Strike a balance between master rates and rate indexation
Regardless of whether you work with price levels or open pricing, you will likely have one or more rate plans that function as reference rates or master rates. These are rate plans that represent the most frequently used rate type, cancellation policy and room type, and whose pricing strategy serves as the basis for other rates.
These other rates are built through supplements or discounts on the master rate, for example, a breakfast supplement or a non-refundable discount. This is what we call rate indexation, and it allows price changes applied to a master rate to be automatically passed on to the indexed rates through the application of that supplement or discount.
If you are transitioning to an open pricing model, it is in your interest to progressively reduce the number of indexed rates, and consider the maximum number of rate plans as master. Consider that the demand for a bed and breakfast rate or a non-refundable rate do not necessarily move in parallel with that of a flexible room only rate, in which case the prices should not depend on each other, but have independent strategies.
Reconsider your tech stack
When redefining Revenue Management strategies, you should always take into account the technology you have at your disposal, as sometimes the possibility of creating your ideal pricing structure depends on the possibilities offered by your PMS and Channel Manager. Make sure that both support open pricing and multiple master rates before you decide to evolve your structure to the new models. Or consider making a change that will give you more possibilities in this respect.
System integrations are essential in a medium to long term plan, as technology continues to advance: every day more and more data can be integrated into the algorithms of these systems, which will require more information and allow you to continue to move forward in maximising your RevPAR.
As your rate structure evolves and becomes more open and therefore more complex, it will be increasingly necessary to have Revenue Management software. If you already have one, or are thinking of acquiring one, find out if it supports a mixed rate structure model to help you make the transition you are planning. It’s also important to know how agile it makes you so you can make changes when you want to take your pricing strategy a step further.
The Agile Pricing methodology can help you in this evolutive process and will be your main ally in achieving an increasingly efficient and profitable strategy.
The journey towards more efficient pricing
The Agile Pricing methodology is conceived as a transformation journey towards a pricing management oriented to adapt your offer as much as possible to the expectations of different segments.
The journey takes two converging directions: on the one hand, we start from working with one or two master rates from which all others are derived, and target the largest number of non-indexed rates that can be managed efficiently with the available resources. On the other hand, we seek a shift from the rigid model of price levels to an increasingly open and flexible structure.
The speed and efficiency of the transition, as well as the stages we go through in mixed models, will depend on the resources we have at our disposal, from a trained human team to a tech stack that allows us to implement this progressive methodology.
The ultimate goal is always to increase profitability. The possibility of adapting your rate offer to a greater number of segments will give you the possibility of attracting more demand, and retaining it by offering at all times the price that each customer is willing to pay.
In a crisis situation like the one we are currently experiencing, being able to adapt your product to the customer’s expectations is crucial. The identification of product and price with each market segment ensures a better positioning and a greater ability to attract and retain customers.