Even at a basic level, the hotel industry is one that is difficult to define. However, the World Tourism Organisation typifies hotels as being arranged in rooms, as coming under some form of management and as providing certain services including room service, daily bed making and the cleaning of sanitary facilities. Hotels are grouped in classes and categories according to the classes and facilities that they provide, and can take many forms including private and public hotels, guesthouses, boarding houses, bed and breakfasts and motels.
The hotel industry within Britain is an important subset of the tourism industry, as major tourist areas often determine where key hotel developments will occur. Tourism generates a large proportion of revenue for many hotels throughout the country, although other market segments are targeted as well. This is particularly true for larger hotels located in cities, which attract a large proportion of the business market. However, business travellers can also be seen as part of tourism, as they are a subgroup of the industry and a productive target. This is particularly true for conference delegates who are often domestic or international travellers
The hotel industry in Britain encompasses thousands of hotels of different types and sizes, each with different price ranges, as with any other (perhaps tangible) product such as cars or houses. First impressions, the consumer seeking accommodation takes all the standard of service, standard of room facilities and the provision of meals and other ancillary services into account. The prices which hotels charge are a reflection of these factors, and are associated with cost, worth and value.
To the consumer, price is what is given up in for return accommodation. For the hotel manager, price is the cost it takes to provide the accommodation and services, making an allowance for profit. Within a hotel, the price of accommodation is a perception of the level of service being provided. Due to this, different hotels use different pricing techniques at various levels as a way of communicating to specified target markets. This can often lead to competition between hotels operating in similar niche markets, especially with larger and often branded establishments. Different methods of pricing are used within different hotel markets, and different types of hotels have different price ranges.
“Price is defined as the amount of money charged for a good or a service. More broadly price is the sum of the values consumers exchange for the benefits of having or using the product or service.”
Price is the only marketing element that produces revenue. However mistakes in pricing include, pricing that is too cost orientated, prices that are not revised to reflect any market changes, pricing that does not take the rest of the marketing mix into account, and prices that are not varied enough for different product items and market segments. It is important for managers within the hotel industry to have an understanding of price. Charging too much chases away potential customers. Charging to little can leave the company without enough revenue to maintain the operation properly. Equipment wears out, carpets get stained, rooms need redecorating and technology needs updating. A hotel that does not produce enough revenue to maintain the operation will eventually go out of business
Factors to consider when setting prices
Internal and external company factors affect a company’s pricing decisions:
1) Marketing Objectives
2) Marketing Mix Strategy
4) Organisation for Pricing
1) Nature of the Market
4) Other Environmental Factors (economy, resellers, government)
Before establishing a price, a product strategy must be selected. If the hotel has a selected target market and position, the marketing mix strategy, which includes price will be more precise. For example Four Seasons positions its hotels as luxury hotels and charges a room rate that is higher than most. Travel Lodge have positioned themselves as limited service accommodation, providing room only at a budget price, aimed at business and low budget travellers. This market position requires charging a lower price. Therefore strategic decisions on marketing positioning have a major influence on price.
A common objective of a hotel can be just to survive. Companies that are troubled by too much capacity, heavy competition or changing customer needs set survival as a prime objective, in the short term survival is more important than profit. Hotels can often use this strategy when the economy slumps. Whereas a manufacturing company can reduce production to meet demand, a 200 room hotel still has 200 rooms to sell a night, although that demand may have dropped to 100 a night. However the hotel can attempt to reduce the impact of low occupancy by cutting rates and trying to create the best cash flow possible under the conditions at the time. This strategy directly affects the immediate competition of the hotel and sometimes the whole industry.
However competitors within the hospitality industry are highly aware of price changes and will generally respond if they think they may be threatened. The result of this is that not only does occupancy fall, but also room rates fall and therefore profits fall. If a survival pricing strategy is used, it should be carefully monitored, in a small town for example the effects of this strategy could be considerable. However if it is a hotel in a larger town the company may want o use their marketing skill to compete with other hotels rather than cut the hotels prices. To a hotel, which has a good marketing strategy, it can make sense to them to let competitors reduce rates attracting the budget conscious customers, leaving more profitable business for them, especially if the hotel using a survival strategy has a small market share.
Current profit Maximisation
Hotels want to set a price that will maximise current profits. The Hotel estimates what demand and costs will be at different prices and then chooses the price, which will produce the maximum current profit, cash flow, or return on investment. This looks at current financial outcomes rather than long-term performance. For example, a company may buy a poorly operating hotel at a low price. The objective becomes to turn the hotel around and make a profit, and then sell it. If there is a successful turnaround the owners may receive a good capital gain.
Other hotel companies want to make sure they have a dominant market position. They believe that a company that has the largest market share will eventually have low costs and high long-run profit. Therefore prices are set as low as possible. For example when the Marriott opens a new hotel, the company strives to be the market-share leader in its class, as quickly as possible. Marriott will open a new hotel with cheap rates and then six months later will charge double that rate. The low rates created demand, and as the demand increased, low revenue business was replaced with higher. This strategy uses price and other elements of the marketing mix to create the awareness of better value than the competition.
The Ritz Carlton, for example has a high construction cost per room. Other than high capital investment per room, luxury chains have a high cost of labour per room. Their hotels require well-qualified staff, and a high employee/guest ratio to provide luxury service. Therefore they must charge a high price for their luxury hotel rooms’ to maintain their position in the quality/luxury hotel market.
Costs set the basis for the price a hotel can charge for its product. The hotel has to set a price that covers the costs for producing, distributing and promoting the product. Apart from covering the basic costs the price also has to be high enough to provide a rate of return for the owners or the investors of the hotel. Therefore a hotel companies costs can be an important element in its pricing strategy.
Costs take two forms, fixed and variable.
Fixed costs, which are sometimes known as overheads, are costs that do not vary with production or sales level. Therefore whatever its output the hotel company must pay bills each month for rent, interest and managers salaries. Fixed costs are not directly linked to production level
Variable costs vary directly with the level of production, for example a banquet function in a hotel has many variable costs; each meal may have the same content, starter, main course and dessert. In addition to the food items, the hotel has to provide linen for each guest. This is a variable cost because the amount depends on the amount required. Therefore the total cost is the sum of the fixed and variable costs, the hotel must then charge a price that will at least cover the total costs at a given level of sales.
Hotel managers sometimes forget that customers are not concerned with a business’s operating cots; they seek value. Costs have to be monitored carefully. If it costs the company more than competitors to produce and sell its product, the company must either charge a higher price or make less profit.
Hospitality companies are now developing sophisticated models and software to better understand costs and their relations to price. These look at room labour costs, advertising, special promotions, and associated costs.
External Factors Affecting Pricing Decisions
External factors that affect pricing decisions include the nature of the market and demand, competition, and other environmental elements.
Market and Demand
Event though cost set the lower limits of prices, it is the market and demand that set the upper limit. It is both the consumer and companies who balance the products price against the benefits it provides. Therefore before setting prices there must be an understanding of the relationship between price and demand for a product.
Cross Selling and up selling
There are many cross selling opportunities available in the hospitality industry. A hotel can cross sell food and beverage; room service, executive support services such as a fax and a range of retail products. Up selling is also part of effective yield management. Through the training of sales and reservation employees to continuously offer a higher priced product, rather than settling for the lowest price.
Pricing in Different Markets
Most hospitality operations operate in monopolistic competition or oligopolistic competition.
Monopolistic competition, the market consists of many buyers and sellers who trade over a range of prices rather than at a single market price. A range of prices can therefore occur because sellers can differentiate offers to the buyers. The physical product can be varied in quality, features or style. Buyers therefore see differences in seller’s products and will pay different prices. This allows the sellers to develop offers for different customer segments, and besides price, they can freely use branding, advertising and personnel selling to set the different offer apart. Because there are many competitors, each firm is less affected by competitors’ marketing strategies.
Oligopolistic competition the market consists of few sellers, but they are highly sensitive to each other’s pricing and marketing strategies. There are only a few sellers because it may be difficult to enter the market. But each seller is highly aware of competitors’ strategies and moves.
This is the simplest method of pricing; this is adding a standard mark-up to the cost of the product. Food and Beverage management often use the cost-plus method to decide wine prices. This is a popular method, because sellers are more certain about costs than about demand. Connecting the price to cost simplifies pricing, so managers do not have to adjust as demand changes. Also because many food and beverage operations tend to use this method, prices are similar, and price competition is minimized.
Break-Even Analysis and Target Profit Pricing
Break-Even pricing is another cost-orientated approach; the company will try to determine the price at which it will break even. Some companies will use a variation of break-even pricing called target profit pricing, which targets a certain return on investment. Hotels use the concept of contribution margin to set rates when demand drops. Hotels will set low rates, rationalising so they are covering their variable costs. This can be effective if it creates additional demand. However some hotels try to steal business during good times by cutting rates.
More companies are basing their prices on the products perceived value. Value-based pricing uses the buyers’ perceptions of value, not the sellers cost as the key to pricing. This type of pricing means that the marketer cannot design a product and marketing programme and then set the price. The price is considered with the other marketing-mix variables before the marketing programme is set. The company uses the non-price variables in the marketing mix to build perceived value in the mind of the buyers, therefore setting the price to match the perceived value.
New Product Pricing Strategies
The pricing strategies of a product usually change as the product evolves; the following strategies exist for pricing new products;
Hotels that want to position themselves as luxurious or elegant will enter the market with a high price that will support this position. Clubs may charge a cover charge to attract a certain type of clientele and create an image of exclusiveness. In each case lowering the price would reposition the business, resulting in a failure to attract the target market.
Price skimming is setting a high price when the market is insensitive to price. This can make sense, as lowering the price will create less revenue, for example the owner of a hotel in a small town can set high prices if there is more demand than rooms. Price skimming can be an effective short-term policy, however a negative point is that competitors will realise that the customer will pay the higher prices, and therefore enter the market creating more supply and eventually reducing prices. Competitors seldom use this method for an extensive period of time in the hospitality industry because of the ease of entry.
Instead of setting a high initial price to skim of small, but profitable market segments, other companies set a low initial price to penetrate the market quickly. This attracts many buyers and therefore obtaining a large market share. However there are conditions that favour setting a low price. The price must be highly price sensitive so that a low price produces more market growth, there should be economies that reduce costs as sales volume increases, and the low price must ensure and help keep out competition.
Existing -Product Pricing Strategies
Sellers who use the product bundle pricing strategy combine several of their products and offer the bundle at a reduced price. For example hotels sell specially priced weekend packages that include room, meals and entertainment or they offer commercial rates that include breakfast and a newspaper. Price bundling can promote the sale of products consumers may not usually buy, but the combined price must be low enough to convince the consumer to buy the product. Benefits of this strategy include the ability to transfer surplus reservation prices to different components of the packages depending on the customers’ requirements. The second benefit of price bundling is the price of the core product can be hidden to avoid price wars or the perception of having a low quality product.
Last Minute Pricing
If a hotel room is not sold for a particular night the sale and profit of that room is lost forever. The unsold rooms from hotels create a market for the last minute sale of rooms. The use of revenue management helps considerably to reduce this problem, but many members within the hospitality industry such as small hotels do not use yield management systems. Private companies or consolidators acquire excess rooms and create packages to sell at discount rates to the public. Sometimes rooms or packages can be sold for 50% discount from the original price.
Other pricing methods include psychological pricing, which use aspects such as prestige, reference prices, round figures and ignoring end figures. Hotels can also use promotional pricing. Hotels will temporarily price their products below list price, and sometimes even below cost, for special occasions, such as introduction or for festivals. Promotional pricing gives guests a reason to come and promotes a positive image for the hotel.