What is 'price optimisation'?
Put simply, revenue optimization means setting the best possible price for your hotel rooms based on the information available. It means determining not just a good price, but the best price.
How do we define 'best'?
The best price is the price that means that you make the highest possible profit. But it does so within given constraints that you set up because you are looking at the long-term as well as the short-term.
What sort of constraints?
Although you may make the most profit if you charge $300 for your rooms you normally sell for $100, you may not wish to do so for fear of making people unlikely to book in the future. This is an important consideration.
Equally, if you price your rooms too cheaply, you may fill up this time, but you may also worry that this cheapens your hotel in the eyes of guests.
Looking at the long-term means that we need to keep prices within certain bounds, even if going outside them would make more income in the short term.
How do you know how price affects the number of guests?
The prediction of how many guests you will get (which can be described as the demand for your rooms) is based on past data, both from your hotel and other hotels. Using the information about how changes in price affected demand in the past helps us to estimate what will happen in the future.
We use this information to predict how many guests you would expect to get at every given price, and the range that it could be in. We then come up with the price that means that you make the most profit.
Why do you say 'profit' and not 'revenue'?
We know that guests are not free. You need to pay for cleaning their rooms (even if it is just with your time) and breakfast. For heating and breakages. An good price optimization algorithm takes this into account.
Does this mean I'll always be full?
Simply speaking, no it doesn’t. Being always full means that you are almost certainly charging too little. You could make more profit if you charged more – so the optimisation algorithm will put your price up.
The idea is to always be somewhere around full. And in quiet season to be fuller than the average.
We had a chat with revenue management expert and Director of Masters at Les Roches Global Hospitality, Scott Dahl about what exactly price optimisation means for hotels and what you need to consider when implementing price optimisation strategies. To find out what he had to say, watch the video below.
RPG: What is price optimisation for hotels?
SD: I mean it’s exactly what it says. It’s getting the price right. But the devil’s in the details a little bit.