There are multiple pricing models currently in use in the world of revenue management. Each model has its benefits and drawbacks and while there is no ‘best’ pricing model, each one is fascinating to learn about and helps develop your analytical thinking and problem solving skills as a revenue manager.
Traditional Model (“rate of the day”)
The traditional model or “rate of the day” of pricing is a model in which each night is assigned a specific RACK or BAR rate, and pricing decisions are made on an individual night-by-night basis. The major pro of this model is that it is highly customizable, but a major drawback is that there aren’t many built in defense mechanisms to defend against unanticipated demand and sudden pickup. For example, under the traditional model you can set a rate 6 months in the future at whatever price you see fit, but if you do not closely watch inventory it is perfectly possible that the hotel will sell out at that price point before you ever have time to react.
Tiered pricing is another model which is relatively simple in concept, but has some very valuable uses. Tiered pricing allows for price to naturally tier up or increase in price as inventory is sold. This is a good defensive pricing strategy, as it decreases the chances that the hotel will sell all of its inventory to lower rated business before a revenue manager can notice the rooms that have pickup. One downside to tiered pricing is that it does required frequent attention to ensure that you have enough rooms at a reasonable price level.
To learn more about how length-of-stay pricing works , watch this video!
Length of stay pricing is a more complicated, but very intuitive rate strategy implemented by some of the largest brands, such as Hilton (although I would consider Hilton to be a hybrid pricing system, as they also use a ‘Hurdle Point’ or ‘Last Room Value’ system in addition to their Length-of-Stay model).
Length of stay pricing requires several pieces in order to see the complete pricing puzzle. First is a Rate Level structure, an example of which is shown below.
After a rate level structure has been determined, the revenue manager would then determine at what lengths of stay he or she would allow the price points in the rate level structure to be booked at the hotel. The revenue manager would then have a calendar such as below:
This is extremely powerful and may take some time to conceptualize fully, but a helpful way to interpret the above chart is to pick a day of arrival and attempt to construct a sentence that will tell the story. For example let’s take arrival on the Wednesday at Rate Level 4. This could be interpreted as: “If a guest were to arrive on Wednesday at level 4 pricing, we would not take a 1, 2, or 3 night reservation- we would however take lengths of stay of 4, 5, or 6 nights, but not a 7 night reservation.” If you spend some time analyzing the above table you can begin to see a pattern develop; this hotel seems to guard it’s Tuesday and Wednesday inventory quite heavily, reserving those nights for the higher-priced Rate Levels. The hotel is not very restrictive at all on its shoulder dates of Sunday and Thursday.
Hurdle Point Pricing
To learn more about how hurdle points work , watch this video!
Hurdle Point pricing takes the Basic pricing model, or Length-of-Stay model, and adds an additional level of complexity by introducing a minimum threshold, or hurdle which represents the lowest possible dollar value that the hotel would accept as a net rate for a stay. Below is an example of rate availability on a night with a BAR rate of $100, and a hurdle point of $58 dollars. The hurdle point system does an excellent job of guarding inventory in the event of unforeseen pickup; the only drawback to a hurdle point system is the added layer of complexity that is created when one must make both Hurdle-Point and Rate decisions at the same time.