There are two main components of good pricing:
The first component is a demand forecast – this is an estimate of how many people would want to come to your hotel at a given price. The more people that want to come, the more you can charge. The fewer that want to come, the less you are able to charge.
For example, in winter you may have 10 people who want to come if you are charging $100 but in summer you might have 100 guests who want to come at the same price.
How do you work out the demand?
This is a tough question. Large hotels will use a combination of previous year results and how many bookings are coming in this year. Then they will add a bit of judgement to get the right price. We do it in a slightly different way. As our clients tend to be smaller hotels with less data, we piggy back off the work of the larger hotels. We use their pricing to determine the demand for our client’s hotel. Then we make adjustments to that to make it correct for the client hotel.
For example, if the hotel is more leisure-oriented, we will adjust the prices down on Wednesdays and up on Saturdays compared to business hotels. In this way, we have the right average demand for Wednesdays but can see which Wednesdays are busier or quieter than average.
The second component is a profit optimisation. This means that simply speaking, if you have only one room left for a given night, you only need to find one buyer. Of the 1000 people looking that day, only one needs to choose your hotel. Someone who likes your friendly service, or who is staying for a few nights so that one night is not such a big deal – they will want to book. The rest will go for the cheaper options – but this is fine; you only need to sell one room after all.
For an example:
Room Price: $150
Variable Cost: $40
Extra Profit made: $110 (from that one room)
But what if you need to sell 20 rooms for the same night? Then you need to find 20 buyers from the 1000 looking. You will need to look more competitive against the other hotels in the area. You can win more business by charging less.
Here, maybe we would recommend charging:
Room Price: $90
Variable Cost: $40
At this point, we might predict you would sell 18 rooms,
so your extra profit from those 18 rooms would be $50 x 18 rooms = $900.
If you sold the rooms for $100, you might only sell 12.
Your profit then would be $60 x 12 = $720.
This is less than the $900 you would make for selling at $90.
If you sold the rooms for $80, you would probably sell all of your 20 rooms,
but still your profit would remain at $40 x 20 = $800.
Again this is less than the $900 you would make at $90.
As a conclusion, our algorythm will always identify the optimal price that will return you the highest possible profit. This is the price we will recommend. This is profit optimisation.