Today, we're going to explain how hotels price their rooms. There's a good chance that if you've ever shopped for a hotel room on a Friday night right across from a concert venue, you've been amazed at how high hotel rates can get. On the other hand, if you've ever been on a road trip and pulled up to a one-star motel on a Sunday night, you may have noticed that you didn't have to work very hard for a super low rate. To begin understanding hotel room prices, let's first talk about demand. A major factor behind the rate that you are quoted comes down to the very simple concept of peak and off-peak days of the week. While every hotel is different, there are several common demand patterns that many properties share. Hotels that see large amounts of corporate travel are known for having extremely high demand on Tuesday and Wednesday nights, also known as the midweek peak. This is because most ordinary business guests travel to their destination on a weekday.
Sunday or Monday stay in the middle of the week, and then depart either on Thursday or Friday. Because so many guests follow this predictable pattern, a rate premium can be charged for reservations that stay over either of these two nights. Other properties, such as hotels and leisure destinations, are known for a demand pattern that is a bit different. They still have peak nights, but instead of Tuesday and Wednesday, their high-demand days of the week typically fall on Friday and Saturday nights. Many hotels find that their Thursday and Sunday nights are often the softest, and that is why these two days of the week are often called "shoulder" or "off-peak" due to their low demand, which is caused by a high volume of checkouts and fewer arrivals. Stepping back a level from the day of weak demand patterns.
Hotels are also heavily influenced by different demand patterns at different times of the year. It's natural that ski resorts don't perform well in the summer and that the Jersey Shore clears out in the winter. This effect is known as seasonality, and most hotels have their own distinct seasonality pattern depending on their geography, surrounding demand drivers, and climate. For example, in my hometown of Dallas, hotel demand across a given year looks something like this, with the strongest months for travel being in the spring and summer, but also October. Like most parts of the US, there is a downtick in demand in the winter due to limited corporate and leisure travel. Demand increases as the weather warms up, and October is a particularly strong month for demand as the milder climate attracts a strong convention calendar later in the year.
Year next, let's talk about supply and how it influences rates. For the purposes of this video, supply simply means the number of hotels and hotel rooms in a given market. As a destination grows in popularity for travel, supply naturally increases. For example, if a small city begins to grow in population, bringing jobs, events, and corporate travel, hoteliers will notice and build new hotels to capture the growing demand. At a very broad level, new supply dilutes market occupancies and drives down rates, as there is a larger amount of rooms vying for the same travel demand. Not all supply is created equal, however. As hotel rooms are added to the market, there will be a wide variety of properties with many different brands and offerings, ranging from economy level to extended-stay to luxury. These hotels' differing service levels are not something that we will tackle in this particular video, but it is important to consider when looking at supply.
Designed to capture a variety of travelers, hotels will also be in different locations within a market, allowing guests to choose to pay a premium to be as close as possible to their desired location or to stay a few miles further away to save a few dollars. To determine where they fit into the pricing puzzle, hotels often do a SWOT analysis, which stands for strengths, weaknesses, opportunities, and threats. They'll do this every few years to weigh up their position versus the other suppliers in the area, using criteria such as review score, location, amenities, brand strength, and star rating. A SWOT analysis gives a hotel a rough guide on how to price versus its immediate competitors. So, back to that rate that you see when you're looking to book a hotel. When you shop for a room online, you are usually shown the hotel's lowest rate for that night. However, this is not necessarily the best deal, as there may be promotions or packages available that offer a better value.
Only rate that a Revenue Manager is worried about? Hotels are known for offering what is called a Best Available Rate (BAR). If a guest does not qualify for any particular discount, despite being called the best available rate, it's typically the highest rate that the hotel has on offer. So, what is the significance of this rate? Well, for the vast majority of hotels, almost all other rates float off of this Best Available Rate. Behind this rate, there are dozens, if not hundreds, of other rates that derive their price from BAR. Just know that the Best Available Rate is the actual rate that a Revenue Manager is changing when he or she makes most pricing decisions. Examples of rates that derive from the Best Available Rate include Advance Purchase rates, which might require the guests to book a non-refundable reservation seven days in advance for a 15%.
Discount senior citizen discounts, which might be a 10% discount only available to guests 65 or older, flash sales, which are sales open for short periods of time at deep discounts, link the stay promotions, which might offer a 25% discount if a guest stays more than three nights, and many, many more. These different discounts and rate plans are often organized into buckets or groups, which can be open and closed based on availability and how quickly or slowly a revenue manager wants to sell rooms. To illustrate, a hotel might shelve their best available rate in Bucket A, their senior citizen discount in Bucket B, their advance purchase and length of stay promotions in Bucket C, and their flash sale in Bucket D. The hotel would then open and close these buckets as needed based on the hotel's occupancy and forecasts. So let's move on to an example.
Year's Eve. Using a ski destination in peak season, one of the busiest times of year for ski resorts, is the weeks around Christmas and New Year's. The ski season runs roughly from November to March, with just a few months for hotels to make most of their yearly revenue. This means that in months when skiing is good, competition can be fierce with high rates and limited availability. Let's start by doing a one-night rate shot for New Year's Eve, which is a major travel date in this market. To start, you probably notice that there is a big variance in pricing between the different hotels. Prices range from $131 to over $4,000. This goes back to that SWOT analysis that we discussed. Notice that the hotels closest to the slopes with the strongest brand loyalty programs, best review scores, and best amenities are charging a hefty premium for New Year's Eve.
Reason that they could increase their rates even more this year. Another factor is the location of the hotel - if it's located near popular New Year's Eve attractions such as the Times Square ball drop or fireworks displays, they could charge a premium for their rooms. Additionally, amenities like on-site restaurants and bars, spa services, and special events could be factored into the pricing. Finally, the length of stay could also impact the rate - some hotels may require a minimum night stay over the holiday weekend. Overall, there are many factors to consider when pricing hotel rooms for New Year's Eve, and hotels in this market must balance profitability with guest demand and satisfaction.
They can consider raising their rates. Therefore, the hotel should attempt to price their rates higher than last year in an effort to grow their top-line revenue. Another important factor in how revenue managers price rooms is pace and pick-up. Pace is a way of answering the question, "how does the hotel compare to the same time last year?" For example, let's say it is seven days away from New Year's Eve at the ski resort, and the hotel is already 90% occupied. At the exact same time last year, when the hotel was seven days away from New Year's Eve, it only had 80% occupancy on the books. This means that all other things being equal, the hotel should attempt to push the rate higher than the same time last year. Pick-up is how many room nights the hotel has gained or lost over an observation period. If a hotel is seeing drastically higher pickup than last year, it's also a sign that they can consider raising their rates.
Should adjust their pricing is demand analysis. That they should increase their bar rate and close deeper discount buckets to maintain a higher property-wide ad. Our hotel pricing isn't a single-player experience, though. When determining pricing strategy, every hotel has a competitive set or comp set, for short, that they watch very closely for pricing guidance and cues as to what direction the market is headed. A good revenue manager looks at their comp set's rates frequently and has a reliable rate shop tool that updates at least daily and preferably on demand so they can track fluctuations in price. So, for example, if the hotel typically prices roughly 10% higher than their nearest competitor because of better amenities and location, and overnight their competitor raises rates $100 over theirs, this should be a big alert that the hotel needs to review its pricing strategies. Another type of analysis closely related to rate shop analysis that hotels can utilize to determine how they should adjust their pricing is demand analysis.
Should the price be rate evolution and how it relates to the booking curve? Since hotel rooms are perishable and time is always a constraint, hotels always aim to increase the hotel's rate as the arrival date gets closer, while still ultimately reaching a sellout. Timing is everything though; if a hotel hits 100 percent occupancy six months in advance, it is a huge mistake, as this means that the hotel was underpriced. On the other hand, if the hotel ends up at 75 percent occupancy when the rest of the hotels in the area sold out, this signals that rates were too low. So, striking a balance is important. The significance is that the closer you are to an arrival date, the more likely that the room will be at its most expensive. Another major influencer on a hotel's rate strategy is a demand forecast. A good, accurate demand forecast may be one of the most important factors and is paramount for making sound pricing decisions.
Hotels often base their pricing decisions using an unconstrained forecast, which forecasts the amount of demand regardless of supply. To illustrate, if the ski resort was a 100-room property and it was forecasting constrained demand of 150 rooms, this means that the hotel has a green light to push rate as there are more guests wanting to stay at the property than it can accommodate. Demand forecasting is one of the most hotly contested parts of revenue management, with millions of dollars flowing into AI, machine learning and automated RM systems that automatically generate demand forecasts for revenue managers. Examples include Hilton's Grow system, Marriott's One Yield Version Two, and IHG's Concerto, which forecasts demand in extreme detail. But with guidance from human inputs, it's still possible to forecast manually, but it can be a lot of work, and it takes a holistic knowledge of a hotel's market, since guests come in all forms.
Another way hotels determine pricing strategy is by utilizing market segments analysis. Market segmentation is a way of categorizing different guests into different segments for tracking, reporting, and forecasting purposes. For example, if last year the hotel's market mix was 30% tour group and this year the hotel has zero tours booked, it allows the hotel to modify its forecasts to account for the lack of tour business and price accordingly. Market segment analysis makes yielding and pricing much more intuitive for hotels as they are looking at different types of demand rather than an inscrutable occupancy figure. Now you know how hotels price their rooms. It's a complicated equation comprised of a hotel's position amongst its competitors in a market, the external influences of supply and demand, as well as historical trends, seasonality, and demand.
Forecasts competitor behavior pickup over time, and the market segmentation of the guests who booked rooms. I hope you've enjoyed this video. Be sure to LIKE and subscribe to enable more educational content like this in the future. Thank you.