How to calculate the price of hotel rooms?
Calculate the price of hotel rooms that should be sold is a task that must be done in all properties, but always taking into account different variables. Generally, the hotel room prices are carried out once a year in a process in which the 3 levels of pricing are analyzed and a strategy is established to work with them according to the time of year we are living. In addition, take advantage of the flexibility that your PMS gives you to easily update your rates in the different direct sales channels of the hotel.
It is important to highlight that this analysis should be repeated as many times as necessary when there are significant changes in the behavior. Also, it could happen with any change of any of the 3 levels. If you have a suitable channel manager, surely updating these types of changes (of rates) in your sales channels will not need much work.
What are the 3 levels to take into account to calculate the price of a room?
The 3 levels to calculate the price of hotel rooms and make a correct definition of prices is:
It refers to the financial field. The Industry-level is where we evaluate our fixed and variable costs. It means that here we define in financial terms what is the value at which we should sell our hotel rooms to meet the breakeven and the expected profits.
The Market level refers to our set of competitors and the market in which our property is playing. Since our hotel rooms will be competing with others that are already on the market, we must see at what price a room like ours is selling today. In this way, we will try to adjust our rates so as not to be left out of the market due to lack of price competitiveness. Likewise, we must be clear about the additional services offered by each property and what is included in their nightly rate.
This level is in charge of the revenue managers. It refers to the price movements that must be made according to the purchase conditions. Since we should not charge the same price to someone who buys us a room in advance, or who is staying more nights than usual, or that is buying specific days of the week, among other factors.
What implicit variables exist in these 3 levels of room pricing?
With a clear understanding of these concepts, we can define the rates of a hotel room appropriately without forgetting that we must take into account all the implicit variables in these 3 levels. Here are some tasks that you must perform at each level in order to define the pricing appropriately:
For the Industry Level:
- First, set the variable costs of opening a room. Remember that by the nature of the business, these costs are low compared to the fixed costs of the establishment.
- Second, Define if a higher category room financially has a higher cost. For example, if all rooms are with a shower and you have one with a Jacuzzi, of course there will be an extra cost (and ultimately an extra price) for the use of this additional feature of the in-room Jacuzzi.
- Finally, Be clear about how much is the expected profitability of your lodgement and the breakeven point
For the Market Level:
- First, define a competitive set with which you are going to compare yourself. Remember to take into account variables such as: services, category, location, room types. In consecuense, we recommend that this set does not contain more than 5 hotels in order to limit the study to the most specific competition.
- Validate the average rates that are set for sale.
- On the other hand, do not forget to validate the permanent discounts such as “genius” and mobile. These discounts are important when defining the rate structure at the market level, since most of the sales are made through these discounts.
Finally, for the Transactional Level:
- The rates are not the same during the whole year. Check special dates, holidays, or some type of season. As a result, with this information you can validate how much the rates fluctuate between one period and another.
- Second, validate the prices that your competitive set has in different combinations of dates. Keep in mind that due to some type of length of dates or due to anticipation of purchase, there may be variations between the week and the weekend. Likewise, it is important that you validate the conditions of the rate (flexible, non-refundable, partially refundable).
- As sales occur in your establishment, you will learn about its dynamics. What means that this will allow you to define restrictions or conditions according to your own demand. For example, if you receive many reservations with check in on Friday and check out on Saturday, you can define a higher room price for Friday, even when the market does not handle it in this way.
- Finally, we recommend you to read the information provided by the OTAs very well. An example of that, when they tell us that the average stay in our area is 3 nights. This means that if we are going to publish a minimum stay promotion, it must be of 4 or more nights in order to take a new market and not give the discount to the majority of people.
In conclusion, with these variables clear, it only remains to start putting everything into practice. Remember that the rate creation process for a hotel room is something that gets better over time. Here we give you the main characteristics to take into account. However, only with the passing of days, months and years, it is you, individually, who will sharpen the understanding of the market to define the most appropriate rates for your hotel.