In our previous posts we looked at how the right price structure and dynamic pricing help you focus on the right business mix and win more business without leaving money on the table. Continuing the discussion on pricing, this post explains two important aspects of pricing, strategic and tactical, and when to use each.
Before we begin, think about how pricing is set in the hotel industry and at your hotel. Why do you think your products and services are priced the way they are? What thinking or analysis goes into your pricing?
When talking about pricing, it is important to understand the levels of pricing. There are three:
- Industry-level pricing
- Product or market-level pricing
- Transaction-level pricing
Industry-level pricing is generally considered at the business planning stage. At this level you consider how supply, demand, costs, regulation and other high-level factors interact and affect overall prices. The decision to build or acquire a hotel, and at what rating (a budget 3-star, a mid-segment 4-star business hotel or a luxury 5-star), rests on industry price levels, feasibility studies, supply-demand analysis and trade forecasts, all of which help determine the potential return on investment.
Product or market-level pricing aligns pricing with business strategy. It signals your property's value proposition to the market. Your price positioning relative to the competition determines the value others perceive in you, and differentiates your offer from theirs. Sometimes an aggressive pricing strategy is used to grow into a specific new market or segment. As a strategist, your price determines the target market you are after. Strategic market segmentation gives your sales teams clear direction, which makes them more effective. Strategic price positioning at market level also reduces competition, because you now compete within your target segment rather than with everybody.
Transaction-level pricing, or tactical pricing, is used at the operational level. Its objective is to set the exact price for each transaction: your price today, tomorrow and for each of the next 365 days. Most hotels manage transaction-level pricing through a pricing structure. A pricing structure, also called a rate structure, is made up of all the rates you could potentially offer a customer, and it varies for every hotel based on the market segments it serves. Pricing and inventory controls are the levers used to achieve maximum yield.
As this shows, each level of pricing plays its role at a different stage of the hotel's operation. We move from general pricing at industry level, with very limited control, to focused pricing with controls and fences at the operational level.
Product or market-level pricing, strategic pricing, is critical in defining your hotel's or brand's position in the market, and naturally reflects the segments you want to focus on. The right market segmentation and business mix, combined with a pricing structure that supports your revenue objective, will be a key determinant of your hotel's profitability.