The hospitality industry operates in a dynamic market where the relationship between price and value is crucial. Establishing an optimal pricing strategy is essential for hoteliers, restaurateurs, and other businesses in this sector. Understanding the concept of price elasticity is equally important as it helps gauge the sensitivity of demand to changes in prices.
But who is to decide the correct price? Oftentimes, the price is set “by the market”: I set the coffee at my bar at a price exactly as the one charged by the bars in my area or location, because it seems like it’s the price customers are willing to pay for it.
The same seems to happen with hotels: If I have a 4* hotel focused on corporate guests, my price should be similar to the one charged by my competitive set to make sure I stay “in the market”.
Let’s go back to the coffee. Say most bars in an area of an average city charge 2$ for a coffee. But then Starbucks arrives and charges 4$ for a very similar coffee. And customers queue to get that coffee. What happened to price & value?
Theory says that price and value are intertwined in the hospitality industry. Price represents the monetary amount that customers are willing to pay for a product or service, while value encompasses the perceived benefits and satisfaction derived from that purchase. Achieving a balance between price and value is essential for businesses to attract customers, maximize revenue, and maintain a competitive edge.
Therefore, sticking to the coffee example, customers who were fine paying 2$ for their coffee, seem also at ease to pay double that amount for a Starbucks one. Because they perceive that extra value.
If we move from a product with a static price (coffee) to one with a dynamic one (hotel room), we also witness how guests who find it fair to pay 100$ for a room in low season, understand that you charge 300$ on peak season. Because the value they perceive in staying with you on those dates makes it worth it.
Determining the right price for a hospitality offering is key, and involves the costs incurred in providing the service, competitor pricing, market demand, customer expectations, and the perceived value of the product or service. Setting prices too high may deter potential customers, while pricing too low may signal inferior quality or leave businesses struggling to cover costs.
Many hotels utilize Revenue Management Systems (RMS) to help them determine the right price. The same applies to airlines, which tend to have more sophisticated software.
However, do they also fit in the economic climate? According to Axel Hefer, CEO of Trivago, inflation is making tourists steer clear of high-end hotels. Can a RMS predict that trend? In that case, a top-class revenue manager is key to adjusting the price to the forecasted demand.
In highly elastic markets, even small price changes can lead to significant shifts in demand. This implies that lowering prices in price-sensitive segments can attract more customers and increase overall revenue, while raising prices may have the opposite effect. However, businesses should be cautious not to compromise profitability when adopting such strategies, as lower prices may not always compensate for the reduced profit margins.
However, if we focus on the luxury segment, things change. As discussed online with Aida Muñoz (Head of Revenue at HIP and an inspiration on all things revenue), Salt Bae charges 1.000$ for a stake, Etihad charges 10.000$ for their in-flight Suite, and the Fairmont Monte Carlo can charge up to 100.000$ for their Suite facing the hairpin Loews curve during the F1 Grand Prix. And customers all happily pay those amounts. Because they want to live the experience. Be it aspirational, show off, or just pure indulgence. For them, the price is not an issue. What they value is being able to be there and then and enjoy. In those cases, the price tag is just another item of the equation, but not determining the demand. Or it is, as that price tag is fencing off the clientele who can opt in.
In summary, there is a delicate balance between price and value and understanding customer perceptions and preferences is key for establishing an optimal pricing strategy.