The Unintended Results Of Knee-Jerk Reactions In Your Pricing Strategy

As in an economic cycle, hotels have business peaks and troughs and your pricing strategy must make provision for this. You can often predict these cycles, but what is more challenging to predict is how severe the troughs and peaks will be.

Outside influence like natural disasters and protests, etc are impossible to predict, but if your pricing strategy is flexible enough you should be able to make adjustments easily – without having a knee-jerk reaction.

Revtech Knee-jerk reactions are very short-sighted in many cases. During a peak or trough in the cycle, the opportunity to readjust your pricing strategy is well-timed if you have been undercharging or overcharging your property. If readjustment of the pricing strategy is not your intention and you are merely pushing and/or reducing your prices when it is influenced by current events, then you are playing a very dangerous game.

Take a period of high demand as an example: you must analyse your data and see why demand it is so high. It might be a busy event period or a time where the Rand is particularly weak, and it is great value for money for tourist to visit our city.

If you push up your rates considerably during this peak period, do keep in mind that conditions will change and when they do, your pricing must still be sustainable.

Consider this scenario: Mr & Mrs Jones traveled to South Africa for the first time last year and the exchange rate at the time was R16 to £1. They decided to return this year, when the exchange rate is R24 to a £1. They have stayed at the same hotel for both visits. Even if their hotel applied a 35% increase to their rate from the year before, Mr & Mrs Jones would still enjoy their holiday to South Africa at the same cost as last year. That’s a win for them and for you.

The difficulty comes in when the Rand strengthens again. It is not in the hotel’s favour to decrease their rates and so maintaining the current pricing results in the guest having to pay 55% more for the same room.

Perhaps you increased your prices only marginally from the year before, but you did that when the exchange rate was very favourable for the international traveler. The real end result is that it becomes too expensive for international travelers to holiday in South Africa and we scramble around to reduce our rates to incentives business again. We must agree that this is not a sustainable pricing strategy.

The same conundrum exists when hotels want to reduce their public rates to be more competitive.

Consider that a 15% reduction on your rates will take up to 3 years to get back to same rate value that your rate was before you reduced it. Consider a marginal increase of 6% year on year, but a slightly more aggressive increase (8%) year on year to the rate you reduced, it will take 9 years for the reduced rate to catch up again in rand value. Think very carefully how you change your pricing structure.

Reducing and increasing rates as the periods fluctuate is a smart thing to do, but it requires some strategic thinking to ensure that it only has a short-term impact.

Article originally written by our partners at Revenue Resolutions. Revenue Resolutions can help you implement the ‘How’, with 25 years of hospitality experience, of which 15 years has been invested in Revenue Management. Contact Theresa Prins on 071 364 6381 (theresa@revenueresolutions.co.za) for more insightful information or to assist you set up your Revenue Optimisation strategy.

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