The pricing-centric model of revenue management has been gaining popularity in the industry over the past decade. This concept promotes availability across all channels even when demand is soaring, and relies solely on dynamic prices to manage booking behavior. This method, which is popular for its flexibility, demands that rooms remain available to be booked, even if they are sold out in a single day.
The core assumption of this pricing methodology is that rate flexibility will optimise performance. This ignores several important elements for effective revenue management. The most important of these is strategic inventory control, which, if neglected, can reduce profitability and integrity.
Pricing without context is the central mistake
Although the ability to use dynamic pricing has become widely accepted, and is easily enabled by modern systems, it does not represent a revenue strategy that is foolproof. Hotels that do not control their inventory risk compromising their performance, particularly during periods of compression.
Accepting high-rated short-stay bookings can cause you to lose guests who are of lower ratings and stay longer. In theory, the rate may appear profitable, but in reality, it could compromise your total revenue. Hoteliers who rely on surge pricing do not always take into account this nuance, which can lead to significant revenue losses.
Advanced revenue strategies include not only rate responsiveness, but also deliberate decision-making about which bookings to accept and reject. Before allocating limited inventory, the most effective systems take into account the total value a booking represents, including stay duration and demand, ancillary spending, and displacement costs.
Why Inventory Control is Important
In order to accurately predict and evaluate the length of stay permutations over time, such strategies require sophisticated analytics. These predictions are complex and can’t be executed reliably using simple business rules. Instead, they rely on proven, ever-evolving algorithms.
If done properly, they allow hoteliers to extend the demand of high-occupancy periods into adjacent shoulder seasons, manage availability using forecasted values rather than the advertised rate, and maintain customer trust by signaling real scarcity instead of resorting to excessive price inflation.
Some pricing methods, like surge pricing, do not take into account the number of guests that will be in a room on a particular date. The hotel’s revenue management strategy is not a strategic plan to manage the hotel’s revenues, but rather a random sequence of bookings. In contrast, advanced forecasting techniques analyse demand patterns according to room type and booking window. It allows for more precise and forward-looking decisions. If these factors are not taken into consideration, the outcome can be suboptimal. For example, a Wednesday night that is sold out will prevent guests from staying for two or three nights.
One established concept that is gaining wider recognition in revenue management is ‘last room value’ (LRV), sometimes referred to as a ‘Rate Hurdle’ or ‘Bid Price’. This metric establishes a minimum acceptable revenue for a reservation to justify its acceptance. LRV, which is not a fixed rate, is instead a dynamic threshold reflecting forecasted bookings, price sensitivity, and demand. This is used to decide what business it is best to accept. Unlike models that are primarily focused on maximising the Average Daily Rate (ADR), Revenue per Available Room is optimised by LRV. This includes protecting inventory, and ensuring every booking provides maximum value. LRV also considers each night of a stay, and will accept a booking for multiple nights (e.g. two or three) but reject a request for a single night if it is more profitable. The hotel can then align each booking with its revenue strategy to ensure long-term profitability.
By embedding rate obstacles into pricing decisions and availability, hoteliers are able to move away from the crudeness of manual controls. They can also shift their pricing philosophy from one that is based on ADRs to one that is based on RevPAR optimization. Value-driven systems only sell inventory when it meets minimum profit thresholds. This supports stronger inventory management and allows for the prioritisation high-value demands to achieve an optimal business mix.
The hidden cost of pricing-centric revenue strategies
The real issue with price-centric methods of revenue management isn’t just lost revenue. It’s a systemic undervaluation. Pricing becomes one-dimensional without automated inventory control, and is disconnected from wider demand considerations. Strong inventory strategies place a high priority on extracting maximum value from every room night. They also recognize that strategic acceptance decisions can help to preserve profitability, not only in times of sell-out but throughout the entire booking period.
These issues can over time weaken the market position of a hotel and make it more difficult to adapt to changes.
In today’s rapidly changing environment, where it is more important than ever to make informed decisions, dynamic, open, or surge pricing mechanisms can be presented as an all-encompassing solution for a problem which requires nuance.
Strategy Over Simplicity
Hoteliers need to be able to control their profitability. The method of calculating revenue based on price, while convenient administratively, can dilute the strategic control they require. An effective approach to revenue control is based on scientific forecasting and precise controls, as well as intentional decision-making. An automated decision system will be able to react to changes in the business environment, take into account the dynamics of the demand and wash based on arrival date and duration of stay. The network effect will prevent any control from being missed or not deployed in time.
It is not a question of whether hoteliers can adjust rates on demand, but if they are willing and able to surrender strategic control. In an ever-changing trading environment, deliberate strategy is a better way to achieve sustained revenue than reactive pricing.
