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Historical Pricing Is History, Well, Not Exactly

Examining the Role Historical Hotel Room Pricing
Should Be Playing in Pricing Strategies



 

By Jean Francois Mourier 
May 11, 2010

History teachers, as a rule, have a penchant for relating current events to incidences or situations in the distant past that share similar characteristics.  This is their way of illustrating that history is the best teacher, the best guide for observing and interpreting the world as it is today.  This is a sound principle, for the most part. 

But with all due respect to history teachers everywhere, this principle does not hold up in terms of hotel room pricing.  In this case, history is not necessarily the best guide.

Historical pricing, in terms of hotel room pricing strategy, is a process by which the asking rate of a room is set for a particular period of time.  The historical aspect is revealed by the determining factors used to set the rates; when engaging in historical pricing, hotels will look at occupancy and rate from an analogous period- whether last year, last month, or last season- and set a rate for the concurrent period accordingly.  Because many hotels operate in cyclical or seasonal markets, or draw a significant percentage of their annual revenues from holidays or recurring events like annual conventions, this pricing methodology had obvious advantages.

The reasons for this strategy’s continued success in the hotel revenue management world are as straightforward as historical pricing itself: as a strategy, it’s easy to design and implement; the prices that result from that implementation are justifiable; and in general, it’s effective (although not as effective as other strategies now available to revenue managers). 

History may indeed be the most popular guide to room pricing, as gauged by the number of hotels that utilize historical pricing as their primary pricing strategy.  It is also perhaps the most traditional pricing strategy, which can account for its tenaciousness as an ingrained habit. 

And yet, as a standalone practice, it lacks depth and sophistication.  Historical pricing does not take competitors’ rates into account.  It does not modify prices based on permutations in supply and demand (except on a historical basis).  As a practice, it lacks the ability to change and react to market conditions, tethered instead to what happened in the past. Historical pricing is by definition not a forward-looking strategy.

Ultimately, though, historical considerations should only be one component of an overall pricing strategy or system.  Ideally, historical pricing should be part of a robust pricing system, one that also incorporates competitor data, minute-to-minute market conditions, booking pace across multiple sales channels, and room inventory levels.  In this system, historical pricing serves a vital function as a starting point, a baseline and a basis of comparison. 

Only in this role can historical pricing yield substantial growth in revenue per available room, and it can do this by being a part of a strategy that optimizes rate levels in a real-time environment.  A strictly historical rate may, under the right conditions, be too high to result in maximum occupancy; under a different set of conditions, it may be much lower than a given consumer would be willing to pay, leaving revenue ‘on the table’.  With more reactive, versatile pricing tactics used in conjunction with historical pricing, this sort of rate optimization is readily achievable. 

Once a historical pricing strategy is rolled into a more comprehensive strategy, it leverages its backward-looking nature to the hotel’s advantage.  How a certain rate affected occupancy at a certain time in the past is crucially important to setting today’s rate, but it’s not the only important factor.  The sooner hotels using only historical pricing as a means of rate setting come to realize this fact, the sooner they can begin reaping the RevPAR rewards. 



Jean Francois Mourier is CEO & Founder of RevPar Guru, a company that has developed an alternative type of revenue management and real-time pricing solution (combined with automated online distribution) to help hotels maximize occupancy and increase their profits. The company’s Yield Dynamic Price Engine, an integrated revenue management and pricing solution, adds unprecedented power and real-time adaptability to the pricing process, leaving managers more time to run their hotels. You may reach him through www.revparguru.com or by calling +1.786.478.3500. 
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Contact: 

REVPAR GURU INC. 
786-478- 3500 
www.revparguru.com

 

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Also See: Tipping Your Cap (Rate) - Why hotel owners need to pay attention to RevPAR / Jean Francois Mourier / April 2010
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