Nothing may be more critical for the profitability of a hotel than getting its pricing strategy right. It can also be an incredibly multifaceted and complex task. What does it take to build a winning rate strategy for hotels today? This article offers a comprehensive look at what hotel pricing is, how to price a hotel room, and what the most prominent hotel room pricing strategies are across the industry.
Whether you want to start with the foundations or are looking for more advanced approaches, we will explore how hotels of all sizes can create smarter, more responsive pricing models that not only maximize revenue but also guest satisfaction (these two go hand-in-hand, just wait and see).
What Are Hotel Pricing Strategies?
A hotel pricing strategy is the way a hotel sets its room prices. In general, hotel pricing strategies are aimed at maximizing revenue. Still, effective pricing considers guest perception and aims to strike a balance between making a profit and offering value for money.
Many factors need to be considered when pricing a hotel room, including what types of customers your hotel is catering to, local market trends, and what competitors are doing. Pricing impacts everything from market share to profit, which is why revenue managers play such an essential role in supporting the bigger goals of the hotel.
The key objectives of hotel pricing strategies are to:
- Earn more revenue
- Stay competitive
- Appeal to different types of guests
Pricing strategies are often supported by tools like revenue management systems (RMS) that help adjust prices based on internal and external data in real time.
Laying the Groundwork: How to Price a Hotel Room Effectively
Even the best hotel pricing strategy may not yield the desired outcome without firm foundations. The hospitality industry and the hotel room as a product are very unique. This section outlines the fundamentals you should know before settling on the rate strategy for your hotel.
Understand the Economics of Your Hotel Rooms
Pricing effectively requires you to know your offering through and through. For a hotelier, it means understanding the specificities of the hotel room as a product, the two most important considerations being perishability and costs.
Room inventory is perishable, which means that if a room is not sold for a given night, that revenue opportunity is lost forever. Because of this, there is an urgency to fill up any unsold rooms as we get closer to a certain date.
The other primary consideration is understanding your breakeven point. Running a profitable hotel is impossible without room rates that cover the expenses incurred when running a room. This is why calculating a hotel room rate starts by identifying the fixed and variable costs associated with running a room and the target profit margin, which gives you the minimum rate or a pricing baseline that covers your expenses and target margins.
Understanding cost considerations and perishability can already be considered a bare minimum hotel pricing strategy. However, maximizing hotel revenue takes more than just covering expenses. Pricing should also reflect how your guests behave, what they value, and how your hotel fits into its market landscape. Let’s look at the full range of hotel pricing strategies that build on these fundamentals.
Common Hotel Pricing Strategies (With Pros and Cons)
There are numerous ways to approach hotel pricing, and different strategies are suitable for different types of hotels, seasons, and guest profiles. Here are the most common pricing strategies in the hospitality industry, including some considerations about their strengths and drawbacks.
Dynamic Pricing and Open Pricing
Dynamic pricing means adjusting room rates based on real-time supply and demand data, where prices rise when demand is high and fall when business is slow. Advantages include improved profit margins because of being able to capture the highest possible rate during periods of peak demand, and the reduction of a lot of the guesswork related to pricing.
However, implementing dynamic pricing can require investing in reliable tech and can be a complex process overall. Additionally, while great for the hotel’s revenues, there is no guarantee guests will respond positively, as significant price differences from one day (or hour) to another can potentially be frustrating.
Dynamic pricing allows hotels to set different rates across all distribution channels, also called open pricing. This contrasts with fixed pricing strategies such as rate parity, where guests will find the same exact rate regardless of the booking channel.
Forecast-Based Pricing
Forecast-based pricing sets room rates using the expected future demand. When supported by reliable historical and market data, this approach allows hotels to plan room rates with precision days, weeks, or even months in advance. The beauty of demand forecasts is that they can be as simple or nuanced as needed and incorporate many different variables, such as booking pace and upcoming events. That said, the effectiveness of the strategy is dependent on the quality of the data. Inaccurate inputs can lead to mispricing of the inventory and missing revenue opportunities.
Occupancy Pricing
Occupancy pricing adjusts room rates based on how full the hotel is at any given time by using occupancy thresholds. For example, when occupancy falls below 30%, we want to stimulate demand by dropping prices, and when occupancy is over 70%, we want to capitalize on the higher demand.
When executed well, occupancy-based pricing contributes to more stable revenue performance year-round because of a healthier occupancy level.
Length-of-Stay Pricing
According to this strategy, the length of stay (LOS) affects the rate the guest pays. Hotels want to incentivize guests to stay longer, as longer stays reduce the cost of cleaning and room preparation between guests, stabilize occupancy, and create more predictable revenue. Thus, the longer the stay, the less the guest pays.
Length-of-stay pricing can also be implemented around specific peak dates. For instance, if you know from historical data that your hotel tends to fill up on a specific event day but not on the days before and after, offering competitive pricing for a longer LOS over that period can help even out the peak.
Cancellation Policy Pricing
Cancellation policy pricing tailors rates based on guests’ risk tolerance. Having different rates for non-refundable (often lower) and fully flexible (often higher) stays lets guests choose how much they value flexibility.
This strategy serves two purposes. Firstly, it protects the hotel’s revenue from last-minute cancellations, and secondly, it allows guests to self-segment, appealing to different types of travelers. Price-sensitive guests may accept stricter terms to save money, while others are willing to pay more for the added peace of mind that comes from a flexible policy.
Price Per Segment and Guest-Type-Based Pricing
Different guest types have different booking behaviors and willingness to pay. Customizing prices, instead of offering the same rates across the board, can significantly increase revenue potential and improve guest satisfaction.
For instance, families tend to book well in advance and look for special pricing for children or joint rooms. Business travelers, on the other hand, often book closer to their stay and are less price-sensitive, which makes them more likely to accept higher rates. Groups typically negotiate volume-based lower pricing due to the large number of rooms booked at the same time, which results in predictable revenue and occupancy. When the rate fences and conditions are clear, segment-based pricing is both efficient and fair.
Loyal Customer-Based Pricing
Offering exclusive rates for loyal customers is nothing new for the major hotel brands of the world; Hilton and Marriott, for instance, each have loyalty programs with over 200 million members. However, you do not need to be a global giant to employ this strategy. At its simplest, loyal customer-based pricing can be offering a discount code to repeat guests or creating a private rate for newsletter subscribers.
Fundamentally, this strategy is based on rewarding returning customers with value that feels personal, whether that is with a slightly lower rate or flexible booking terms. Even small or independent hotels can implement this pricing strategy using basic CRM tools.
Again, excessive discounts can eat into margins. However, many hoteliers view this as a worthwhile tradeoff in exchange for building customer loyalty.
Case in Point – CitizenM: The Dutch hotel brand has brought loyal customer-based pricing to the next level. The mycitizenM+ subscription allows members to pay about 100€ per year for guaranteed 10-15% discounts on the lowest publicly available room rates, free late checkout, and room upgrades – simple perks for a flat fee. This model requires no point collecting, and at the same time, creates upfront revenue in the form of subscription fees and locks in repeat bookings (Source: Skift).
Value-Added Pricing
If you are looking to add premium pricing in your hotel, coming up with ways to add value to room stays is a fitting strategy. Bundling room nights with perks such as breakfast and spa access justifies higher rates and positively impacts guest satisfaction. However, it is important that the perceived value for the guests (that is, the extra you are charging) outweighs the cost of the added amenities.
Package Pricing
For experience-oriented guests, offering packages is another way to increase total revenue per guest. The gist is in simplifying the booking process for the guest by offering tours, meals, or experience tickets as a package with the room, which removes many planning points for the stay. These offers work particularly well for leisure guests.
The main drawback is that there is less flexibility for guests who want only part of the offer. One solution is to offer customized packages so that guests have the freedom to tailor the experience while still encouraging higher overall spending – a win-win for you and your guests.
Upselling
Upselling is a classic hotel pricing strategy that increases revenue by encouraging guests to book a higher-value option than they originally intended for an additional fee. This bumps up ADR and can enhance guest experience.
However, an ill-timed sales pitch can have the inverse effect on guest perception. Upselling should be positioned as a benefit, which can be done by sending the offer through a pre-arrival email, during online check-in, or at the front desk. Staff training is very important in this context to make sure that the offer feels like a value-added suggestion rather than an aggressive upsell.
Cross-Selling
Cross-selling is focused on promoting the additional services of the hotel (such as dining and spa) to the guest to increase their total spend. This strengthens all revenue streams and adds to the guest journey.
As with upselling, cross-selling calls for subtlety. A well-timed recommendation based on the guest’s preferences is far more effective than bombarding them with generic promotions. Cross-selling can be automated through booking channels or delivered in person.
Penetration Pricing
Penetration pricing is a discounted pricing strategy that is used to attract customers and gain market share. It is especially useful for new hotels entering a market but can also be used by established hotels as a way to gain a bigger share of demand for a future date compared to competitors. This is done by offering a lower rate to guests who book well in advance.
As with all strategies that include lowering prices, there is always the risk of damaging perceived value and brand positioning if the discounts are deemed too high. Hoteliers should carefully weigh the benefits and drawbacks when setting lower prices.
Competitor Pricing
Hotel prices do not exist in a vacuum, and your guests are already constantly comparing you against competitors, even if you are not. Competitor pricing involves monitoring or adjusting pricing based on what similar hotels in your market are offering, which ensures that your property is competitive.
The main advantage of this strategy is that you are aligned with the market, and you reduce the risk of being overpriced compared to the selection. However, relying too heavily on competitor pricing can backfire. It can cause a so-called race to the bottom, with competitors constantly undercutting each other, which will ultimately erode profitability. In addition, the approach is not nuanced because it does not consider differences in service quality or brand value between different properties. Just because your neighbor drops their rate does not mean that you should.
This is why competitor pricing is the most effective when it is not used on its own, but as a complementary approach to your overall rate strategy. So more as a benchmark or reference point than a roadmap.
Rate Parity
Rate parity refers to maintaining consistent pricing across all the hotel’s distribution channels (e.g., online travel agencies (OTAs) and direct bookings). This consistency builds trust in guests’ eyes, as they know they are getting a fair deal no matter where they book.
However, strict rate parity can limit your ability to respond to fluctuations in demand and to adjust based on how each channel is performing. The challenge is balancing consistency with agility, and rate parity just is not always the most optimal strategy. However, for many hotels, the transparency and trust it creates are well worth the associated constraints.
Discounted Pricing
Offering discounts on room rates is one of the oldest tricks in the book and one of the most widely used when it comes to hotel pricing strategies due to its effectiveness. Reducing prices helps attract guests who are more price-sensitive and is a useful tool for simulating demand during off-peak periods or unexpected gaps.
While this is an effective strategy in the short term, it can hurt yield and brand value in the long term. Guests get conditioned to wait for discounts, which makes maintaining rate integrity harder. This is why many hoteliers shy away from discounted pricing completely and rely on adding value to offerings instead. It is still a useful strategic tool to have in the broader revenue management kit, but it is not one to depend too much on.
Behavioral Pricing Strategies in Hospitality
Beyond data and forecasting, there is a lot of psychology involved in pricing. In fact, how prices are presented to guests can influence booking decisions just as much as the rates themselves. Behavioral pricing tactics can add to the effectiveness of pricing strategies in the hospitality industry by playing into human biases. The chances are you have come across many, if not all, of these subtle cues.
Anchoring and Framing
When guests see a high “original” price crossed out next to a lower rate, they feel like they are getting a great deal, even if the discounted price is your standard rate. This technique, called anchoring, sets a reference price that makes the actual rate seem more attractive. In the same vein, showing a room that is priced higher next to a more moderately priced one can make the latter feel like it is of better value.
Scarcity and Urgency Cues
Phrases like “Only two rooms left at this price!” or “Book within the next hour for this rate” play on our FOMO (fear of missing out). These urgency triggers encourage quicker booking decisions and consequently increase conversions. This is a favorite tactic of OTAs, because travelers are already comparison shopping under time pressure.
Psychological Thresholds
A room priced at €199 tends to perform better than one at €200. Although the difference is marginal, consumers perceive prices just below round numbers as significantly cheaper. This technique is also called charm pricing, and this small adjustment can lead to significant gains for the hotel without having to cut deeply into profit.
How to Present Value in Price
Overreliance on discounted rates is rarely a sustainable strategy for the profitability of a hotel. A great alternative route is to focus on framing value. A guest may respond more positively to “€220 including breakfast and late checkout” than to “€200 standard rate”. Highlighting the added value the guest is receiving justifies the higher rate and strengthens guest satisfaction – a smart addition to any hotel pricing strategy.
Common Mistakes to Avoid in Hotel Pricing
Because pricing is so closely tied to the profitability of your hotel, it is important to be aware of the common pitfalls when landing on a strategy.
Static Pricing in a Dynamic Market
One of the biggest mistakes hotels make is setting prices once and then forgetting about them completely. Today’s environment is increasingly fast-moving, and demand can shift by the hour. If your strategy does not adjust to market conditions, you risk missing out on revenue during peak periods or being overpriced during low demand. This is possible to avoid whether you use dynamic pricing tools or prefer to review pricing manually.
Rate Cannibalization Across Channels
Offering too many rates across different platforms can lead to what is called rate cannibalization. For example, if your OTA price is a lot lower than the direct booking rate available on your website, guests will go with the first option, and you end up paying high commissions on top of an already slimmer margin. As a rule of thumb, it is always better to incentivize people to book with you directly with either lower pricing or perks such as flexible cancellation.
Over-Reliance on Discounting Without Value Strategy
Constantly lowering rates to drive occupancy is an effective strategy for higher occupancy in the short term, but it can also damage your brand over time. Guests start to expect discounts, which reduces perceived value. Focusing on added value can be a more sustainable pricing strategy so that guests feel they are getting more, not just paying less.
Ignoring Rate Fences
Rate fences are the conditions that separate one price from another, such as the non-refundable rate from the member-only rate. Without clear fences and communication about what different prices are based on, pricing can appear inconsistent and unfair, consequently eroding trust in the eyes of customers.
Avoiding these missteps will protect your pricing power and ensure that your hotel pricing strategies align with your business's long-term goals.
The Future of Hotel Pricing Strategies: What Hoteliers Need to Know
Hotel room pricing is evolving rapidly, and to stay competitive, hoteliers are better off embracing emerging tools and guest-centric models. Here are three critical trends shaping the future of hotel pricing strategies:
AI-Powered Dynamic Pricing
AI-powered revenue management systems already exist and will be increasingly used to automate pricing based on real-time data about demand, booking pace, and competitor rates. The future promises less manual input with price optimization handled by machine learning, even by the minute.
Personalized, Data-Driven Offers
In the spirit of personalization, which is now less a trend and more an established client expectation in hospitality, pricing strategies will be more closely tied to CRM and guest data platforms. This enables dynamic offers based on guest history, such as targeted offers for returning guests and win-back deals to activate dormant customers.
Sustainability-Linked Hotel Pricing Models
No surprise here either, as demand for sustainability is ever-increasing. Eco-conscious travelers look for green pricing models, which could take the form of hotels offering discounts for opting out of daily housekeeping or packaging low-maintenance stays as “green”. Greenwashing is, of course, not condoned, but there are several authentic ways hotels can approach sustainability-linked pricing that also enhance brand perception. For instance, a Marriott-owned airport hotel in Canada offered a lowered “green” rate in exchange for guests opting out of housekeeping. This reduces the hotel's water, energy, and labor costs while realizing guest values and functions as a viable rate option for price-sensitive guests.
Modern Hotel Pricing Strategies Are Built for Change
Pricing is not a task you do once and forget about, but rather an ongoing process of trial and error. Finding the right cocktail of pricing strategies can be a rewarding journey– and often, the cost of not experimenting is much higher than trying out different approaches.
With future trends suggesting major shifts in hotel pricing strategies–more guest-centric, tech-enabled, and driven by evolving values–what is most needed from hoteliers is flexibility. Pricing power comes not from rigid rules but a willingness to adapt.
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