MIHM203: International Hotel Revenue Management and Pricing 2019

This report provides a critical analysis of international hotel revenue management, focusing on traditional revenue management issues, price elasticity of demand, and price endogeneity within the hospitality industry. It explores the application of pricing strategies for economy, limited service, and full-service hotels, considering the potential consequences of using competitor pricing. The report covers capacity control, overbooking, forecasting, and the impact of technology on revenue management. It also discusses dynamic pricing, price per segment strategies, and the importance of understanding customer behavior and market demand for effective revenue optimization. This document is available on Desklib, a platform offering a wide range of study resources for students.

International Hotel Revenue Management

Table of Contents
Introduction......................................................................................................................................3
Part 1................................................................................................................................................3
Issues associated with traditional revenue management.............................................................3
The concept of price elasticity of demand and related price endogeneity issue in the hospitality
industry........................................................................................................................................3
Part 2................................................................................................................................................3
Application of the best pricing strategy for an economy hotel, a limited service and, a full-
service hotel.................................................................................................................................3
Potential consequences resulting from using competitor pricing strategy for pricing the
product.........................................................................................................................................3
Conclusion.......................................................................................................................................3
References........................................................................................................................................4

LIST OF TABLES
Table 1: Pricing strategy for economy, limited and full service hotel.............................................8
LIST OF FIGURES
Figure 1: Effect factors on pricing strategies of hotel revenue......................................................10

INTRODUCTION
The present study is based on the critical analysis and evaluation of the issues related to
traditional revenue management, and the concept of price elasticity of demand and issues related
with the price endogeneity within the hospitality industry. Along with this, the study will also
cover the realistic application of best pricing strategy for an economy hotel, a limited service
and, a full-service hotel. It will also emphasize on the possible results of using the competitive
pricing strategy as a base for pricing the product.
PART 1
Issues associated with traditional revenue management
Ever-challenging issues in the hospitality industry, from advanced technology-associated
customer demand to rise in costs of labour to shifting competition, are integrating complexities
for the hoteliers to manage the soaring operational costs effectively (Corgel, Liu& White 2015,
p. 430). On the basis of the traditional revenue management, on the one hand, there is a top
casual forecasting model for the room rates, but on the other, the traditional method is not able to
yield real-time solutions for the optimization of room rates.
Problems in revenue management can be classified into various but related areas namely;
capacity control, pricing strategies, overbooking and forecasting (Noone, Enz & Glassmire 2017
p. 45). Other related issues in regards with revenue management are inclusive of economic
theory, competition impact and consolidation, the behaviour of the customer, the development of
revenue management, revenue management’s performance evaluation and the strategies used for
addressing issues of revenue management.

Focusing on the overbooking issues for the hospitality industry with various tour operations and
stating that an overbooking policy treats the hotel’s capacity completely proving effective costs
savings as compared to the overbooking policy that allowsthe capacity to every tour-
operatorseparately (Peng et al. 2015, p. 615). Furthermore, the revenue management forecasting
comprises demand forecasting, price forecasting, and capacity forecasting, given that all have
their own specific requirements.
On the other hand, technology is still considered as the key issue to practice revenue
management. The required technology and data to promote the effective adoption of revenue
management are not easily accessible to several hoteliers(Corgel, Liu& White 2015, p. 420).
Lack of technology has become the main barrier for most of the revenue managers; issues can
vary from having different techniques that are not able to communicate well with each other, or
are not able to secure the budget to make adequate investment in technology as per the
requirement of the hotel.
The yield management to not consider biases, a regular customer will not be given priority, for
instance. In addition, if the system is not able to consider well-forecasting, it will not assist in
profit maximization. Thus, the historical data required to be predicted might not be readily
accessible(Noone 2016, p. 266). Regardless of these drawbacks, the yield management system is
very renowned in most of the service industries. It is also evidenced to offer huge cost savings
and increased revenue.
On the other hand, some researchers have not supported the above argument as changing
demands and rates may make the visitors dissatisfied. It has been believed by the visitors that it
would be not fair to pay a higher price for the specified produce if not reserved already. Similar

to this, it has been stated by McMahonBeattie (2011), differential pricing strategies form
confusions for the visitors not determining the actual money value for the customer.
The concept of price elasticity of demand and related price endogeneity issue in the hospitality
industry
In context with the hospitality industry, the pricing elasticity is referred to as by in which manner
there is a change in demand for a hotel room in response to pricing. For instance, in a situation
where a hotel reduces its rates by a percentage and considers an eventual rise in revenue, then
that demand is stated as elastic. On the other hand, the inelastic demand is not considered as
price sensitive. The elasticity of demand has been developed as a response of quantity demanded
because of changing prices and other key determinants of demand. The concept of elasticity of
demand has been determined as a mix of the function of individual price, the price of related
goods and disposable income. Therefore, the PED can be employed to monitor customer
sensitivity to price. It shows hotels, how elastic customer demand is in terms of the product, with
the change in price for that product (Peng et al. 2015, p. 625). In terms of demand and pricing,
revenue managers are required to be clear and defined about the basic fundamental that
correlation of demand does not connect to the causation of demand.
The most reliable aspect of price elasticity for hotels is the variation between individual and
market demand. The market of the hotel might consider a correlation wherein lower prices raise
the demand (Yeoman & McMahon-Beattie, 2011, p.85). Therefore higher rates of room decrease
demand. If hotels increase rate inresponse to higher demand, then some consumer is priced out.
The hotel revenue is ultimately improved by optimal matching rates to demand.

The prices of the hotel are treated as endogenous to growth the growth of the firm. It is highly
recognized that avoiding the possible potential endogeneity of prices might integrate biases in
the relationship results between prices and eventual growth. It can be asserted that hotel vary in
quality levels, high-quality hotels will be placed at higher demand,and they are thus able to
charge and demand higher prices, This can result in a correlation between the error team and
price, which targets the unobserved quality that is having an endogeneity problem(Corgel, Liu &
White 2015, p. 425). In the absence of endogeneity controls, there is biased in the price elasticity
towards zero, that can give birth to endogeneity problem, as the quality stays as unobserved. Yet,
the hotels set prices in accordance with the quality, forming a complicated situation thereof.
PART 2
Application of the best pricing strategy for an economy hotel, a limited service and, a full-service
hotel
It can be said that limited service and economy hotels are more expected to be motivated to
demand a fractional dollar amount to stimulate each room’s margin rented. Moreover, the
consumer base of limited service, as well as economy hotels, seems to be price sensitive and
oriented with acquiring the best possible price. Both limited service and economy hotels are
based on value, and they must tend to use a just-under pricing strategy on a constant basis while
preferring to communicate regarding the competitive pricing (Abrate&Viglia 2016, p. 127). The
limited service hotels, on the other hand, provide minimum services to guests, they are generally
budget-friendly.
It is significant that limited service hotel, charge prices per segment, and offer discount codes to
boost direct bookings. In addition, they must offer packages and describe the length of stay

strategy in order to add convenience and ease to the guest (Ren et al. 2016, p. 17). There must be
proper cancellation policy, upselling and cross-selling, with involving review management to
stimulate customer sales and better revenue management. In general, price per segment pricing
strategy must be used by economy service and limited service hotels, wherein they offer a similar
product at the different prices to different customer types.
On the other hand, the full-service hotels are luxurious with all superior amenities and services
present. The best pricing strategy for upscale and full-service hotels is a dynamic pricing
strategy; inthis, they will sell their rooms at higher prices when there is higher occupancy rate
and charge lower prices when the occupancy rate is lower. By making use of dynamic pricing
strategy, full-service hotels can increase their room rate at the time of peak seasons and lower
rates at the time of offseason (Sánchez-Pérez, Illescas-Manzano& Martínez-Puertas 2019, p.93).
It is vital that full-service hotels obtain aggregate data on the market demand and forecast the
occupancy to make pricing changes accordingly. This data also assists in evaluating past
performances to establish suitable pricing strategy will leveraging business insights and
improving profitability. For the full-service hotels, Property management systems, hoteliers must
assess the Selling systems, distribution systems and booking system to make the best of their
strategy.
For economy, limited service and full-service hotels, for proper optimization of revenue, it is
vital for all to seek for a pricing strategy that matches the business portfolio of the hotel. The
main considerations are the business model of the hotel and the average length of stay of the
hotel.
Table 1: Pricing strategy for economy, limited and full service hotel

Pricing strategy Justification
Limited service hotel price per segment, just-under
pricing strategy
These strategies are selected
to provide same products at
different prices and
customers.
Economy service hotel price per segment, just-under
pricing strategy
These strategies are selected
to provide same products at
different prices and
customers.
Full service hotel dynamic pricing strategy Charging prices according to
the occupancy rates to
increase revenue
Potential consequences resulting from using competitor pricing strategy for pricing the product
In a situation where the pricing of the product is done according to what the competition is
charging is considered as competitive pricing. The competitive based pricing, while setting, is
essential to consider the criteria of the behaviour of customers. The most important facts to be
kept into mind while considering competitive pricing strategy are costs, competition and price
sensitivity. It is initially important to assess the prices, move and services provided of
competition to the customer, before setting prices;otherwise, it could adversely impact the sales
and profitability of a hotel. If the hotel charges a higher price for the same service, as compared
to the competition, then it can face loss(Lee 2015, p.115). Similarly, the competitive pricing

strategy should be designed in such a way that attracts, retains and captures the customers. The
charge of prices equivalent to the competitors, can create several outcomes, for example, hotels
with this strategy have to charge, what the competitor is charging, even there is a higher cost of
the product, in this situation they had to operate and make adjustments in their prices of
packaging, and distribution and advertising. One more aspect to pricing the responsiveness of
competition, if the competition rapidly follows a decrease in price, then the hotel might lose
opportunities to shift share from competition and can tend to drive prices down across the
market(Lee 2016, p.66). Competition is the biggest challenge to revenue management as a
whole. The agility and unpredictability in the competitive set have the potential to result in a
seismic shift in the traditional methods of pricing room rates and establishing pricing strategies,
further undermining the hotel of ability to retain customer and market share.
The competitive pricing strategy includes a better understanding of the pricing strategy of
competitors. An ideal revenue management tool can help hotels in considering the same. It helps
in tracking and knowing the pricing of competitors for a specified time period and
recommending the smart price. Thereby, hotels can make changes in their pricing across all the
channels of distributions to attain a competitive edge(Lee 2016, p.75). It is significant that the
rooms are not priced at too high or too low as compared to the competition.
Evaluation of the external influences is necessary that would impact the market conditions, such
as booking lead time and holidays, it is also stated that competition can have different rates and it
is crucial to consider those rates structures closely for the different room types and facilities. In
general, to prevent adverse consequences, the main aspect is applying comparisons while
charging rates on the basis of competitors’ strategies.

CONCLUSION
On the basis of the above analysis, it can be concluded thatrevenue management and pricing
strategy is very crucial in the hospitality sector. In the hospitality sector, it is vital that hoteliers
consider optimal and effective pricing strategies to balance their revenues, and increase their
return on investment and market share. Hotels are required to consider demand in the market and
target their customer base while analyzing the move of competitors, and price accordingly on the
basis of the quality offered. Thus, revenue management goes hand in hand with pricing
strategies; if there is inappropriate strategies of pricing, then it will dramatically affect the hotel’s
overall performance.

REFERENCES
Abrate, G &Viglia, G, 2016. Strategic and tactical price decisions in hotel revenue
management. Tourism Management, 55, p.127.
Corgel, J.B, Liu, C & White, R.M, 2015. Determinants of hotel property prices. The Journal of
Real Estate Finance and Economics, 51(3), p.430.
Lee, SH, 2016. How hotel managers decide to discount room rates: A conjoint
analysis. International Journal of Hospitality Management, 52, pp.75.
Lee, SK, 2015. Quality differentiation and conditional spatial price competition among
hotels. Tourism Management, 46, p.115.
Noone, BM, 2016. Pricing for hotel revenue management: Evolution in an era of price
transparency. Journal of Revenue and Pricing Management, 15(3-4), p.266.
Noone, BM, Enz, C.A. &Glassmire, J, 2017. Total hotel revenue management: A strategic profit
perspective. Routledge. p.45.
Peng, B, Song, H, Crouch, G.I. & Witt, S.F, 2015. A meta-analysis of international tourism
demand elasticities. Journal of Travel Research, 54(5), pp.615.
Ren, L, Qiu, H, Wang, P. & Lin, P.M , 2016. Exploring customer experience with budget hotels:
Dimensionality and satisfaction. International Journal of Hospitality Management, 52, p.17.
Sánchez-Pérez, M, Illescas-Manzano, M.D. & Martínez-Puertas, S, 2019. Modeling hotel room
pricing: A multi-country analysis. International Journal of Hospitality Management, 79, p.93.

Yeoman, I & McMahon-Beattie, U 2011. Revenue Management. Houndmills, Basingstoke,
Hampshire: Palgrave Macmillan. p.85.