06 Feb Achieving the right mix of Strategic & Tactical Pricing for maximizing profits
In our previous posts we discussed about how having the right Price Structure for your hotel and the implementation of Dynamic Pricing helps you focus on the right business mix and win more business without leaving money on the table. Continuing our discussion on Pricing, in this post, we would explain and discuss two important aspects of Pricing; Strategic Pricing and Tactical Pricing and when to use it.
Before we begin, think about how pricing is set in the hotel industry and at your hotel. What initial thoughts do you have on why your product / services are priced as they are? What thoughts or analysis do you think or know went into your pricing?
When talking about pricing it is important to understand the “levels of pricing”; There are three levels of pricing:
- Industry Level Pricing
- Product / Market Level Pricing and
- Transaction Level Pricing
Industry Level Pricing is generally considered during the business planning stages. At this level, you would consider how supply, demand, costs, regulations and other high-level factors interact and affect overall prices. Decision on whether to build / acquire a hotel and what rating it would be; a budget 3* property, a mid-segment 4* business hotel or a luxury 5* hotel; will be based on the Industry Price level, feasibility studies, analysis of supply-demand and business trade forecasts; all of which will help in the determination of the potential Return on Investment or ROI.
Product / Market Strategy Level is used for the alignment of Pricing with Business Strategy. Such pricing is used to signal your property’s value proposition to the market. Your property’s price positioning relative to the competition will determine what value you want others to perceive. This is also used to differentiate your offering from others. Sometimes, an aggressive pricing strategy is used for growth into a specific new market or segment(s). As a strategist, your price determines the target market you are after. Your strategic market segmentation provides vital direction to sales teams, resulting in higher sales effectiveness. Market level strategic price positioning also reduces the competition as you would now compete with your specific target segment and not with everybody.
Transaction Level Pricing or Tactical Pricing is primarily used at an operational level and it’s prime objective is to determine the exact price for each transaction. This essentially refers to the day-to-day pricing as in what will be your price today, tomorrow and for the next 365 days. Pricing at the transaction level is managed in most hotels using a pricing structure. A pricing structure, also called a rate structure, is made up of all the rates you could potentially offer a customer and vary for every hotel based on the market segments served by the hotel. Various Pricing & inventory control mechanisms are used as levers to achieve maximum yield for the business.
As is evident from the above, each pricing level has a role to play at different stages of the hotel’s operation. We move from general pricing at an industry level with very limited control to focused pricing with controls and fences as we move towards operational level pricing.
The role of Product / Market Strategy Level pricing or Strategic pricing is critical in defining the positioning of your hotel / brand in the market and is naturally a reflection of what specific segment you want to focus on. Using the right Market segmentation and business mix along with a pricing structure that supports your revenue objective will be a key determinant in your hotel’s profitability.