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Value-based room pricing, and knowing what your hotel guest is willing to pay

July 13, 2012 | Hotel Marketing

A customer’s willingness to pay is an important issue for all hotel companies but there are many factors to consider when it comes to pricing. Here is a close look at how willingness-to-pay based pricing varies for core products and ancillary offerings, and how to maximize results.

The primary focus of revenue management will always be identifying the right price for a product. As such RM professionals today are shifting their approach from cost-based logic to value-based pricing for both core and ancillary products.

Instead of taking a hotel company’s costs into account, value-based pricing focuses on the customers’ perception of value. There are, of course, examples of value-based pricing outside the travel industry. Last year, the UK’s Department of Health referred to a new value-based approach to the pricing of branded medicines. A system of value-based pricing was introduced so that patients could access what doctors thought were the right medicines and treatment. In this context, the purpose of value-based pricing is to improve patients’ access to effective and innovative drugs by ensuring they are available at a price that reflects the value they bring.

So when it comes to value-based pricing there are two things to consider:

1. Pricing based on the consumer’s willingness to pay for a service

2. Pricing based on an individual’s overall, long-term value to the enterprise

While cost will always have some impact on pricing, for core products like rooms, the hospitality and travel industry has moved beyond pure, cost-based pricing where margins are fixed. Rather they have shifted to a more dynamic model which take a customer’s willingness to pay into account where margins can change with the market, explains Alex Dietz, principal product manager at business analytics specialist SAS adding that there is room for improvement in this area and cost is certainly no longer the primary driver. With regards to ancillary products (golf, spa, food & beverage, retail etc.), most pricing remains based on a cost-plus approach. “We have a long way to go there,” he says.

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