In a market economy, the commercial success of any company largely depends on the correctly chosen strategy and pricing tactics for products and services. Today, the basis for the successful functioning of a hotel business is the income obtained from the primary and additional activities of its divisions. A flexible pricing policy allows the hotel business to take into account the specifics of the customer base to a greater extent, and the variety of tariff rates helps to receive additional income, which is formed by attracting client groups from various market segments.
Industry
The hotel business, as a structural element of the hospitality industry, is a component of the paid services market. It has a number of special features that directly affect the formation of prices. It should be noted that prices for hotel services have high elasticity since they are formed on a heterogeneous product market. This elasticity of demand is transformed under the influence of the following factors: consumer income, the degree of market saturation, traditions in consumption, the level of culture, etc. (Manning et al., 2018). In the hospitality industry, the development of a pricing strategy is intertwined with the overall marketing strategy due to the fact that a price is a powerful tool of direct influence on the market.
When it comes to the hotel industry, competition is a crucial aspect that directly impacts the tactics that will be implemented. Every travel company must examine its rivals’ strategies on a regular basis and develop plans for businesses in the same strategic group, keeping track of the variables that influence them. Variables such as the size, type of the firm, culture, history, members, operational processes, and financial resources impact each competitor’s goals (Manning et al., 2018). By gathering information on each rival independently, the tourist industry must be able to determine the resources of the competitors, as well as their opportunities and weaknesses.
Industry Markups and Contribution Margins
Competition and its analysis will always be a feature of the tourist industry’s strategic management and strategic planning, resulting in high performance and competitive advantage. The contemporary tourist industry requires the formation of a competitive business network to ensure the growth of connections with consumers and other stakeholders. Tourism enterprise management must understand the tourism products they offer, as well as their competition, keep abreast of changes in their competitive environment that will have a decisive impact on them (Baek et al., 2019). Moreover, they have to ensure that they are well acquainted with the characteristics of their competitors using modern methods, all of which are articulated through a clearly articulated vision, mission, and specific values.
The hotel business sells a perishable, intangible, time-sensitive commodity (namely, the use of a room and facilities for a set period of time). Furthermore, there is no direct cost per unit because the hotel complex’s running expenditures are mostly one hour (wages) and one facility (construction and maintenance costs) (Manning et al., 2018). As a result, in the hospitality sector, using operational income and profit as a business dimension makes more sense.
The cost-plus method of goods and services is the most common in the hotel industry. Selling prices are established at the level of reimbursement of all expenses, including direct and indirect costs, when utilizing cost-plus pricing methods (retained costs) (Baek et al., 2019). The bonus element is a set markup that usually contains a profit component to ensure that the owners get their money back (investment). The markup can be calculated as a percentage of the cost base. A markup percent may be utilized to recover costs that are present in the business but cannot be defined for a priced item, in addition to profit margins. Cost-plus pricing may be broken down into three categories – full cost-plus pricing, direct cost-plus pricing, and gross margin pricing (Manning et al., 2018). The direct cost-plus approach is widely used in the hotel industry. It entails determining the item’s cost (direct materials, labor, and costs) and applying a percentage markup adequate to recoup indirect costs and create profits.
Other important factors influencing markups are economical conditions and marketing strategy. For example, most products and services are in demand as an economy expands because customers must spend money. As a result, purchases are made in large quantities, resulting in higher markups. A well-executed advertising campaign may boost demand for a product or service. This means that consumers will buy or look for the goods in big quantities, boosting profit margins. Advertising in daily newspapers or on television may help leading logistics firms boost their profit margins. Due to the lack of promotion, the service becomes less recognizable, lowering demand.
Supporting Prices and Margins
One of the marketing strategies in the hotel sector is package deals. Rather than merely selling rooms, unique packages with additional offers/services are offered at an affordable rate. This implies that customers are getting more for their money. For instance, Breakfast Packages (which can include a sophisticated breakfast buffet for a much lower price than what it would cost a guest if they chose it separately) or something more personalized, which can include a variety of activities and services for couples (Honeymoon occasion, for instance) at a good price. There are many ways to create packages, as well as a variety of elements that influence them.
Revenue management determines how much different categories of consumers are prepared to spend. When properly executed, revenue management may efficiently manage the complete business strategy. The adoption of a revenue management plan that adjusts to the current environment, such as dynamic price advertising, is critical (Kalotra, 2017). Based on real-time market data, dynamic pricing entails altering room prices daily or even throughout the day. Prices must change on a frequent basis to preserve margins due to supply and demand.
The Hotel Loyalty Program is similar to the airline ticket reward program, in that it rewards regular travelers with incentives. This is a marketing technique used by hotel chains (and occasionally independent hotels) to attract and retain customers by giving discounts and other advantages (Kalotra, 2017). Hotel loyalty programs are a practical and efficient way to keep guests coming back. These initiatives foster long-term connections and satisfied consumers, lowering expenses and increasing profit margins. They must also be personified in certain ways, based on societal distinctions (income, marital status, etc.). A business guest, for example, could be searching for a free shuttle, while a family might be looking for inexpensive theme park tickets. These segment distinctions should eventually be reflected in a loyalty incentive scheme.
Conclusion
The pricing and margin processes that take place in the hospitality industry have a number of specific characteristics. This is due to the high elasticity of prices in different segments of the tourist market, the time gap between the moment the price is set and the moment of purchase and sale of the product, as well as seasonal differentiation. The formation of a pricing policy in a hotel is a component of a unified marketing policy and is always influenced by competing enterprises. In the hotel business, the cost-plus strategy for products and services is the most prevalent, and it may be increased using a variety of marketing methods, such as revenue management.
References
Baek, U., Sim, Y., & Lee, S. (2019). Analysis of hierarchical competition structure and pricing strategy in the hotel industry. The Journal of Asian Finance, Economics, and Business, 6(4), 179-187.
Kalotra, A. (2017). An analysis of awareness of marketing mix strategies of hospitality industry: A Study of Delhi. Johar, 12(2), 1.
Manning, C., deRoos, J., O’Neill, J. W., Barry A N Bloom, Agarwal, A., & Roulac, S. (2018). Hotel/lodging Real Estate Industry Trends and Innovations. Journal of Real Estate Literature, 26(1), 13-41.