Management of rooms is an important sector in the overall management of hotels. It entails setting up the appropriate price, room provisions and services that in turn keep customers interested in an organization. The single most important consideration that determines pricing of rooms is demand.
This concept is used to refer to the change in the need or want for rooms when the price changes. In a typical situation an increase in the demand is likely to lead to an increase in the prices of rooms and a decrease in demand automatically leads to a decrease in the pricing of rooms. In considering demand as a factor in the pricing of rooms, it is necessary to find out what happens to the total revenue in a hotel.
This is in reference to the different seasons and changing economic conditions (Martin and Catherine, 2006). It is appropriate to note that it is not easy for an individual or an organization for that matter to determine the demand thus set prices that are sensitive to the changes that occur within a short duration of time. It is easier for the revenue department to determine the changes in demand as seen in the change of figures in the revenue department.
In an effort to justify the importance of demand in setting up the prices of rooms it is necessary to look into a scenario whereby the cost of a room is set high yet the customers willing to utilize such a facility are few, it would drive the level of consumption low and a business enterprise will experience low levels of performance. An opposite situation is evident when the cost of a room is set high yet the number of people utilizing such a facility is quite low. This would drive consumers away from the facility.
The cost structure within a business is a significant determinant of the pricing of rooms. This structure bears reference to the existing fixed and variable costs within the venture. An example of a fixed cost in such a circumstance is the salary accorded to personnel maintaining and managing rooms such as the rooms manager and other housekeepers.
Variable cost on the other hand refers to cost that change in reference to the volume of sales that come about as a result of the existence of the rooms. An increase in the levels of fixed costs automatically necessitates an increase in the pricing of rooms in order to maintain profitability in such a venture (Rick and Openshaw, 2007).
It also worth noting that a business with high levels of fixed costs in relation to variable costs is likely to experience higher levels of inconsistency in the levels of profitability, such a scenario therefore demands that the right prices are set for the market. In a short span of time any price determined that exceeds the variable cost eventually contributes to the fixed costs thus net income.
The result is existence of a wide possibility of price choices. In an effort to justify that cost structure eventually determines the pricing accorded to rooms, a situation whereby a room’s manager together with his personnel highly salaried will in turn necessitate an increase in the cost of rooms however a mitigating effort is created by an appropriate variable cost that leads to fair pricing (Anderson et al, 2009).
The customers are significant determinants of the cost of rooms. They are classified into different categories, it is however necessary to concentrate on a specific category that is referred to as the habit prone customers who are likely to resist changes in the cost of rooms.
This is in reference to the customer’s level of loyalty to a specific brand in the industry. Hoteliers and persons managing ventures related to hotels must be keen enough to avoid a change in brand loyalty as a result of changes in the cost that negatively impacts on consumers. The effect will be loss of customers that leads to a decrease in the profits.
This eventually makes the business change its pricing strategies. In order to justify such a factor an illustration of Hilton and its room management services seems appropriate. It offers specific rates for their rooms to customers especially those known to them as a result of utilizing the services of the organization for a lengthy period of time; this action serves to retain them within the organization (Martin and Catherine, 2006).
Pricing models
A number of pricing models existent within and without the hotel industry can be used with the purpose of attaching the appropriate cost to a room. An example of such a model is the Heston model that appreciates the use of a closed form solution.
The advantages of such a model of pricing thus the reason for its use in several areas is it’s ability to build an association between the price of an asset and in this case the room, its constituents and the asset volatility (Fabrice et al, 2007). It is also necessary to appreciate the aspect of stock pricing and how it forms a significant contribution to such a process.
Ventures in the hospitality industry are quoted in a number of stock exchanges which in turn influences the process of pricing in reference to other organizations in the same sector. This type of pricing model is utilized to a higher degree as the volatility assumes a time varying function. The disadvantage of such a process is that it is controlled by outside factors.
The capital asset pricing model is a useful tool in determining the cost of a room as it balances supply with demand among investors and in this particular instance, consumers of the services of a hotel room. This is for the sole purpose of ensuring that the utility of a product or service is translated into that extra satisfaction (Steven, 2005).
The advantage of such a model is seen in its ability to offer quantitative insights into the market. It however fails to offer a more qualitative approach that determines the extent of success furthermore its tenets are theory based thus difficulty in implementation.
Reference List
Anderson, D et al. (2009) Statistics for business and economics. 2nd ed. Cengage Learning
Jagels, M & Catherine. E. (2006) Hospitality Management Accounting. John Wiley and Sons publishers.
Rouae, F et al. (2007) Option Pricing Models and Volatility Using Excel-VBA. 10th ed .John Wiley and Sons
Shreve, S. (2005) Stochastic calculus finance: The binomial pricing Model. Springer.
Steves, R & Openshaw, G. (2007) Rick Steves’ London. Avalon Travel