Irrational pricing in the hotel industry

(Disclaimer: if you happen to recognize the hotel from where I’ve taken the example, it is important to note that the problem is by no means unique to it, nor is it unique to the booking engine used on it’s website. The illustrated problem is pervasive in the hotel industry. I am not singling out the hotel or the booking engine/CRS for any reason other than to illustrate the problem discussed here.)

Our industry suffers from irrational pricing and amazingly, this irrationality is most prevalent in a hotel’s direct channels, where the hotel supposedly should have the most control in how it sells its rooms and products.

For years now, so many hoteliers have complained about the stranglehold the OTAs have on their distribution and business that one would imagine technology providers to the industry would have figured out how to help hotels improve the situation. Unfortunately this hasn’t been the case.

At the heart of the irrational pricing problem lies the concept and misuse of Rate Plans, which have become somewhat of a plague in our industry.

Hotels moved away from the “Rack Rate” to the concept to the Best Available Rate (BAR), which was a good idea to accommodate the reality of supply and demand pricing. Except that it’s turned out to not really be such a good thing mainly because the Best Available Rate is not really, or even nearly, the best available rate. This is because:

• If the hotel wants to offer a length of stay based promotion, they create a rate plan for stays of 7 days or more, lower than BAR.
• If they want to try to fill Sunday nights, they need to create a new rate plan for stays that include Sunday nights, lower than BAR.
• If they’d like to create an advance purchase special, they need to create a new rate plan for bookings with a lead time of 21 days or more, lower than BAR.
• If they’d like to offer a promotion for non-refundable rates, they need to create a new rate plan with that specific policy, lower than BAR.

Now a consumer could very easily be booking her stay 45 days in advance and staying 8 days, which would obviously include a Sunday night… and therefore qualify for all four promotions. And all rate plans are returned in the availability display.

And then there are the package rates. The theory is that since the consumer is committing to buy more (than just the room) she should the get similar discounts on the room component of the package rates as well.

But she doesn’t. And this is because the revenue manager has better things to attend to than make those discounts available on the package rates too. If there are the above four promotions running simultaneously, and three packages, the revenue manager would need to create 12 more rate plans to make the pricing somewhat rational. In total, he’d need the BAR rate with four variations (the promos), plus three packages with four variations to each (the four promos) or 20 rate plans.

But let’s assume this was all somehow done. The pricing options would still be silly since if the hotel has 5 room types, the consumer would have to scan through 5 room types x 20 rate plans or 100 price points!

Fortunately revenue managers cannot be bothered (and probably rightly so) to manage 20 unfenced rate plans. So they stick to BAR, a few promos on the room-only price and a few packages. And yet the search result screen looks something like this (and please pardon the imperfect stitching together of multiple images I needed to capture all price-points):

So as a consumer I’d rather select and book my room from here:

But would the hotel prefer if I did?