Of course this can be applied to all sorts of things – where you are trying to carefully manage the rate at which something sells to get the most for it without running out too soon or having too many left over (Christmas Cards?). The important thing is that you need to be able to have a ‘price varying’ pricing strategy without upsetting your customers – and nowadays, it is expected in areas such as hotels and airlines. Less so with, say, theatres – but they could do it in theory too.

How does it work?

A lot of hotel owners will vary prices according to how well rooms are selling – aiming to encourage demand with lower prices when they don’t seem to be selling fast enough, or charging more when they are going fast. This sort of pricing strategy is fairly simple to understand, but as you can imagine there is a lot of thought that goes in to doing this by the big airlines and hotel groups in their ‘revenue maximisation’ departments.

If you need a rule of thumb, then by all means have a few simple cut off points where you look at how many ‘rooms’ you have for a certain date and then implement your pricing strategy accordingly. The complexity comes when you have to do this for every date in the future, across different categories of ‘room’ and (ideally) varying it by day. You might even vary the price by the hour in the last 24 hours of bookings.

Modelling

The trick is to model the ideal ‘curve’ which you want to have – the graph of how many ‘rooms’ are left in the days running up to the point at which it expires. You then need a simple-to-operate system to plug all your bookings data in to so that it tells you which prices to change – and therefore bring your pricing strategy to life. It’s one of those things that, as with so much in life, is beautifully simple in concept – but is always a bit more complicated than you think to implement.

You won’t be surprised to know that this is an ideal spreadsheet application. First, define the ‘curve’ of bookings by day (or hour) and use the actual data to calculate variance from this. Then set up some rules about how far you will move the price depending on how far you are from the desired curve.

Complications

There are always things to watch for, such as the customer’s perception if they repeat visit your website or call back for quotes. Similarly, you need to know how long to hold your quotes valid for – and how to record this. You can also get a more sophisticated pricing strategy by factoring in enquiries as well as actual bookings. Overlaid on this may be a master plan showing times of expected higher demand (weekends, holidays, events) which will affect the starting point. You also need to understand your fixed and variable costs quite well.

Conclusion

Even a fairly simple manual system can increase revenue by 15%-25% without increasing volume (occupancy). A more detailed system can achieve much more than this. You can see why the big hotels invest a lot in this area.