Know-How Exchange : Customer Behavior

Hi, Fla,

For a factory, normally profit is measured against fully loaded cost - materials, labor, and a figure that represents the fixed overhead - rent, lights, management, etc - all the other costs it takes to have a business. If the price of the product is too high such that the line is idle because there is no demand, then the factory is making zero profit and not covering its fixed overhead. When demand falls off, a factory will reduce price so as to make profit over variable cost (cost of materials and labor) and that profit helps offset the overhead. The object is to price such that the factory line is always full.

Think of your hotel as a factory. If you are running at minimum staff - you can't reduce any more and still accommodate even one guest - then their salaries are part of fixed cost - these costs don't change until you reach a number of guests such that you have to bring on another staff member. In this case, if you have empty rooms and these staff members are not working up to their maximum capacity, then you can price rooms using variable cost pricing until those rooms are full. At that point, you have do decide if you bring on another staff member and fill up the next block of rooms. In that case, you'd count the next staff member hired as variable cost and you'd have to cover them in the pricing.

What I'm recommending is that you begin looking at your empty rooms and your variable cost and price accordingly so that you fill the rooms you can accommodate with present (fixed) staff. If it's 15%, great! If it's lower, make it lower. With this approach, if you look at total profit versus profit per room, you will see you will make more total profit.

Obviously, you can price higher for reservations out further and as time gets closer, reduce the price you need. Since most people are one-timers, people won't catch on to this and just delay making reservations out further. It shouldn't hurt you.

Or you could have a tiered pricing such that if guests aren't paying "full price," they don't get the "amenities" that a full price guest gets - paper delivered to the room, breakfast included, access to the spa/health club, invitation to the happy hour with hors dourves, premium TV, 300 count linens - whatever it is you care to offer.

I hope this helps.

Wayde

This strategy can work with budget-minded customers, if your value/quality is clearly better than the price you offer. If you've determined that 40 USD is the tipping point for hotel rooms, then you certainly can lower the price. Make sure that the a la carte price + extras is more than 40 USD. You want the "full luxury" price to be a deal compared to the a la carte price "fully loaded".

If you don't already have a wealth of people who have written positive reviews for your hotel on the various travel blogs, start requesting your guests do it (offer them a gift on a future visit with proof, for example). Reviews by people who stay at your hotel are a great source of information by prospects.