The rates charged and the fine print conditions the sale can vary somewhat

A few examples will illustrate the different approaches to pricing our hotel and restaurant guests typically experience.

1. When guests contact a hotel and request a price quote on purchasing ten or more hotel rooms on a single night, their call will no doubt be transferred to the sales department where they will be offered a quantity purchase discount. If, however, that same guest reserves a table of ten, for the same night, at a nearby table service restaurant no discount will be offered and, in most cases, a mandatory service charge (effectively a price increase) will be added to the guest’s bill.

4. When guests arrive, with a confirmed reservation (at a hotel they have never stayed at before), and if the hotel is slow that night, the guest will likely be given a room upgrade at no extra charge to encourage them to come back in the future.

If the same guest goes to his or her favorite restaurant (one they frequent at least monthly) on a slow night and orders a ten-ounce sirloin steak, they know there is zero chance they would be offered the option of paying the menu price for the ten-ounce steak but being upgrading (at no charge) to a 14-ounce steak.

The single most important decision in
evaluating a business is pricing power. If
you’ve got the power to raise prices without
losing business to a competitor, you’ve got a
very good business. And if you have to have a
prayer session before raising the price by
10% then you’ve got a terrible business.

Understanding the power of pricing is critical. Effective pricing allows you to capture an audience and maintain a successful business. So, where then do future hospitality managers initially learn about pricing?

To point out the in-practice differences in pricing philosophy between hard-core accountants and hard-core marketing professionals is to re-state the obvious to those hotel or restaurant managers who have spent much time in our
industry. Nor does it really make any sense to say one
approach is right and the other is wrong. It does make sense, however, for students of each approach to learn important lessons from the other.

What follows are three truths hoteliers know about pricing (that most restaurateurs don’t recognize) and three truths restaurateurs know about pricing (that most hoteliers don’t recognize).

Hoteliers measure percentage changes in top line sales (ADR, occupancy %, and RevPAR) regularly and with great precision. The truth, as every restaurateur knows, however, is that sales are not nearly as important as profits.

Food and beverage sales made at discounts significantly below regular menu prices simply for the purpose of increasing revenue volume do not often occur in the restaurant industry. The cost focus of restaurateurs just will not allow them to knowingly sell at or below their costs.

c.) Hotel owners deprived of rightful investment returns

Restaurateurs’ Truth #2: Don’t Sacrifice Pricing Potential Due to Diminished Demand.

Every serious hotel pricing study ever undertaken shows the futility of lowered room rates in the face of slackened demand. The research consistently shows those hotels that reduce rates the most in periods of reduced demand lose the most. Those who reduce rates the least, profit the most in the long term.

Despite that fact, in the hotel industry the pain of
occupancy rate declines is routinely compounded by decisions to reduce rates because room sellers are
convinced that lowered ADRs create greater demand for rooms. The truth is lowered room rates do not create higher room demand. They simply create lower rates.

b.) Reduced per-room sale profitability at a time when each profit dollar is precious

c.) A very slow and painful multi-year recover process when the decision is made to increase prices to previous levels

The internet should not be used as an excuse to abandon pricing power. Restaurateurs know it is important to make their presence known via the use of advanced technology. The best of them are adept at utilizing Yelp,

Facebook, Twitter, iPhone apps and all the rest of the available technology tools to increase the ease with
which their customers buy directly from them (re-read the last five words in this sentence and you will know what restaurateurs know).

Is there another way to go? Can a business actually
maintain complete control of what it sells and the price at which it sells it? Note to hoteliers; restaurateurs (and Southwest airlines!) know that they can.

Three Truths Restaurateurs Should Learn From Hoteliers

It is a dangerous assumption to think that businesses can charge more for their goods and services simply because the business has added costs to them. Increased costs do not automatically equate to increases in consumer
perceptions of value; a fact recognized by any business owner whose operating costs continually exceed his or her revenues.

An increase in costs cannot automatically dictate an
increase in selling price. In fact, the opposite should be true. The fact that beef costs have risen 20% does not mean customers’ willingness to pay higher prices for steaks has risen as well. An appropriate selling price for a product or service must dictate its allowable cost. It is only when selling prices accurately reflect consumer perceptions of value that a business can ascertain the

Airline executives understand the important relationship between capacity management and revenue and thus they measure their inventory utilization efficiency using
PRASM (Passenger Revenue per Available Seat Mile).

Hoteliers focus on RevPAR (Revenue Per Available Room) a similar measure that equates the ability of hotel management to optimize the pricing of available room capacity. Yet in the restaurant industry, RevPASH
(Revenue Per Available Seat Hour) is a powerful but under-utilized restaurant performance metric. It shouldn’t be. Few restaurateurs regularly monitor RevPASH. They should.

Hoteliers’ Truth # 3: Differential Pricing is Customer-centric Pricing

What do hair salons have in common with restaurants and hotels? Each has a limited ability to serve their customers in periods of heightened demand. Hair salons are constrained by the number of chairs and hair stylists available at any one time. Hotels have a limited number of rooms. Restaurants have a limited number of seats.

B. Allocate the limited supply to selected
customers who meet established criteria (e.g., they are volume buyers, repeat buyers, they buy at certain times, or they hold other favored buyer status).

C. Raise prices until demand is reduced
sufficiently to equal the available supply.

Neither pricing approach A nor C identified above would likely make you feel your hair salon valued your
continued business. If the salon used approach “A”, you would likely visit another salon because your wait to get in your favorite salon (remember it is Prom week) would be excessively long. If approach “C” were implemented, you would pay substantially more this week than last week for the same service. Based on your individual customer characteristic (your frequent buyer status) you would, rightfully, expect the “special” treatment,
differential pricing, identified in approach “B”.

The individual buyer characteristics (e.g., age, frequency of purchase, timing of purchase, payment method, among many others) used to implement differential pricing
strategies help to ensure fairness to customers and to optimize revenues. That’s because only pricing decisions made after fully considering each of your target markets’ individual desire, ability, and willingness to pay
characteristics will best serve them and ensure their long-term loyalty to you.

1.Think of your own experiences as a hospitality customer. Are there pricing strategies used by hoteliers that you wish restaurateurs would adopt? Are there pricing strategies used by restaurateurs that you wished hoteliers would adopt? If so, why?

2.Do you think it is customers or businesses suffer most from poor pricing strategies? Explain your position.