Method to the madness: How hotels set room rates

For hotel guests, it can be dizzying how the cost of the same room, at the same property, can vary dramatically from one day to the next.

But there's definitely a method to the seeming madness.

Hotels decide how to price their rooms "based on many different factors, including the market they are in, special events or holidays that may affect their demand for rooms and the differences in the rooms they have to sell,'' said Craig Eister, a senior vice president for the hotel company IHG. IHG's brands include Holiday Inn, InterContinental and Crowne Plaza. "Prices for rooms may change over time as any of these factors vary."

The guest mix in a hotel may also help dictate whether room rates go up or down, says Bobby Bowers, senior vice president of operations for hotel research firm STR. For instance, vacationers might be more price sensitive than business trekkers.

"Delivering great customer value is key for any hotel operator,'' Bowers says, "and fair pricing is a critical component in that equation.''

Like most hotel brands, Best Western says it has revenue managers to help figure out pricing. It relies on a methodology that includes forecasting demand, scanning websites like Expedia.com to see what their competitors are charging, and comparing their own booking trends.

The company recently rolled out the first phase of a new technology that forecasts demand four months in advance. Best Western also uses very specific room descriptions to help determine rates.

"Many brands have moved to a room type description that only included the bed type and whether or not the room allows smoking,'' says Patti Halter, the director of revenue services for Best Western International. She says that the chain "encourages its hotels to describe their room types to the consumer in greater detail, which in turn allows the hotels to charge premium prices for guest rooms that demonstrate a higher consumer demand.''

Similar to airlines that might charge extra for a seat with more legroom, "a Best Western branded hotel may identify a guest room as having a specialty mattress type or another specialty item that is in demand for their specific hotel or market,'' she says.

Properties may also vary the pricing of a room type based on its popularity on a given day of the week, she says, charging more for a standard room with a king-size bed on a weekday "based on the customer base of primarily solo business travelers ... while a room with two queen beds may be priced higher on weekends when more families and groups are traveling.''

Some cast the net even wider to get the pricing just right.

Patrick Bosworth, CEO and co-founder of the software company Duetto, says he uses algorithms based on a variety of data sources to help his roughly 300 hotel clients come up with the optimal room rates.

"Historically, hotels have just looked at how many reservations they have on the books or what competitors are charging,'' says Bosworth.

His company looks at data ranging from airline ticket sales, to the most popular days being searched on booking sites, to lodging reviews on TripAdvisor.

If "airline ticket sales are up 13% in the market (and) searches on the website are up 11%,'' the hotel might consider raising room rates, Bosworth explains.

On the other hand, if searches on a hotel's site are down 9% vs. the previous year, Duetto might suggest that the hotel's marketing department send an e-mail to past customers offering a perk, like a free concert ticket, to attract guests. "Those are the things that allow them to see further into the future so they can raise prices and earn money on days when they know they're going to be busy'' or drop prices to fill rooms.

Duetto even monitors weather patterns.

Weather can particularly figure into calculations for properties like beach and mountain resorts. "If you have a particularly beautiful or bad weather forecast, it can impact last-minute demand as well as cancellations,'' Bosworth says.

One of his clients in Palm Springs, Calif., discovered that when the weather there was clear, but cloudy or rainy in Los Angeles or San Diego, occupancy could spike 20% to 30%. Knowing the forecast, the hotel could raise room rates or roll back discounts for those dates.

For hotels, it's not just a matter of setting the right price for a room, but convincing guests to book through the hotel directly, rather than a third-party site, like Hotels.com or Orbitz, which try to offer cheaper rates and require hotels to pay a fee for the bookings steered their way.

"Over the last five years the commissions paid to those third-party intermediaries have been growing at roughly twice the rate of (revenue) growth'' for the hotels, Bosworth says. Making guests want to book directly with the hotel hinges on various factors, including improving the hotel site's experience and "getting the pricing right.''