How Hotel Pricing Really Works

hotel room by the beach_hotel ratesYour flights are booked. Itineraries are in the works. Now it’s time to book your hotels. You begin your search only to be overwhelmed by all the possible choices. Not only are there too many hotel options, but once you choose, you still have to decide how to book that room. Comparing rates across multiple sites will undoubtedly give you a headache—and unfortunately, that is intentional. Travel booking sites like Expedia and Booking.com are designed to capitalize on your confusion. We’ve talked about that before, but today, we’re going to help you understand the science behind the hotel rates themselves.

We’ll break down how hotels go about pricing their rooms, how rates differ across sites, and how to know when and where to book. Armed with this information, you’ll know exactly what to look for next time you book a hotel.

How Hotels Determine Room Rates

Calculating Room Demand

We’ll start with some basic economics: how hotels predict the demand for their rooms. As with all products, hotel rooms are priced based on a supply and demand structure. What’s unique about hotels (and flights too) is that hotel bookings are “perishable products.” Once a date rolls around, every room that wasn’t booked for that night perishes. Because of this, it’s more difficult to price hotels than products with longer shelf lives, like a pair of shoes. Hotels need to use a highly sophisticated system to price their rooms.

Hotel prices are put through a rigorous prediction process. The hotel looks at the past year’s demand and compares it to larger trends that correlate with the hotel industry. These trends include the health of the country’s economy, how much their competitors charge for similar rooms, and even weather patterns. The ultimate goal is to forecast how many people will choose to stay in that hotel on any given night.

The hotel also looks at the booking history for their specific location. Essentially, the hotel asks, “If we expect 100 people to stay at our hotel on May 1, how many of those reservations will be booked three months, two months, one month, or two weeks out?” Using complex algorithms to determine this “booking curve,” hotels are able to predict how much their location will fill up each night of the year. If these calculations don’t predict an expected occupancy, the hotel might decrease the price of their rooms.

Pricing Hotel Rooms

So, what does all this mean? We asked Roomkey CEO Steve Sickel, who was also an IHG executive for 13 years, to help explain.

“The punchline is that there are a ton of things that affect the price of any given hotel room. Trying to time the demand and optimal pricing is very difficult. The more information a hotel has, the better they can predict the futurewhich is the goal.” – Steve Sickel, Roomkey CEO

One way hotels can predict future bookings and optimize their booking curve is by offering advance purchase rates. With this option, travelers can book a discounted rate for their hotel room. The trade-off is that you have to pay upfront and can’t cancel or get a refund. The discounted rate comes at the cost of your flexibility. But if you’re certain you’ll make the trip, the lower rate is usually worth the inability to cancel.

Advance purchase bookings help hotels. If they get more people to lock in their stays early on, they can better predict the booking rates for the remaining rooms later. Let’s step into the mind of a hotel manager. Their thought process is, “If I can sell 60% of my rooms at least 30 days before check-in, then I can price optimize the remaining 40% since I know I will at least have over half of the rooms booked.” It plays to their benefit (and yours too) when they offer lower rates for early bookings.

Changing the Price

Sometimes hotels will increase the price for a room when they know they will see an uptick in rooms booked. Take annual events or holidays, for example. If a New York hotel knows that every year they book to capacity on the day of the Rockefeller Christmas tree lighting, they know they can raise the price of their rooms and still get enough bookings to sell out.

On the other hand, some hotels decrease the rate close to arrival if they aren’t seeing their expected occupancy. Sometimes you’ll see hotels flashing lower rates a few days before a check-in date. For example: If a hotel expected 80% occupancy one week prior to check-in but has only reached 70% once that week rolls around, they might try to offer lower rates so they’re more likely to fill the rooms. This is how Airbnb’s HotelTonight site operates. They get their inventory from hotels who are eager to sell rooms close to arrival dates. You can only book last-minute rooms on this site, but you can usually do so at a lower price than if you had booked that same room a month before. This makes planning quite difficult, but some travelers will take the risk in hopes of saving a few bucks.

Varying Rates by Room

When you view a particular hotel, you might think that every King room at that location has the same price. But that’s not the case since each room has different rate types and different perks. Normally, a hotel room with a beach view will cost more than one with a parking lot view. Each room has its own price along with alternate prices for advance purchase bookings and loyalty rates. (We go into more detail about loyalty rates here.)

Each of these metrics (and a few more that we didn’t mention to save your sanity) are calculated to create predictions for occupancy at various pricing levels to generate the ideal price for each room. Hotel pricing can vary throughout the year because these metrics change regularly. The software is constantly recalculating to keep up with real-time data. To stay on top of this, hotels usually post room prices 366 days (or one year and one day) in advance of the check-in date and sometimes change this price daily until the arrival date.

What About Third-Party Sites?

A common misconception about sites like Priceline and Hotels.com is that they are “discount” sites. This actually isn’t true, due to contracts called price parity agreements.

Nearly all hotel companies have rate parity clauses in their agreements with third parties who sell rooms on their behalf like Travelocity, Orbitz, etc. These clauses say that each party agrees not to publicly sell a lower price than the other—forcing the online travel agency (OTA) to sell the same rate as the hotel. This is the reason that every OTA claims they have the “best” price: because it’s the same price as the other best price.

It’s confusing, right? Technically, saying they have the best rate isn’t a lie or illegal, but it’s one of many OTA sales gimmicks that can confuse the customer.

But what if you do find a lower rate from an OTA? This is usually because a non-public rate was leaked into the listings. Sometimes hotels offer wholesale rates to OTAs for rooms that get sold as a package deal with a flight or a rental car. The hotels require that the site doesn’t explicitly show the lower rate. Instead, they can display that the package as a whole is cheaper than each item purchased separately. You don’t know which item is offered at the lower cost or by how much; you just know that the total is lower. On rare occasions, a room is listed at that lower wholesale rate without the bundle. This is against the parity rules but sometime slips under the radar. If you see one of these rates, you’re one of the lucky few because this was almost certainly an error.

When Should I Book To Get the Best Rate?

We have some tips for when you should book your hotel but there really is no magic day like there is for flights. In fact, conventional wisdom still remains: booking earlier is still better than booking last minute. Hotels want to have a fully optimized booking curve but they can’t if everyone waits until the last minute to book. So, they offer lower rates, advance purchase pricing, loyalty member benefits, and other deals to encourage travelers to book in advance.

However, there is a best place to book, and that is almost always directly with the hotel. Unlike third-party OTA sites who take your booking, our platform allows you to search among thousands of hotels before booking direct. When you’re ready to book, we take you directly to the hotel site where you’ll secure your room and rate (which you now know all about!).

Hotel pricing certainly is a complicated subject. That’s why our partner hotels handle the pricing, so all we have to do is show you the lowest rate for each hotel. We show you straightforward prices and truthful information so you can feel confident in your booking decision. Now, let’s start planning your next vacation!

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