Virtual Haggling Over a Hotel Suite

Everyone expects a car dealer to make offers and counteroffers as they read your responses. The same thing now happens online when booking a hotel room.

 

When you are purchasing a car you expect a certain amount of back and forth with the salesperson. They might suggest a certain model, trim level, package or accessory in the hopes that you will value it highly enough to buy at their opening price.

What happens if they see that you aren't interested? Often they will reduce the price, trying to come up with a number more closely aligned to the value you place on what they are trying to sell.

This is called differential pricing and it means selling the same thing to different people at different prices depending on how they value the product. The goal for the seller is to get as much from each buyer as they are prepared to pay, and that means adjusting prices. They will go lower if that is what is required to secure a lower margin, but still profitable, sale.

The same thing happens online in a kind of virtual haggling. Take a look at this screenshot, taken in the early stages of trying to reserve a hotel room. (also look for the great way they invoke the scarcity principle)

As you can see they suggest two upgraded rooms:

2 Double Beds Executive Floor
This upgraded room is priced at $169, a $30 premium over the standard room rate of $139.

1 Bedroom Suite With Sofabed
This suite is priced at $239, a $100 premium over the standard room rate of $139.

 

Travellers who place a high value on upgraded rooms or the associated amenities are likely to select one of those options. They pay the full price, which in this example could also be considered the "opening offer".

But what about a business traveller that just needs a place to stay? What happens if you choose the cheapest $139 room? Does the hotel settle for that or, like a good salesperson, do they make a counteroffer?

After you have committed to the least expensive room and completed the reservation this is what they show you – a second chance a upgrading:

See what happened? Just like the car dealer that waits until you are ready to walk out the door and then makes a counteroffer they now offer you lower prices on those same upgrades.

2 Double Beds Executive Floor
This upgraded room is now offered as $25 option, a savings of $5 over their original.

1 Bedroom Suite With Sofabed
This suite is now offered as a $75 option, $25 less than their original offer.

 

Everybody gets a second chance. They traveller that is somewhat interested in an upgrade, just not enough to pay full price, now has a chance to purchase the upgrade at a lower price. The hotel also benefits. Sure – they would have preferred to sell those rooms at full price, but they'd rather offer a discount than let those rooms sit empty.

But how does the hotel avoid cannibalizing sales? How do they stop the people who really value upgrades (and are prepared to pay full price for them) from selecting the cheap room and then pouncing on the cheaper upgrade option?

They introduce a hurdle. This is the caveat that goes along with the upgrade offer:

The hurdle is that the upgrade is not guaranteed. You only get the upgrade if it is not sold to someone else.

This protects the hotel in two ways. First it lets them keep trying to sell the upgraded room at full price to someone else. If they do... great! They get more revenue and higher profits. If they don't... still good. The upgraded room still gets sold and, while they are settling for a little less money, revenue and profit are still better than with a standard room.

It also helps prevent cannibalization. If a traveller really values the upgraded room they aren't going to risk losing it to save a few dollars. They would rather just pay full price.

It is a great approach to revenue management that lets the hotel stream travellers according to how much they value their product and charge them accordingly.

Sponsored by FloristWare – Flower Shop Software

Beyond Cost Plus is sponsored by FloristWare: Fully-featured flower shop software that saves you time and money while increasing sales – without costing you an arm and leg or tying you to a wire service.

FloristWare – flower shop software/POS system.

Related Material

Proof There Is More To Pricing Than A Cost-Plus Formula

Still clinging to a cost-plus pricing formula? Here is more proof that the biggest and most successful companies have moved beyond cost plus.

Pricing Lessons From The Travel Industry

The travel business is tough, and they survive by innovating. Other industries can benefit from their research and experience.

Boxing Day Sales

A new addition to our resources section illustrates some of the sophisticated pricing concepts involved in Boxing Day sales.

Volume Premiums - More Isn't Always Less

Volume discounts don't always make sense. Charging a higher per-unit cost in a larger pack size contradicts the traditional cost plus pricing model but offers vendors a great way to increase profits.

In-Room Internet Access at Hotels

Hotels employ some advanced techniques when pricing in-room internet access - but are they being too greedy?

Boxing Day Sales

A surprising real world example where identical products are offered for every different prices just feet from each other in the same store.

Same Product, Same Store, Different Price

A surprising real world example where identical products are offered for every different prices just feet from each other in the same store.

The Diminishing Marginal Utility of Popcorn

Movies theatre popcorn pricing employs some very sophisticated strategies that are worth looking at.

Real World Pricing: At the Movies

A movie theater showcases many advanced pricing strategies including pricing that accounts for the diminishing marginal utility of popcorn and entices us to buy more than we could ever enjoy.

Diminishing Marginal Utility and Fresh Baked Brownies

Fresh-baked brownies illustrate the concept of diminishing marginal utility and how pricing to increase demand despite that.