The Price is Right: Getting the right price for your upgraded room types

Just for a split second, let’s imagine we don’t actually work in hotels. I know, it’s hard right? We hoteliers have a somewhat skewed view of what it is like to be a guest. Our insider knowledge about operations, pricing strategies, and guest behavior often makes it difficult to fully relate to the unassuming experience of a typical traveler. For most of us, the first day on the job in a hotel is your last day as a guest. You are suddenly privileged to a plethora of information that makes it all but impossible to go back to the good old days of just checking into a hotel and enjoying yourself. And it’s even worse for Revenue Managers. We know things that make the booking process seem like one big scam. You must be the most profitable guest for the hotel or risk not getting a room at all. Things like minimum lengths of stay in which our fellow hotels tells us they are “sold out” if they don’t feel like we are the best guest for their last few rooms.

Now that we have taken our hotelier shoes off, let’s book a hotel room for an upcoming family vacation. If you are like most travelers these days, your first resource is most likely the internet. In fact, studies show that over 80% of travelers use online platforms to research and book accommodations, with mobile bookings accounting for nearly 40% of these transactions. This growing trend highlights the importance of digital accessibility and convenience in the modern traveler's decision-making process. You log on to your favorite hotel brand website or maybe an online travel agency such as Expedia, plug in your dates, and click the button that will tell you whether or not you can afford to take this much needed vacation. Suddenly, like being smacked in the face with something wet, you are provided endless options for your brain to digest. Not only must you make the difficult decision on whether or not to book the unrestricted rate or take the leap of faith and book the restricted and non refundable rate, you must also choose what room type would be the best fit.

Should I pay $50 more to get the room that is 50 square feet larger? Do I need a bathtub? Can we make one bed work? Will the hotel offer me a better deal for an upgrade if I wait until check in?

All of these questions run through the minds of our valued guests each and every time they book a room with us. As a hotelier we know that our inventory is perishable and as a result we have only one question and it’s a pretty simple one. Am I getting enough money for my premium rooms? This question is crucial because premium rooms often represent a significant portion of a hotel’s revenue potential. Ensuring these rooms are priced appropriately can maximize profitability while balancing guest satisfaction and market demand.

Each time I start working at a new hotel I often find the answer to this question is no. In the following case study, I will explain a simply strategy to ensure any* hotel can change this answer to a resounding YES. Restructuring your room type differentials, which refers to the pricing gaps or distinctions between different categories of rooms, can have an immediate positive impact on your overall RevPAR.

*Any hotel that has more than one room type and/or has noticeable differences between room types

The Implemented Solution:

The first step to implementing a solution is to analyze your current occupancy by room type for the last 12 months. This provides a comprehensive view of trends and patterns, helping to identify which room types are performing well and which may require adjustments to optimize revenue and occupancy rates. You can do this pretty simply assuming your PMS system has robust reports, such as those that provide detailed breakdowns of room nights and ADR by room type. If your PMS lacks this functionality, you could consider exporting raw booking data and using Excel or another analysis tool to manually calculate and organize the needed insights. You can easily compile the information and utilize formulas in Excel to calculate the occupancy percentage by room type as shown below.

The formula to calculate this is the number of rooms available for the given period (total nights each room was ready to be sold) divided by the number of rooms occupied during the same period (nights rooms were actually booked by guests). In this example, the standard room had 3139 occupied room nights in Quarter 3. With a base of 37 rooms in this category and 90 days in a quarter, there were a total of 3330 nights in this period for this room type (37*90=3330). Occupied nights (3139) divided by total nights available (3330) is 94.26% occupancy for this room type. Complete this calculation for each room type in your hotel.

Our Deluxe room ran at 89%, Double at 83%, Junior Suite 80%, One Bedroom Suite at 82% and One Bedroom suite with Water view at 90%.

The next step is to find the ADR for this same period for each room type.

Once we determined the ADR and occupancy by room type, the next step was to compare this to our current room type differentials. In the chart above, the last column displays the standard price differential from the Standard room type. By analyzing these figures, we can identify patterns, such as whether premium room types consistently achieve their expected price differential or if certain room categories underperform.

As most hoteliers understand, the actual differential achieved is sometimes very different than the standard differential. This discrepancy often results from "complementary" upgrades performed by reservations and front desk staff members for loyal guests, standard room type overbookings, or as a service recovery method. Identifying these trends helps to pinpoint operational areas that might require adjustments to maximize revenue.

To better interpret this data, use a formula to subtract each upgraded room type ADR from the ADR of the standard room to find our Actual Differential amount. For example, if the ADR of a standard room is $100 and an upgraded room type's ADR is $120, the actual differential is $20. Incorporating this into your analysis allows you to compare expected versus achieved outcomes effectively.

Additionally, let’s bring our earlier-determined occupancy percentages into the chart. Highlighting these percentages alongside ADR and differentials provides a clearer picture of how room types are performing. For instance, a high occupancy rate coupled with a smaller-than-expected differential might indicate demand-driven pricing opportunities or the need for stricter upgrade policies. Identifying these insights can guide strategic decisions to enhance both revenue and guest satisfaction.

As you can see from our results above, we ran at high occupancies in our upgraded room types but were not necessarily getting the price we were asking for. This is mostly due to heavy overbookings in both the Standard and Deluxe room types.

With the information above, it’s easy to see that we may not be charging enough for our upgraded room types. If a hotel has occupancies below 70% in their upgraded room types, I would say they may be charging too much for those room types, however, we ran at 80% or above for each room type in this example. The best example that tells us we are not getting enough money is our One Bedroom Water view suite. As you can see, we ran 90% in this category and yet we only achieved an actual differential of $56.28. With demand so high, we can surely achieve a higher differential than this.

It is at this point that you are ready to determine your new differential structure. A lot of things come into play when deciding this. Most hotels will simply increase or decrease each differential by a certain amount given their specific goals or budgets. I would suggest shopping around your compset to find out how much more they charge per square foot/added amenity in each upgraded room type to ensure you are still being competitive with your new structure. At our hotel, we determined that our upgraded room types were underpriced compared to our main competitors and outlined a new structure based on that data and the data we have determined so far as demonstrated in our charts. The best part about determining a new structure is that is fairly easy to test out and revert if the new structure is not working as intended. Our new structure is shown below.

The next and last step is to make the actual changes in your PMS and CRS systems. Be sure to alert your front desk and reservations teams on the new differential amount as they sometimes manually calculate prices for upgraded room types. Also, you may not be able to change the differentials for corporate negotiated accounts as these are normally only submitted once very one or two years. Just remember to update your differentials during your next RFP season.

How Results Were Measured:

Our hotel implemented the room type differential changes at the end of a physical quarter, making it easier to measure results. I would recommend you do this as well or at least wait until the start of a new month. The success measurement is pretty straight forward. For the first few days, make sure to check in frequently with your reservations and front desk teams to see how the new differentials are working out. Our reservations team said they received no additional push back from the increased differentials which was a great initial sign. Other than that, just sit back and wait for your RevPAR to increase. You may want to update the tracking sheet we created previously at least once a week with actualized production by room type, including room nights and ADR.

After the conclusion of the period you are measuring the results for (could be 1 week, 1 month, or an entire quarter) it’s time to get some official results. Compile the same results as you did during the preparation phase, this time for a period in which the differentials were changed. Our results are shown below for the entire quarter following the change.

As you can see, in this example, we did not lose very much in occupancy for our upgraded room types which is a very good sign when measuring your results. What we did manage to do was greatly increase our differentials from Standard to Deluxe. Although our Double differential is about the same, we also managed to increase all the other room type differentials.

To put these results in to actual physical revenues is pretty simple. First, find the difference between your prior period actual differentials and your measurement period differentials as shown below.

Now we can simply multiple our occupied rooms in the measurement period by this difference to get an actual increase in revenue for the period.

Specific Results:

For our specific property, the change in differential structure resulted in $107,015.78 in revenues

All in all, it is important that you are getting the right differential for each of your upgraded room types. Test things out to see what works, shop your competitors, and decide if you are leaving money on the table. Revenue Managers often make changes to their BAR structure, pricing strategy, and OTA distribution channels but sometimes overlook the extra cash sitting right in front of their faces. Just remember, the easiest and fastest way to increase RevPAR is getting guest to book and stay in your existing upgraded room types. This often does not require any investment (besides your time) and will most likely result in additional revenues you did not have before. Talk about ROI!