Strategic Pricing: Is It Better to Start High and Lower Prices or Start Low and Increase Them?

In the competitive hotel industry, pricing strategies are essential to maximizing revenue, especially during peak demand periods like local events, holidays, or high tourist seasons. A common dilemma faced by hotel managers is whether to start with high prices to capitalize o

n early demand and then lower them as the booking window closes, or to begin with lower prices and increase them over time as demand builds. Both approaches have their advantages, but which one is more effective in optimizing hotel revenue? Let’s dive into both strategies and evaluate their pros and cons.

1. Starting High and Lowering Prices: Capitalizing on Early Bookings

This strategy involves setting high prices at the outset, leveraging early demand from travelers eager to secure rooms for upcoming events or peak seasons. As the date approaches and availability remains, prices are gradually reduced to sell off any remaining inventory. This approach is common in markets with high early demand, such as during large conferences, sports events, or local festivals.

Advantages:

• Maximizes Revenue from Early Bookers: Early travelers or those with specific plans may be willing to pay a premium for certainty and guaranteed availability. By setting high prices initially, you can capture this demand and secure early bookings at a higher rate.

• Perception of Value: Starting with a high price can create an impression of exclusivity and luxury, encouraging customers to perceive your hotel as a premium choice. This can appeal to guests who prioritize booking early for peace of mind.

• Reduced Risk of Underpricing: Starting high allows you to capture more revenue upfront, which can be beneficial in offsetting any losses when the prices are eventually dropped.

Disadvantages:

• Potential Loss of Early Sales: Some guests may be hesitant to book at high prices, especially if they think there will be discounts closer to the event date. This could lead to fewer bookings initially, especially from price-sensitive customers.

• Brand Perception and Trust Issues: If you lower prices later on, guests who paid the higher price may feel they overpaid, which can harm brand loyalty and trust. Frequent price reductions can also lead to customers waiting for discounts instead of booking early.

2. Starting Low and Increasing Prices: Building Demand Over Time

This strategy involves beginning with lower prices to attract early bookings and drive momentum. As the event or peak season approaches and availability becomes more limited, prices are gradually increased. This approach works well in markets where demand builds over time as the event date nears or where customers are looking for a bargain but may be willing to pay more as scarcity increases.

Advantages:

• Attracts Budget-Conscious Travelers: Starting with lower prices can attract more price-sensitive guests who may be more likely to book early. This can help fill rooms quickly, particularly in markets where guests are driven by deals and affordability.

• Stimulates Early Bookings: Offering a low initial rate can encourage bookings early on, giving you a solid base of guests before prices increase. This can be particularly effective if the event or season is still months away.

• Creates Urgency with Gradual Price Increases: As prices rise closer to the event or season, guests may feel a sense of urgency to lock in a reservation before prices go higher. This can drive bookings as the event draws closer, ensuring a steady stream of guests at higher rates.

Disadvantages:

• Initial Loss of Potential Revenue: Starting low means you may miss out on revenue from guests who would have booked at a higher price early on. This could result in lower overall revenue if you’re unable to raise prices quickly enough as demand increases.

• Perception of Lower Value: Beginning with a low price might signal to some customers that your hotel is less desirable or of lower quality. This could impact bookings from guests who might otherwise have perceived your property as a premium option.

• Risk of Undercutting Demand: If you increase prices too quickly, guests who initially booked at the low rate might feel misled or dissatisfied. Additionally, if demand doesn’t build as anticipated, raising prices too soon could result in a slower rate of bookings.

Which Strategy Is More Effective?

The answer depends largely on the type of hotel, your target demographic, and how predictable the demand for your location or event is. Here are a few factors to consider when deciding which pricing strategy will work best for your property:

• Demand Predictability: If your hotel is located in an area where demand is relatively predictable (such as in tourist hotspots during a busy season or near a major event), starting high and then lowering prices might be the best choice. You can take advantage of early bookings while gradually clearing out remaining inventory at lower prices as the event nears.

• Guest Sensitivity: If your target guests are more price-sensitive or are looking for a deal, starting with low prices and gradually increasing them might be a better approach. This is especially true if your property is in a competitive market where guests are comparing rates across multiple hotels.

• Market Competition: If there’s a lot of competition in your area, starting low might be the key to attracting more guests early on. However, if your hotel offers a unique experience or a premium service, beginning with higher prices could be more effective in positioning your property as a high-end option.

The Hybrid Approach: Dynamic Pricing

Rather than sticking strictly to one strategy or the other, a dynamic pricing approach might be the most effective solution for many hotels. This involves adjusting prices based on demand, competitor pricing, and availability in real time. For instance, a hotel might start with moderate prices, increase them as demand starts to build, and then lower them closer to the event if there are still available rooms to sell. Dynamic pricing offers flexibility, allowing hoteliers to adapt to changing market conditions and maximize revenue at every stage of the booking process.

Conclusion: Balancing Both Strategies

Ultimately, there is no one-size-fits-all answer when it comes to hotel pricing. Whether you choose to start high and lower prices, or begin low and gradually increase them, depends on your market, customer behavior, and overall demand patterns. However, by combining elements of both strategies or using dynamic pricing, you can optimize your revenue potential and ensure your hotel is booked at the best possible rates.

In a market where customer expectations are constantly evolving, flexibility and the ability to respond to real-time demand are key to maximizing profitability. By monitoring trends, understanding your guests’ booking patterns, and being proactive with pricing adjustments, your hotel can stay competitive and profitable, no matter what the future holds.