Trivago: Why hotel competition based solely on price is not a good strategy

When hoteliers are trying to attract new guests to your property, it can be enticing to use price as an incentive, businessblog.trivago.com notes in the following recent report:

After all, competing on price often feels like such a natural path to follow. But competing on price alone is a risky proposition. Thus, to ensure a maximum and sustainable competitive edge, other factors should be taken into consideration and should be adapted in parallel with your pricing.

Why focusing only on price is risky:

Here, we discuss why competing on price alone, is not a good strategy for hotels who want to win loyal, long-lasting guests.

You might lose your value proposition

A competitive pricing strategy involves setting room rates based on competition rather than on guests. While setting prices based on your competition can make you a strong contender in attracting price-sensitive customers; setting your prices based only on this strategy can be risky for not only your business but also your reputation. Let us tell you why.

Firstly, competition-oriented pricing is based on the presumption that your competitors are priced correctly, thereby taking power completely out of your hands. Since you set your room rates based on your competitors’ rates, this leads to ignoring your own unique positioning. There are chances that you rate your rooms at a much lower price than what you offer, thereby facing revenue loss. On the other hand, you might rate your rooms and services at a much higher rate than your offer, thereby indulging in price wars without offering anything substantially valuable to your guests. Understandably, when your guests won’t find value for their money when they stay at your hotel, they’ll be more prone to leaving negative online reviews, thereby affecting your business and image.

Secondly, it makes you ignore your value proposition. Value propositions are the core to growth for any brand, but pricing based solely on the competition can make you lose your value proposition. What’s the worst part of price war is that you’ll never be able to win loyal customers as low-price guests are usually loyal to prices than to hotels.

Therefore, while setting rates, you should assess your own position within the market and consider linking competitive pricing strategy with some other pricing strategies.

You might face financial instability

When competing on price, you tend to set low prices for your rooms which translates into earning narrow profit margins, which translates into less cash flowing around your company. With such a small financial cushion, you’re more vulnerable with every slight increase in costs or unexpected costs, say emergency boiler replacement at your property. In such a situation, you might be forced to look out for ways to reduce costs.

The first thing that might come into your mind, as a hotelier, is to reduce benefits and wages for your employees or to cut down on quality services, like an impressive breakfast spread, for your guests. In both of these cases, you run the risk of hurting your business. Your employees are less likely to remain as productive and motivated. Also, your guests might not like to come back to your hotel as a result of poor offerings and inferior customer service.

Competing only on price can hurt you in the long run

Hoteliers start price wars to win market share, sometimes not as a result of careful analysis, but because of their competitive instinct kicking in. A price cut can lead to a shift in market share which proves to be helpful for some time. But what if it doesn’t shift at all or it reaches a saturation point? In this situation, you’ll not have a sustainable cost advantage as you give your customers a big discount and hurt your bottom line.

Moreover, due to price wars, you miss out on your chances to grow as it’s difficult to get out of cutting-price strategy. tutor2u, in its evaluation of Price Wars, says, “Price wars are nearly always bad news for the majority of businesses that get locked into them.” Consequently, a low-price winner might win that battle but can never win the war as it’s not a sustainable model.

Ways to optimize your competition strategy:

Here, we show you how you can build a consumer-oriented pricing strategy while improving demand to gain a competitive foothold in the market:

Rethink pricing strategy from the consumer perspective

It isn’t easy to price something. It’s where a lot of hoteliers get stuck. Sometimes, they assign an arbitrary rate to their rooms that just barely turns into profit. Some hoteliers focus only on competitor-oriented pricing, thereby ignoring the consumers. Therefore, having a proper revenue management strategy is important as it helps you strategically price your rooms and other services.

Many factors shape the pricing decision, but fundamentally good revenue management exists when there is a positive correlation between hotel prices and occupancies. This means that when occupancy is high, the rate should be raised and when occupancy is low, the rate should be dropped. Through this dynamic pricing system, you should try to achieve a balance between underpricing and overpricing by adjusting room rate with response to demand and supply.

As a part of your revenue management strategy, it is also important to understand your offers and your market to implement value-based psychological pricing. EyeforTravel, in its study, The Pricing Puzzle notes, “While cost will always have some impact on pricing, for core products like rooms, the hospitality and travel industry has moved beyond pure, cost-based pricing where margins are fixed. Rather they have shifted to a more dynamic model which take a customer’s willingness to pay into account where margins can change with the market.”

This type of pricing entails assessing the value of your offer and also, understanding your customers’ behaviors and lifestyle. The next step is to communicate the value to your potential and current guests. Such a customer-based strategy is about pricing your rooms and services according to perceived value. And, this brings us to our next factor with which you can raise the value of the overall experience of your guests.

Make quality your selling point

According to Tourism & Hotel Competitiveness Research, “Value perceived by customers in the hospitality setting combines elements of both price and a customer’s expectations for service experience.” And, in order to communicate with your guests that the best price doesn’t equal the best value, you have to optimize your offerings and customer service as per the rate at which you offer your room. This implies ensuring guests derive ultimate value for what he/she’s paying by offering tangible benefits, like an on-site gym, sauna, or spa; quality of food, free parking, safety and security, room cleanliness and comfort, and in-room amenities including plush pillows and towels, complimentary refreshments, and so on.

To reinforce this point about quality, another very essential approach is to provide a level of customer service your competitors can’t match. Prompt and courteous service quality and friendliness of hotel staff are of utmost significance to ensure your guests get value for their money and you enjoy a high level of customer satisfaction. This also builds trust and often leads to repeat business and referrals for hotels. As a hotelier, your aim should be to take your unique approach and focus on providing value that will help you avoid competing only on price. You should also focus on improving your hotel’s online reputation to influence travelers and your potential guests.

Give incentives to new as well as loyal customers

Running attractive loyalty programs guarantees repeat business for your property, and also, high revenue gains, as pointed out by PwC in its Consumer Intelligence Series. The report also makes an interesting observation on how customer preferences drive loyalty, “After room quality and location, business travelers value loyalty benefits over room price—not surprising, since their companies typically cover room price on a business trip but loyalty points add up to free nights as a leisure traveler over time.”

Furthermore, your initiatives to foster guest loyalty and inspire repeat bookings can also help you attract, convince, and delight first-time guests as well. Such efforts include implementing personalized Email marketing campaigns, adding small personal touches to enhance the guest experience, streamlining operations, and facilitating feedback-sharing processes.

Not only this, you should offer special deals to your potential guests to make them choose you over your competitors, like free airport shuttle, complimentary breakfast, fruit basket on arrival, and so forth. One way to do this is through trivago’s Special offer feature. Here, you can find popular Special Offer templates, viz. free service, discounted service, or a nice gift and promote special offers.

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