Open Pricing Strategy for Hotel Revenue Management: Concept, Advantages, Tools, and Implementation Steps
As a hotel revenue manager, one of your key responsibilities is creating a pricing strategy tailored to the property and its market. Many hotels still rely on a fixed pricing strategy that uses a tiered pricing system based on room types. However, this strategy fails to consider the demand and often presents room rates as the same. With the open pricing strategy, hotels can remove these restrictions, set independent room rates, and drive higher revenue.
You can check out our video about revenue management before starting to read this post.
This article explores the concept of open pricing and how it can benefit hotels that implement it. You’ll learn how the open pricing strategy is different from a fixed-tier BAR (best available rate) strategy and where it sits in the dynamic pricing environment. Last but not least, you’ll also discover how to implement open pricing and what technology exists to bring it all to life.
What is an open pricing strategy?
Open pricing strategy, when applied to hospitality revenue management, refers to a flexible pricing approach that enables property managers to adjust room rates based on demand and factors that influence it such as the day of the week, seasonality, and competitor pricing, to name a few.
Ira Vouk, author of Hospitality 2.0 and hospitality technology and revenue management consultant, elaborates on the definition, “Open pricing strategy involves not only setting adjustable rates for different room types based on demand, but it also enables you to flexibly price additional products and decide on the rates for various channels you sell your reservations through.”
is about setting a price for a product or service based on current market conditions that drive demand.
“Dynamic pricing is just the concept of the change itself as opposed to not changing your price at all, which still happens in a lot of cases where hotels have the same rate across the whole winter season,” Ira Vouk says, “Many properties still don’t adjust their prices based on demand.”
Dynamic pricing is a broad category that includes a traditional BAR approach and a flexible open pricing method.
BAR approach vs open pricing approach
BAR: Best Available Rate
BAR (also known as rack rate) is a type of dynamic pricing where a hotel sets the lowest fixed price for a standard room type. To calculate rates for all other room types, a hotel uses modifiers — a predetermined amount added to the base rate either as a percentage or as a fixed fee. Discounts and promotional rates are also fixed and calculated as percentages from the rack rate. While the BAR can be dynamically priced in real-time depending on supply and demand, all the other related rates are not.
Let’s consider Sunshine Hotel, which employs a fixed-tier revenue management strategy with the BAR method. Assume the hotel offers a promotional rate for corporate guests at 15 percent less than BAR, and an OTA package net rate might be 20 percent less. On ordinary days, the BAR is $150, with the promotional rate being $127.50 and the OTA rate resulting in $120. If BAR jumps to $200 on a compressed date, other rates move in lockstep: The promotional rate becomes $170, and the OTA rate — $160, respectively.
For other room types, the rates are determined by preset differentials, which remain unchanged. For example, a twin room might have a pre-set differential of $20, making its rate $170 ($150 + $20). A suite might have a pre-set differential of $50, making its rate $200 ($150 + $50). For corporate guests and travelers that book through an OTA, the discounts are applied to these adjusted rates accordingly, resulting in different prices for each room type and customer segment.
During a major city event, the BAR may be raised to $200 per night for the base room type, while discounts and differentials for other room types remain constant. Corporate guests pay 20 percent less — $170 — and OTA discounts are still at $160. The hotel is left with one choice — to sell rooms at these prices, which may be too low for such a high demand, or close these two discounted channels and not sell via them at all.
But what if a potential guest is okay with getting smaller discounts?
Say our Sunshine Hotel is a beachfront hotel offering two room types: ocean-view rooms and garden-view rooms. Tourists typically seek picturesque ocean-view rooms so the hotel sets a higher price for those accommodations. As a result, the usual price difference between ocean-view and garden-view rooms might be $75.
Now imagine that the major city event we were talking about earlier is an annual week-long garden festival in the area. The demand for garden-view rooms increases substantially, while ocean-view accommodations experience a drop in demand. That’s when the hotel needs a more flexible model than BAR to increase the price of garden-view rooms for guests who specifically desire those accommodations during the garden festival and offer greater discounts on ocean-view rooms for price-sensitive travelers who can enjoy their stay in a hotel without garden views.
Taking all of these things into account, our Sunshine Hotel adopts an open pricing strategy that offers a flexible discount structure and pricing for different room types based on demand, distribution channel, and individual customer preferences. Rather than rigidly setting specific rate percentages for each category and room type, the hotel decides on a range of flexible price points for different room types and customer segments. As opposed to using BAR with a handful of rate tiers that may change once per season, the hotel now can offer granular pricing based on demand with a lot of price points.
With open pricing, the base rate for the standard room type won’t necessarily be $150: It may be $152 or $199. All guests still receive promotions, but the percentage of discounts may be adjusted per needs.
When demand surges during the annual garden festival, the hotel can set prices and discounts dynamically for all room types. For example, since the demand for the garden-view rooms is higher, the base rate for this room type will also increase and be set to $250. The hotel may then offer corporate guests a smaller discount of 5 percent, charging $237.50, while people who booked via an OTA might receive an 8 percent and pay $230.
Additionally, the hotel can now flexibly adjust rates for ocean-view room types as they experience a drop in demand. The hotel can offer higher discounts on those rooms for price-sensitive guests who don’t particularly care about the garden view.
To summarize, with open pricing, you take demand as the key driver of your strategy and choose between an infinite number of factors when setting rates. In the strict BAR-level approach, you select from a limited number of values assigned to specific rates. And both methods can be put in the dynamic pricing category, with the critical difference between them lying in the degree of flexibility and the range of factors considered when setting room prices.
Open pricing advantages and challenges
Here comes the question: Is open pricing a silver bullet for every single hotel out there? Pretty much. In one way or another, everyone can benefit from implementing open pricing.
“It’s just common sense,” says Ira Vouk, “If a property is still using a limited BAR approach, the property is losing money, regardless of the type, the market, the region, the amount or the type of inventory.”
But, of course, as with any other strategy, open pricing has its pros and cons.
Open pricing advantages
As mentioned earlier, open pricing offers numerous benefits to hotels. Here we explore the key advantages of implementing an open pricing strategy in the hospitality industry.
Ability to optimize revenue. Open pricing allows hotels to set room rates based on demand, guest segments, and distribution channels, enabling them to maximize revenue during peak seasons and increase occupancy during low-demand periods. By adjusting prices in real-time, hotels can ensure they are always offering competitive rates, attracting more customers, and increasing overall revenue.
Better inventory management. By continually adjusting room rates based on demand, hotels can allocate their inventory more effectively, attracting bookings for room types with higher availability and encouraging guests to choose alternatives when certain room types are in short supply. As a result, open pricing contributes to efficient inventory management, maximizing revenue while minimizing unsold rooms or missed opportunities.
Increased flexibility for pricing decisions. Open pricing provides hotels with more control over their pricing decisions, allowing them to respond quickly to changes in market conditions. This flexibility can help hotels adapt to unexpected events, such as a sudden increase in demand due to a local event or a decrease in demand due to unfavorable weather conditions.
Greater personalization for customers. Open pricing allows for more personalized pricing strategies based on real-time market conditions and customer preferences. By offering tailored rates that cater to individual needs, hotels can foster trust and loyalty among their guests, ensuring that they feel valued and confident they’re paying a fair price for their stay.
Challenges of open pricing adoption
Shifting to open pricing can present several challenges for hotels, including but not limited to the following.
Requires resources and technology adoption. Implementing an open pricing strategy requires investment in advanced technology and data analysis tools to monitor market conditions, analyze historical data, and adjust prices in real time. This can be a significant financial commitment, particularly for smaller hotels and those with limited resources.
Change management. Overcoming resistance to change and ensuring a smooth implementation process can be a daunting task. According to Ira Vouk, “One significant challenge in adopting open pricing is changing the mindset of the operators and owners of the properties, who still rely on rigid legacy PMS solutions. Despite modern, cloud-based systems being much less expensive and much easier to learn, there’s a conservative mindset and fear of the unknown that prevails in the industry, preventing them from adopting new technologies that would lead to much better revenue optimization and greater profits.”
Complexity. Open pricing is more complex than other pricing strategies due to its dynamic nature, data-driven approach, reliance on technology, need to balance multiple factors, and requirement for frequent adjustments. All of this can be time-consuming and complex, especially for hoteliers who are not familiar with advanced data analysis techniques or who still use legacy systems.
As Ira Vouk notices, “If a hotel doesn’t use a revenue management technology solution and does everything manually, it’s easier for them to grasp the BAR concept because it’s just simpler than open pricing.”
May require more frequent monitoring and adjustments. As open pricing is based on real-time data, it requires continuous monitoring of market conditions and frequent adjustments to pricing. This can be labor-intensive and may strain the resources of hotels that do not have dedicated staff or the necessary technology to automate these tasks.
Despite these challenges, the benefits of open pricing outweigh the difficulties. With careful planning, effective communication, a commitment to change management, and, more importantly, technology adoption, hotels can successfully navigate the challenges associated with shifting to open pricing.
So we’ve been talking about technology a lot without mentioning any existing solutions. Let’s fix that.
Technology enabling open pricing
According to the 2021 Skift Research, despite the increasing prevalence of advanced revenue management technology systems in the hotel industry, only a relatively small percentage of hotels (just 28 percent as of 2021) already utilize them. The good news is more and more professionals working with hotel revenue consider automation and integration as crucial factors for achieving success in the future.
Gianna Rivera, a travel distribution consultant and connectivity and content distribution executive, comments, “I think we’ve seen an influx of newer property management systems and pricing tools. But existing systems have also embarked on tech changes.”
To properly support open pricing initiatives, look for the following features in technology solutions.
Real-time data analysis. You must have the ability to analyze market conditions, customer preferences, booking trends, and competitor pricing in real-time is crucial for adjusting rates dynamically.
Machine learning and AI-driven forecasting. The tools must incorporate machine learning and AI to better predict demand and optimize pricing decisions based on historical data and trends.
Integration with PMS, CRS, and other systems. There should be opportunities for integration with property management systems (PMS), central reservation systems (CRS), and other relevant hotel technologies to ensure smooth data exchange, rate parity, and inventory control.
Customizable pricing rules. Technology solutions must allow you to flexibily set unique pricing rules and discount structures for different customer segments, room types, and booking conditions.
Performance tracking and reporting. Comprehensive reporting tools that provide insights into the effectiveness of the open pricing strategy, helping users track key metrics such as occupancy rates, ADR, and RevPAR.
Automated rate updates. This feature ensures that the most up-to-date rates are always displayed to potential customers, enabling hotels to better capitalize on demand fluctuations and market conditions.
User-friendly interface. A simple and intuitive user interface that allows hoteliers to quickly navigate and make pricing decisions with ease is a must.
Below you will find a few providers of open pricing technology in the hospitality industry.
Please be aware that we are not promoting these tools, and they are only provided as examples.
- IDeaS Revenue Solutions is one of the leading providers of revenue management software and services. IDeaS offers advanced analytics and forecasting tools to optimize pricing decisions for hotels of all sizes.
- BeonX, formerly known as Beonprice, is a revenue management solution for the hospitality industry that utilizes its proprietary Hotel Quality Index (HQI™) to analyze a hotel’s data and benchmark it against the competition. With a focus on the open pricing strategy, Beonprice’s AI-driven technology can dynamically adjust room rates based on market conditions, demand, and customer segmentation.
- Duetto is a cloud-based revenue management solution designed for the hospitality industry. It helps hotels and other accommodation providers optimize their pricing strategies using open pricing principles, allowing them to make data-driven decisions that maximize revenue and improve business performance.
- Beyond Pricing is a revenue management solution designed specifically for the vacation rental industry. By utilizing the open pricing approach, Beyond Pricing helps short-term property managers and hosts optimize their revenue through a data-driven approach.
There are more providers similar to the ones listed that offer robust revenue management solutions, utilizing real-time market data and dynamic pricing techniques. And it’s a good thing that the use of technology in implementing an open pricing approach is becoming increasingly prevalent in the hospitality industry. As more hotels and property owners recognize the benefits of open pricing, it is important to consider the best practices for successful implementation. In the next section, we will give recommendations for effectively implementing an open pricing strategy in the hospitality industry.
How to Implement Open Pricing Strategy
Implementing open pricing may appear complex, but advancements in hotel technology and revenue management software have significantly simplified the process. To ensure your hotel effectively executes open pricing, get acquainted with these steps.
Integrate hotel systems
Prior to transitioning to open pricing, ensure seamless integration of all your systems, including PMSs and CRSs.
According to Gianna Rivera, “The key challenge behind adopting open pricing is the integration and management of various technology systems required for its implementation. Hotels often deal with multiple internal systems for inventory, revenue management, CRM, loyalty systems, and distribution, which are fragmented and siloed. The biggest challenge lies in streamlining these systems and ensuring that the staff behind these functions work collaboratively to create effective pricing strategies and compelling stories for consumers to make informed decisions about their hotel stays.”
So integration is a must as it enables the systems to communicate, share data, and update simultaneously. You need to establish secure and accurate data transfer between these systems, allowing for real-time pricing adjustments and demand forecasting. While manual rate range setup by room type and date is possible without integrated systems, it is time-consuming and prone to errors. If you want to know more about PMS integrations, read our dedicated article explaining how to integrate with OPERA PMS.
Develop a pricing strategy
Analyze historical data, market trends, and competitor pricing to create an initial pricing strategy. In open pricing, you would still define rate categories, but the pricing tiers associated with each category would be flexible, allowing you to make adjustments as needed to optimize revenue. The conditions and restrictions associated with each tier would be determined based on your hotel’s specific requirements and market dynamics, enabling you to customize your pricing strategy to best suit your unique situation. You would need to consider factors such as seasonality, special events, and customer segments when developing your strategy.
Conduct regular rate reviews
Assess the minimum and maximum values quarterly to stay ahead of demand and adjust rates as needed to maximize revenue. Update room rates in accordance with forecast changes and market trends. Continuously monitor and evaluate your hotel’s performance, making adjustments to your pricing strategy as necessary.
Modify booking discounts, not channel availability
Instead of closing discount channels during high-demand periods, adjust the offered discounts. For example, if your hotel offers special discounts for senior citizens or corporate guests, consider reducing the discount percentage during peak times rather than eliminating the option entirely. This approach allows you to keep the channels open while optimizing revenue. Apply this approach to all discount channels, adjusting the discount percentages based on demand and customer segments.
Capitalize on modern technology tools
Take advantage of tools, software, and resources designed to automate and optimize open pricing processes. Employ integrated hotel systems, automated rate shopping tools, demand reporting services, and performance analytics to help your hotel implement and monitor the success of its open pricing strategy. Invest in training and resources to ensure your revenue management team is well-equipped to manage open pricing effectively.
Utilize AI technology
Advanced revenue management systems and AI-powered tools can gather real-time data on competitor pricing, local events, conferences, and other factors that may impact demand in your area. By analyzing this data, AI algorithms can make data-driven recommendations for rate adjustments and help hotels fine-tune their pricing strategy.
These AI-driven systems can also predict future demand patterns based on historical data and trends, allowing hotels to optimize their pricing strategies proactively. Additionally, AI technology can help identify market anomalies, such as sudden surges in demand or unexpected drops in competitor rates, enabling hotels to respond promptly and effectively.
Utilizing AI technology in open pricing implementation not only simplifies the process but also increases accuracy and efficiency, ultimately leading to improved revenue management and competitive advantage for hotels.
Monitor competition and market trends
Regularly track competitor pricing and market conditions to identify opportunities for rate adjustments. Stay informed about local events, conferences, and other factors that may affect demand in your area. Use this information to fine-tune your pricing strategy and make data-driven decisions. Of course, these and other processes can be automated with AI technology.
For example, at AltexSoft, we developed several AI features for our client Key Data Dashboard — a US-based business intelligence company that provides performance data insights for small- and medium-sized vacation rentals. These features analyze key hospitality KPIs like Occupancy Rate, WAPE, Average Daily Rate, etc., automatically.
Communicate with your team
Open pricing implementation requires collaboration and communication among various departments within your hotel. Ensure that your sales, marketing, front office, and revenue management teams are aligned and understand the rationale behind the open pricing approach. Regularly update them on any changes to the pricing strategy and provide clear guidelines on handling rate-related inquiries from customers.
By following these recommendations, your hotel can get on the road to the successful implementation of an open pricing strategy.
As technology advances and solutions for data management and revenue optimization become more accessible, a growing number of hotels will likely adopt open pricing to stay competitive and maximize profits. Hotels that invest in cutting-edge systems, staff training, and adaptability will be well-positioned to capitalize on this trend and drive business performance. The increasing importance of personalization and dynamic pricing in the industry will further fuel the adoption of open pricing, transforming the way hotels set rates and engage with their customers in the years to come.