Latest / Pricing Power Podcast with Fexingo: How Businesses Set Prices, Raise Margins, and Win Customers / How Luxury Hotels Price the Same Room Differently
Transcript
- Lucas: So, Luna, here's a number that's been stuck in my head for a while. On a random Tuesday in October, the same king room at the same four-star hotel in downtown Chicago can go for one hundred and eighty-nine dollars on Expedia, two hundred and nine on the hotel's own site, and one hundred and forty-nine if you know the right corporate code. Same bed, same view, same night. Luna: That drives me crazy. I've stood at the front desk and heard the person next to me quote a rate that's fifty bucks less than what I paid. And the clerk just shrugs. Lucas: Right, and it's not random. It's the product of a whole discipline called revenue management, which hotels borrowed from the airlines back in the eighties. And for episode one hundred fifty of this show, I wanted to look at how the industry actually prices that same physical room differently depending on who you are, when you book, and what you're willing to tolerate. Luna: So it's not just greed or a broken computer system. There's a method to the madness. Lucas: A very refined method. Let's start with the basics. In the old days, a hotel printed a rack rate — the official, published rate you'd see on the back of the door. That was the price. You called, you asked for a room, you got the rack rate. Maybe ten percent off if you were AAA. But it was basically fixed. Luna: And then the airlines figured out that you could charge the business traveler more because they book last minute and don't care about price, and the leisure traveler less because they plan ahead. Hotels saw that and said, why not us? Lucas: Exactly. So the modern hotel revenue manager is essentially running a live auction for every room, every night, using software that crunches historical booking patterns, local events, competitor rates, even weather forecasts. The goal is to sell every room at the highest possible price without leaving any unsold inventory. That's the core tension: price too high and you eat empty rooms, price too low and you leave money on the table. Luna: And the 'competitive set' — that's the group of nearby hotels they compare themselves to. They're not just watching their own bookings. Lucas: Right. The revenue manager looks at maybe ten or twelve comparable properties — same star level, same neighborhood, similar amenities — and they track what each one is quoting on any given night. That's the comp set. If the Marriott next door drops its rate to one sixty-nine, your rate might follow within hours. It's a real-time price war, but fought in percentages and parity clauses rather than with artillery. Luna: So the 'rate parity' thing hotels always talk about — that's the requirement that the price on their own site can't be higher than what they offer on Expedia or Booking dot com. That keeps the online travel agencies honest. Lucas: Yes, and it used to be ironclad. But here's where the pricing gets really interesting. Because hotels figured out that they could still win your loyalty without violating parity — by throwing in perks. Breakfast, late checkout, free wifi — the rate is the same, but the effective price to you is lower once you value the perks. That's how their loyalty programs create a separate pricing tier without ever touching the published rate. Luna: So it's a kind of non-price competition. They're not cutting the sticker price, they're just making the total offer better for certain customers. Lucas: Exactly. And there's one more trick from the early days of online booking that really exposes the whole machinery. Do you remember Priceline's 'Name Your Own Price'? You bid, say, eighty dollars for a four-star room in a specific part of town, and they'd either match you with a hotel or not. The catch was, you didn't know which hotel until after you paid. That's called an opaque channel. Luna: Oh, I used that in college. It felt like gambling, but you could get a really nice room for half price. Lucas: And that's exactly the point. The hotel gets to unload unsold inventory at a discount without publicly slashing its rate, because the discount is hidden behind the opaque curtain. The published rate stays high, the brand image stays intact, and the revenue manager gets to fill a room that otherwise would have stayed empty. It's price discrimination through information asymmetry. Luna: So the same room, same night — the opaque channel customer might pay eighty, the corporate code person pays one forty-nine, and the walk-in off the street pays two hundred and nine. All of them are in the same building, maybe even on the same floor. Lucas: And that's not a bug, it's the whole design. The key insight is that customers differ in their willingness to pay, and the hotel wants to capture as much of that difference as possible. The leisure traveler booking two weeks out is price-sensitive, so they get the lower rate. The business traveler booking three days out is time-sensitive, so they pay full freight. The opaque bidder is willing to trade certainty for price, so they get the rock-bottom rate. Luna: And the revenue manager is basically a psychologist with a spreadsheet. Lucas: Pretty much. And it's worth saying that this isn't just about squeezing every last dollar. It's also about managing the guest experience. A hotel that's fully booked at two hundred dollars might actually be leaving money on the table if the local convention is in town — because demand is so high they could have charged two fifty. But a hotel that's only half full on a random Tuesday has to make a call: do I drop the rate to attract more guests, or hold firm and risk empty rooms? That's the daily calculus. Luna: And I guess the rise of Airbnb and other alternatives has made that calculus even harder, because now hotels aren't just competing against each other, they're competing against a whole supply of short-term rentals. Lucas: That's a great point. And it's one reason we've seen more hotels lean into what they call 'experiential' pricing — bundling the room with credits for the spa, or the restaurant, or a local attraction. They're trying to shift the conversation from price per night to value per stay. Luna: So the next time I get a rate that's higher than my neighbor's, I should just smile and think about the revenue manager's algorithm working as intended. Lucas: Or you could book through an opaque site and beat them both. But yes, it's all part of a system that's become incredibly sophisticated. And look, we can get into the weeds of all this because we love it, and I know a lot of listeners do too. If these pricing conversations have ever helped you see a price tag a little differently, or maybe even saved you a few bucks on a negotiation, then you know the kind of value we're trying to create. We keep this show ad-free, and that's only possible because some listeners choose to support the work at buy me a coffee dot com slash fexingo. A small contribution helps us keep digging into these stories, and we're grateful to everyone who's done that. Luna: Yeah, it really does make a difference. And we're happy to keep doing this because of you. Lucas: Alright, so let's get back to the numbers. One of my favorite studies on hotel pricing came out a few years ago, where researchers scraped rates for the same hotel across different booking channels and found that the price difference for the same room on the same night could be as high as thirty percent. And the biggest gap wasn't between the hotel site and an online travel agency — it was between the hotel site and the opaque channel. That tells you how much of the discount is essentially a penalty for not knowing the hotel's name in advance. Luna: So information is the real currency here. The more you know, the more you pay — or the less, depending on how you use it. Lucas: Exactly. And the hotels are fully aware of that. That's why they've been tightening the rules around opaque channels. Priceline's 'Name Your Own Price' still exists, but it's a shadow of what it was. Now they have 'Express Deals' and 'Pricebreakers' — similar idea, but the discount isn't as deep and the hotel gets more control over the inventory it puts there. Luna: So the hotel is willing to discount, but it doesn't want to train customers to expect discounts. If you know you can always get thirty percent off by bidding, you'll never pay the published rate again. Lucas: Right, and that's the eternal tension in pricing. You want to capture the low end of demand without eroding the high end. It's the same problem that airlines, and car dealers, and even software companies face. The hotel industry just happens to have perfect, real-time data on occupancy and demand, so they can refine the approach more precisely than almost anyone else. Luna: And that data is getting more granular, too. Now they're looking at your browsing history, your past stays, even the weather in your home city to predict how likely you are to book and at what price. Lucas: That's the frontier. A few years ago, there was a story about a hotel that reportedly showed a higher rate to someone searching on a Mac versus a PC, because the algorithm guessed Mac users have more disposable income. I don't know if that exact test is still happening, but the principle is undeniable: the more they know about you, the better they can price to your willingness to pay. Luna: Which feels a little creepy, but also kind of inevitable. I mean, isn't that just the logical end of any business that wants to maximize revenue? Lucas: It is, and that's why we study this. The pricing power that hotels have is the same pricing power that any business can build if they really understand their customers and their own costs. You don't need a giant data science team to do what a revenue manager does — you just need to think in terms of segments, willingness to pay, and the value of your inventory over time. Luna: So if I'm a small business owner listening, I should start by asking which of my customers would happily pay more, and which ones are only here because the price is low. Lucas: That's the first move. And then you can decide whether to create separate offers, different bundles, or even a loyalty program that rewards the high-value customers without discounting for everyone. The hotel industry gives you a perfect playbook. Luna: Alright, I'm ready to go renegotiate my hotel rate for the next conference. Lucas: Just remember, the revenue manager is probably two steps ahead of you. But that's the fun of it. Next time you check in, you'll know exactly what's going on behind the front desk.