Latest / Pricing Power Podcast with Fexingo: How Businesses Set Prices, Raise Margins, and Win Customers / How Hotels Price Empty Rooms Last Minute
Transcript
- Lucas: The most valuable commodity in the hotel industry isn't location or luxury amenities. It is time. Specifically, the twenty-four hours between yesterday at midnight and today at midnight. Once that clock strikes twelve, the inventory expires. It cannot be stored, it cannot be returned, and it generates zero revenue tomorrow if it wasn't sold today. Luna: So unlike a retailer who can hold onto unsold winter coats until next season, a hotelier is operating under extreme pressure to clear the ledger every single night. Lucas: Exactly. That is the core definition of perishable inventory. And because of that, hotels developed what is now called revenue management, or yield management, decades before airlines adopted similar tactics for their seats. The goal is simple: sell the right room to the right customer at the right price to maximize total revenue per available room, which is abbreviated as RevPAR. Luna: But how do they actually know what the right price is without just guessing? I mean, setting a static rate feels like leaving money on the table during peak times or losing customers during slow weeks. Lucas: They don't guess. They use complex algorithms that ingest historical data, current booking pace, local event calendars, and even competitor pricing in real-time. Let's look at a typical urban hotel with two hundred rooms. If bookings are ahead of last year by ten percent by mid-week, the system automatically raises rates. If bookings are lagging, it triggers promotions or opens up lower-tier rates on third-party sites. Luna: That sounds incredibly efficient, but doesn't it punish the person who books early? You pay more for certainty while the last-minute booker gets a discount? Lucas: It seems counterintuitive, but early bookers are usually business travelers or planners who have rigid constraints. They are less price-sensitive because their travel dates are fixed. The algorithm recognizes that willingness to pay is higher for inflexible demand. Meanwhile, the leisure traveler who books three days out has flexible options. If the price is too high, they will go elsewhere or not travel at all. So the hotel lowers the price to capture that marginal buyer. Luna: Right, so you are segmenting the market based on flexibility rather than just income. The person who needs the room for a conference pays a premium, while the spontaneous vacationer gets a deal. Lucas: Precisely. And this segmentation is why you often see the same hotel listing different prices on different websites. A corporate contract rate might be hidden from public view, while a non-refundable advance purchase rate appears on Expedia or Booking.com at a significantly lower number. Luna: I always wondered why the price fluctuates so wildly day-to-day. Is it purely based on how many rooms are left, or are there other factors driving those daily changes? Lucas: It is a mix of inventory scarcity and anticipated demand shocks. For example, if a major convention is announced for next month, the system will start raising prices immediately, even though the event is weeks away. It is trying to lock in high-value bookings early before the room count gets thin. But once you get within forty-eight hours of check-in, the logic shifts entirely to risk mitigation. Luna: Risk mitigation? You mean if the rooms are still empty, they would rather sell them cheap than not at all? Lucas: Yes. Because the marginal cost of adding one more guest to an already occupied floor is negligible. It is maybe five dollars for laundry and cleaning supplies. So selling a room for eighty dollars at 4 PM on the day of arrival is infinitely better than letting it sit empty for a thousand dollars. The threshold for selling drops precipitously as the date approaches. Luna: That explains why I sometimes find cheaper rates on the hotel app itself when I am literally standing outside the lobby. Are they trying to upsell me directly to avoid paying commissions to online travel agencies? Lucas: You hit on a huge part of the puzzle. Online travel agencies, or OTAs like Booking.com, take a commission that can range from fifteen to twenty-five percent of the room rate. If a hotel has unsold inventory close to arrival, they might push a discounted rate directly through their own website to bypass that fee. It is a channel conflict where the hotel tries to retain margin by steering you toward direct booking. Luna: So the price you see depends heavily on where you are looking and when you are looking. It is almost like a game of musical chairs where the music stops faster and faster as the night goes on. Lucas: A great analogy. And this leads to another fascinating tactic: overbooking. Hotels know that some guests will cancel, some will no-show, and some will extend their stay. If they only sell exactly the number of rooms they have, they leave money on the table. So they intentionally oversell by a small percentage, relying on statistical probability to ensure full occupancy. Luna: That sounds risky. What happens when the statistics fail and more people show up than there are keys? I've heard stories about being bumped to another hotel. Lucas: It is rare in upscale segments, but it happens. When it does, the hotel is legally and ethically obligated to walk the guest. They must provide transportation to a comparable nearby hotel, cover the cost of the stay there, and often pay for the first phone call. But the financial penalty of walking a guest is usually far less than the reputational damage and compensation costs involved. It is a calculated gamble. Luna: Calculated, yes, but still annoying for the poor soul stuck in a motel down the street. Does this dynamic pricing apply equally to luxury resorts and budget motels? Lucas: Not equally. Luxury hotels have higher fixed costs and a smaller customer base, so their pricing is more stable and focused on brand preservation. They rarely engage in deep discounting because it dilutes the perceived value of the brand. Budget chains, however, operate on volume. Their margins are thinner, so they need every room filled. They are much more aggressive with last-minute price cuts to drive occupancy. Luna: So the type of hotel dictates the aggressiveness of the pricing strategy. High-end brands protect the halo, while economy brands chase the volume. Lucas: Spot on. And there is also the concept of length of stay restrictions. During peak periods, hotels might require a minimum three-night stay to prevent someone from booking just one night at a high rate when they could have booked four nights at a slightly lower average rate. It forces the leisure traveler to commit to a longer trip, which smooths out the operational load for housekeeping and front desk staff. Luna: That makes sense operationally. Cleaning three consecutive nights is easier than turning over rooms every single day for different short-term guests. It reduces labor variability. Lucas: Exactly. Labor is the biggest variable cost in hospitality. By stabilizing the occupancy pattern, hotels can optimize staffing schedules. This is why you see fewer promotions during long weekends or holidays. The demand is predictable and high, so there is no incentive to discount. Luna: It really highlights how much of hotel pricing is about managing internal operations, not just external competition. The price tag is a reflection of the kitchen's schedule and the housekeeping roster. Lucas: Absolutely. And we cannot talk about hotel pricing without mentioning ancillary revenue. The room rate is just the entry ticket. Once you are in the door, the hotel tries to extract value through minibars, parking fees, resort fees, and dining. In many properties, these add-ons contribute significantly to the bottom line, sometimes exceeding the profit margin on the room itself. Luna: Resort fees are the worst part of that equation. You see a cheap room rate online, but then you get charged fifty dollars a night for amenities you didn't use. It feels deceptive, doesn't it? Lucas: It is controversial, but economically rational for the hotel. Resort fees allow them to advertise a lower base rate in search results, which captures your attention. Then they recoup the cost of amenities like pools, gyms, and Wi-Fi through mandatory fees. It is a way to keep the headline price competitive while maintaining overall revenue. Critics argue it obscures the true cost, but it works for the seller. Luna: So it is a psychological pricing tactic. Lower headline price gets the click, and the mandatory fee ensures the margin stays intact regardless of whether you use the gym. Lucas: That is a fair characterization. And it ties back to the broader trend of unbundling services. Airlines did it first with baggage and seat selection. Hotels are following suit, charging separately for breakfast, parking, and even early check-in. Each of these is priced based on its own marginal cost and demand elasticity. Luna: It transforms the hotel stay from a bundled package into a la carte experience. You only pay for what you actually consume, or you pay extra for convenience. Lucas: Yes. And this granular pricing allows the hotel to cater to different types of travelers. The business traveler who needs Wi-Fi and breakfast will pay for those bundles. The backpacker who just wants a bed will skip them. It maximizes revenue across the entire spectrum of guest preferences. Luna: It is impressive how sophisticated this industry has become. Most people just see a number on a screen, not the complex web of algorithms, labor logistics, and psychological tactics behind it. Lucas: Most people don't. But understanding it changes how you travel. You stop viewing the price as arbitrary and start seeing it as a signal of supply and demand. You learn to time your bookings, choose your channels wisely, and recognize when you are being segmented. Luna: And maybe accept that paying more for certainty is just the cost of doing business when your time is the scarcest resource. Lucas: Exactly. Time is the ultimate inventory. And once it passes, it is gone forever. That is the lesson that drives every decision in this industry. Luna: If these conversations have moved your work forward in some small way, supporting us helps keep these insights ad-free and consistent. Consider buying me a coffee at buy me a coffee dot com slash fexingo. Lucas: We appreciate it. It allows us to dig deeper into these mechanics for you every week. Luna: Yeah, it really helps sustain the research behind these episodes. Lucas: Looking ahead, as artificial intelligence becomes more embedded in these revenue management systems, we will likely see even more personalized pricing. Imagine a system that knows your personal price sensitivity based on your past behavior and adjusts rates accordingly. It raises ethical questions about fairness, but it is technically inevitable. Luna: Personalized pricing at the individual level... that takes dynamic pricing to a whole new, slightly unsettling dimension. Lucas: It does. The question is whether consumers will tolerate it or if regulation will step in to cap the degree of personalization. One thing is certain: the empty room will always be the enemy, and technology will only make the fight against it more precise.