How Hotels Set Prices

Why hotel room prices change so much, from revenue management and online booking platforms to the economics of a perishable product.

A hotel room can cost very different amounts depending on when you book, what day you stay, and even which website you use. Behind these changes is a set of pricing techniques called revenue management.

A perishable product

A hotel room is like an airline seat: if it is not sold for a particular night, that night’s revenue is lost forever. At the same time, the number of rooms is fixed in the short run. Hotels therefore try to sell as many rooms as possible at the best possible prices.

Key measures

Hotels track:

Occupancy rate: the share of rooms filled.
Average daily rate: the average price paid per occupied room.
RevPAR, or revenue per available room: total room revenue divided by the total number of rooms. It combines occupancy and price into one measure.

Revenue management

Hotels use software to adjust prices based on:

Expected demand, including events, holidays and weekdays versus weekends.
How far in advance guests book.
How many rooms are still available.
Competitors’ prices.

They also offer different rates for flexible and non-refundable bookings, and for longer stays.

A conference comes to town

A city hotel usually charges 100 dollars a night. When a large conference is announced, the hotel's software sees bookings surge for those dates and raises prices to 250 dollars. Rooms still sell out, because conference attendees need to stay nearby. The following week, demand drops, and prices fall back, perhaps with discounts to fill empty rooms.

Online travel agencies

Online travel agencies such as Booking.com and Expedia have made it easy to compare hotels. They bring hotels many customers but charge commissions, often around 15 percent or more of the room price. Hotels encourage direct bookings with loyalty points or small discounts. Regulators in several European countries have limited contract terms that stopped hotels from offering lower prices on their own websites.

Thinking the same room should always cost the same

A room's price reflects demand at a particular moment, not just its size or quality. Charging more when demand is high and less when it is low helps hotels fill rooms and can make travel more affordable for flexible guests.

Key takeaways

Hotel rooms are perishable: an unsold night's revenue is lost.
Hotels track occupancy, average daily rate and revenue per available room.
Revenue management adjusts prices based on demand, timing and availability.
Online travel agencies bring customers but charge significant commissions.