Friday, April 29

Is pay-what-you-want a viable hotel pricing strategy?

My fiancée and I are taking a trip to Halifax this summer. I booked a mystery hotel online using Priceline's name-your-own-price function, and ended up with the Westin Nova Scotian.

In researching the hotel, I discovered that they ran a very interesting promotion over spring break, where they set aside 60 rooms for guests to pay what they wanted. Pay-what-you-want is a unique (if not gimmicky) pricing strategy that seems to have been popping up quite a bit in recent years, perhaps thanks to Radiohead's use of the strategy to sell their album In Rainbows.

The Westin's promotion was probably not designed to maximize their profits for those 60 rooms. In fact, the hotel's director of revenue told a local paper, "I was just hoping we’d get some press out of it." But I wonder if pay-what-you-want has potential as a profit-maximizing strategy. According to the article, guests paid anything from nothing to $129 per night, which is still less than the hotel's posted room rates, but significantly more than the $85 price I paid through Priceline.

A profit-maximizing hotel should try to fill all its rooms. Hotels are like airlines and movie theatres, where an additional customer costs the business very little. Yes, you have to clean an extra room. But regardless of the number of guests, a hotel has to employ front desk staff and cleaners, pay its property taxes and utility bills, and perform maintenance and upkeep on its property. An extra customer doesn't have much effect on any of these costs. Pay-what-you-want should help fill a hotel, because no customer will be turned away because the hotel's price tag is too high.

Hotels also want to get customers to pay the highest prices possible. This is especially important during peak times for a hotel. For example, say a 500-room hotel has 1,000 potential guests. Perhaps 600 of these guests would be willing to pay up to $100 per night, while 400 would be willing to pay $150. If the hotel sets its price at $100, it will be full, but will lose out on the $50 from the 400 high-value guests. If the hotel sets its price at $150, it will have 100 rooms sitting empty, which isn't ideal either. The trick is for the hotel to try and get the high-value guests to pay $150 and then fill the remaining 100 rooms with people willing to pay $100.

This is where products such as Priceline's Name-Your-Own-Price, Travelocity's Top Secret Hotels and Hotwire come in. They presumably attempt to target low-value guests in order to fill rooms which would otherwise sit empty, while the hotel can keep its standard room rate at $150 to scoop up the high-value guests as well. However, I'm not sure how well these products work at getting people to pay as close to their maximum willingness to pay as possible. I use Hotwire and Priceline for most of my hotel stays, and there are times I've gotten a price at least two times lower than what I was willing to pay.

This is where there is a potential for a pay-what-you-want strategy. On Priceline, customers can name their own price, but you're trying to get yourself the lowest price possible. Although the Westin's pay-what-you-want promotion may look similar, it differs significantly from Priceline because there is an understanding that you should pay what you feel is fair. If a Westin-style promotion appeals to people's sense of honesty and fairness, people may fork over an amount much closer to their maximum willingness to pay than with Priceline.