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A top-end hotel in a large commercial city has made huge investments in land, building and operations, including salaries and other regular expenses. It is faced with high fixed costs. The variable expenses are not very significant. Any additional room booked by a guest hardly increases the cost to the hotel. How does the hotel price its rooms?
The variable costs are low, and the hotel must aim at maximizing sales, since almost the entire revenue would add to the contribution and thus increase the level of profit. Occupancy rates have a significant impact on the performance. At the same time, there are other issues worth considering, especially in deciding the price for a marginal guest.

• Given that the entire sales price will add to the contribution, how much discount should be offered on the rack rate to improve capacity utilization?

• There are add-on revenues by way of food and other services which need to be taken into consideration.

• Is the industry facing a lean or peak season currently?

• What should be the pricing strategy if a corporate client wants to block 2,500 rooms annually?

• What is the nature of competition faced by the hotel, and what is the cost structure of the competitors?

• Will a lower rate to the marginal customer induce other customers also to demand lower rates?

1. Assume your own figures with respect to the various parameters of a hotel, work out an example and decide your strategy wherein a walk-in customer at 12 pm asks for and tries to negotiate the price of a room for a two-day stay.

2. Similarly, formulate a strategy for a large multinational company (MNC) which wants a corporate deal for 2,500 rooms during the coming financial year.