Understanding Hotel Guest Willingness to Pay

In the ever-competitive world of hospitality, understanding guest willingness to pay (WTP) is the golden key to unlocking optimal pricing strategies and maximizing hotel revenue. WTP essentially translates to the highest price a guest is prepared to shell out for a hotel room and its associated services. By deciphering this value, hotels can strike a delicate balance between attracting guests and securing healthy profit margins.

Customers’ evaluation of hotel prices has received increasing attention in hospitality research. Beyond the specific attributes of the offer, internal norms related to prior experiences affect customers’ response to price. Drawing on the behavioral price literature, in this article we delve into the intricacies of guest WTP, exploring the factors that influence it and unveiling strategies to leverage this knowledge for a thriving hotel business.

What is willingness to pay?

Willingness to pay, sometimes abbreviated as WTP, is the maximum price or amount of money a customer is willing to pay or sacrifice in exchange for a product or service or, in some cases, a price range. Hotel amenities are considered to be the most significant determinant of customers’ WTP, while potential customers are likely willing to pay less than this threshold, it’s important to understand that, in most cases, they won’t pay a higher price, knowing customer WTP is essential for pricing strategies that help hotels determine the best prices for their products or services.

The concept of ‘willingness to pay’ emphasizes that no matter how much you value a product or where that value originates from, you as a customer won’t exceed your predetermined limit when making a purchase.

Unveiling the Factors that Shape Guest WTP

Hotel managers and revenue managers face these kinds of questions every day or even more similar:

• How much are our guests willing to pay for a higher floor room?
• How much should we charge for a room with an ocean view?

The answers to these questions and other questions can help revenue managers to set up appropriate rate fences and hopefully maximize the hotel’s revenue and profit. Many times, hotel managers rely on personal experience, trial-and-error, benchmarking with competitors, or rule-of-thumb to determine the degree of variations in price.

To understand what influences customer willingness to pay (WTP) in the hotel sector, revenue managers must grasp how much value customers attach to specific hotel features. This knowledge will enable them to set up rate fences effectively and price their rooms accordingly. It’s important to remember that customers’ willingness to pay a particular price for a product or service can change over time. Apart from external and internal differences, here are some of the factors that can affect customer WTP in the hotel industry:

1. Airport and transportation services
2. Free mini-bar items
3. Smartphone service
4. Cancellation policy
5. Free wi-fi service
6. Room views
7. Club access
8. Hotel floor

It’s worth noting that these attributes are not exhaustive, and there may be other factors influencing customer WTP as well as picking a hotel room is usually an intrinsically complex and idiosyncratic task: one guest may prefer a soft bed while the other may like a hard one. However, certain attributes are almost universally desirable by all guests – larger room space, free services, a quieter room, etc. Knowing customers’ perceived utility of these attributes, hoteliers can up-sell rooms, cross-sell other products, offer product bundling, or add free service to attract more guests.

Factors Influencing Customer Willingness to Pay in the Hotel Sector

According to some researches there are six main categories of contactless amenities in hotels: (1) contactless front desks, (2) contactless elevators, (3) contactless room entrances, (4) contactless payments, (5) smart room devices, and (6) robotic services; however, customers’ WTP for those amenities is unknown. In particular, there is a mismatch in the supply and demand of different contactless amenities (Skift & Oracle Hospitality, 2020). While 70% of hotels consider investing in self-service check-in, keyless access, food ordering, and concierge services, customers prefer contactless payments, digital room keys, and digital messaging services most. Therefore, exploring customers’ WTP for various contactless amenities is critical to guide hotels’ investment decisions. Based on the literature, we hypothesize customer willingness to pay (WTP) for their hotel experience in the hotel sector is influenced by various factors, where these findings highlight the complex nature of factors affecting customer WTP in the hotel.

1. Business Characteristics: Commercial activity, business size, and annual turnover impact tourism companies’ WTP for tax instruments related to sustainability.
2. Consumer Awareness and Preferences: Consumer knowledge and preferences also play a role in WTP, with collaborative branding efforts by ownership companies positively influencing guests’ WTP in hotels.
3. User-Generated Content (UGC): Online reviews and star ratings posted by previous guests have a significant impact on hotel guests’ WTP, while being featured on a “best of” list may not have the same effect.
4. Destination Image and Environmental Beliefs: The perception of a destination and individuals’ environmental beliefs affect their willingness to pay for eco-friendly hotels, with their attitude towards such accommodations mediating these relationships.
5. Guest Demographics: Age, income level, and travel purpose significantly impact willingness to pay (WTP). Business travelers, often reimbursed by their companies, may be less price-sensitive compared to budget-conscious leisure travelers.
6. Hotel Characteristics: Factors like location, brand reputation, star rating, and amenities all play a role. Guests are generally willing to pay more for hotels in prime locations, established brands, luxurious amenities (such as spas and fitness centers), and unique experiences.
7. Room Attributes: Elements such as room size, view (e.g., oceanfront vs. city view), floor level, and bed type can also influence WTP. Guests might be willing to pay extra for larger rooms, stunning views, or higher floors.
8. Perceived Value: This refers to the overall perception a guest has of the hotel’s offerings relative to its price. Excellent service, comfortable beds, and a personalized experience all contribute to enhancing perceived value.

 The factors that can influence guests’ choice of a hotel are numerous, including:

• Income
• Geography
• Weather
• Age
• Gender
• Brand loyalty
• Service levels
• Advertising
• Competitors’ products and pricing
• Expectations
• Legality
• Packaging
• Environmental or social impact
• Necessity

Understanding these factors can help revenue managers make informed decisions when pricing their hotel rooms and designing marketing strategies that cater to their target customers.

While the factors affecting guests’ choice of a hotel may seem complex, identifying the hotel attributes that influence hotel choice and the features that guests perceive as important can assist hoteliers in making optimal decisions for hotel development and pricing strategy. Numerous studies in the tourism and hospitality field have explored the primary attributes that impact guests’

Unveiling the Tools to Gauge Guest WTP

Understanding guest willingness to pay (WTP) is a continuous process that requires a combination of market research, data analysis, and an intuitive understanding of guest psychology. Here are some strategies that hotels can use to optimize their pricing strategies and better align prices with guest WTP.

Directly asking guests their WTP might not be the most effective approach, also prior knowledge and price acceptability as customers’ prior knowledge plays a key role in the decision-making process. Specifically, prior knowledge has a strong impact on the information search stage. Prior knowledge also facilitates customers’ information processing Customers with high product category knowledge find it easy to evaluate a product’s attributes and utility. Here are some valuable tools to estimate guest WTP:

• Market Research: Regularly monitor market trends, analyzing competitor pricing, online reviews that mention price, and travel industry reports provides valuable insights into guest expectations and price sensitivity within a specific market segment to stay informed about changing customer preferences and demands.
• Website Tracking: Tracking guest behavior on the hotel website, such as the rooms they view and the length of time they spend on different pricing pages, can offer clues about their WTP range.
• Leverage Data Analytics: Invest in advanced analytics tools that can analyze large volumes of data quickly and accurately. This will enable you to identify patterns, trends, and correlations that can inform your pricing decisions also by analyzing guest choices, hotels can understand which features guests value most and how much they are willing to pay for them.
• Price Sensitivity Meter: This survey method asks guests to categorize different price points as “too expensive,” “too cheap,” “just right,” or “acceptable.” This helps gauge price sensitivity and identify the price range guests find acceptable.
• Price Elasticity of Demand: These metric measures how guest demand changes in response to price fluctuations. By analyzing historical data, hotels can understand how price changes impact bookings.
• Segment Your Customer Base: Divide your customers into distinct segments based on factors such as demographics, behavior, and preferences. This will allow you to tailor your pricing strategies to each segment’s unique characteristics

Strategic Applications of Understanding Guest WTP

By leveraging their understanding of guest WTP, hotels can implement powerful strategies as below:

• Dynamic Pricing: Consider implementing dynamic pricing strategies that allow hotels to adjust room rates based on real-time factors like demand levels, booking patterns, competitor pricing, special events, and availability. This allows them to maximize revenue during peak periods and attract guests during slower times.
• Targeted Packages and Bundles: Hotels can create targeted packages that bundle desired and additional services or amenities i.e. (spa treatments, airport transfers) with the room rate at a premium price for guests seeking a specific experience, this can help justify higher prices and differentiate your hotel from competitors.
• Upselling and Cross-Selling: Equipped with knowledge of guest preferences, hotels can personalize upselling and cross-selling strategies. For instance, a guest booking a high-end room might be receptive to an in-room breakfast upgrade, also consider provide training to front-line staff on effective upselling techniques and how to communicate the value proposition of higher-priced room options.
• Loyalty Programs: Rewarding loyal guests can incentivize repeat business and make them less price-sensitive. Offering exclusive discounts or upgrades can further enhance loyalty.
• Optimizing Online Distribution Channels: Understanding WTP across different online booking platforms allows hotels to set competitive prices and potentially negotiate better commission rates.

Conclusion: The Art and Science of Guest WTP

In recent years, hotel revenue management (RM) has transformed from a simple inventory management technique into a powerful marketing tool centered around the needs of the customer. This shift has been driven by the realization that in order to set optimal prices, it is essential to understand how customers make purchasing decisions.

Traditionally, revenue management professionals relied on historical data and market trends to determine room rates. While this approach was effective to some extent, it failed to take into account the unique preferences and behaviors of individual customers.

“Reprinted from the Hotel Business Review with permission from www.HotelExecutive.com”