Inside a Hotel Price Optimization problem

In price optimization, the goal is to maximize revenue over the booking horizon by setting optimal prices for each product available for sale; in other words, a price for each combination of room type, arrival date, and length of stay.

There are several specific nuances to this problem that make the solution tricky, including calculating price elasticity, determining the impact of competitor pricing and accounting for “yieldable” demand.

The optimal price is subject to demand and capacity constraints, and considers the price elasticity of demand.

However, there are some factors in the hotel problem that make calculating price elasticity particularly challenging. demand does not just vary according to price. Demand can vary dramatically according to a number of factors including:
■ Time of the year
■ Day of the week
■ Special event periods
■ Time remaining until arrival
■ Competitive effects

For example, many hotels have a low price available during the off-season and offer higher rates during peak periods. This means that for most hotels, even those without a formal revenue management function, when demand is high, prices tend to be high.