Pricing Model for Hotel Industry

A Project report submitted to

In partial fulfilment of the requirements of the course

Revenue and Price Analytics

By Group 14

Introduction

Managing hotel rooms in a big hotel is a tedious task and they have different attributes for
different types of rooms.

This project is to understand various revenue management techniques like regression, conjoint
analysis, price forecasting and Van westendorp. We have done this analysis to better
understand the pricing model of the hotel industry. We have taken two types to data for this
project. Primary data was collected by using survey methods and secondary data was collected
from Kaggle.com. For secondary data, we have taken Airbnb data sources as hotel prices and
booking data were not publicly available.

Analysis

Data Sets: https://www.kaggle.com/stevezhenghp/airbnb-price-prediction

This data set has a lot of unnecessary attributes, and which are mostly nominal data. So, we
have cleaned the data set and taken 615 rows of data out of approx. 44000 rows
For primary data gathering, we have floated the below survey form.

Primary data survey form:

https://docs.google.com/forms/d/e/1FAIpQLSdxaOUehbKFDz8T8lT6Q9c4kAIwEKuqO9C9fiKuk
AhortsbUA/viewform.

Price Regression (Exhibit 1)

We have added dummy data in the data set to replace all the categorical data and then we
regressed the price as a dependent variable against the independent variables. From the
regression we got a very low R square value of 3.4% and none of the variable’s P values are
significant. So we concluded that the variables like rating, snacks, meals, room type, and
booking date have no effect on the price function of hotel rooms. One of the main reasons could
be the room price mostly depends on the hotel location, current season and demand. These
three data were not available in the data sets and they cannot be regressed against price in
these data sets.

Conjoint Analysis (Exhibit 2)

So we have done conjoint analysis to understand the importance of different attributes when it
comes to the customer side. From the conjoint analysis we got that room type in the hotel and a
well-versed cancellation policy has the highest importance and the highest utility range. Room
type has a utility range of 5.25 and attribute importance of 31%. Cancellation policy also has
attribute importance of 31% and utility range of 5.32. Instant booking facility has the lowest

importance amongst all the attributes, and it has less effect when a customer considers booking
a hotel.

Van Westendrop analysis (Exhibit 3, 4, 5)

We have done Van Westendrop analysis to determine the marginal price point and optimal price
for every segment of the hotel industry. We took the survey data where all data were segmented
into three categories: Cheap, midrange and premium.

From the analysis, we got below observation:

In Budget segment,The point of marginal cheapness is 1000 where optimal price should be
1200 and point of expensiveness is 1600

In Mid range Segment, The point of marginal cheapness is 1900 where optimal price should be
2300 and point of expensiveness is 2800

In Premium segment, The point of marginal cheapness is 3500 where optimal price should be
4500 and point of expensiveness is 5500
So, the analysis and general observation is a good match, so hotels should price the segments
accordingly and increase prices during peak demand and festive occasions.

Forecasting the time series data of Hotel prices

The Year 1 and Year 2 (10 months) average monthly data on prices for the hotels with property
type, Villa, Bungalow, and Boutique hotels were considered to analyse the time series data and
forecast the upcoming average monthly prices two months of Year 2 and the whole of Year 3.
Given in the data, the seasonality and trend are related with each other, the time series model is
a multiplicative model, i.e., Yt= Tt*St*Ct*It, where Yt is the price, Tt is the trend component of
the data, St is the seasonal component, Ct is the cyclical component and It is the irregular data
or error. We first tried to remove the cyclicity of the data by doing moving average with
parameter 3 since it gave smoother data than MA(2).
Next, we removed the seasonality by dividing the seasonal component from the actual pricing
data (Yt). After that, we separated the trend by finding the regression equation from the time
and deseasonalized data. This helped us to get the forecasts (St*Tt). We also checked for the
MAPE value to see the error committed while forecasting the prices for future. Given the MAPE
value was 32.5%, we can say that the forecasts are reasonable.

We can see (Exhibit 8) that the forecasts have a gradual downward trend which suggests that
the average monthly prices for hotels (Villa, Boutique hotels and Bungalow) will be lesser as
compared to Year 1 and 2. We can however see an increase in the average monthly price for
the month 4 (April) and 5 (May), which are the summer times in the US and the prices hikes up
during that period.

Appendix

Exhibit 1 (Price Regression)

Exhibit 2 (Conjoint analysis)

Exhibit 3 (Van Westendrop - Budget Hotel prices)

Exhibit 4 (Van Westendrop - Mid-range Hotel prices)

Exhibit 5 (Van Westendrop - Premium Hotel prices)

Exhibit 6 (Time series data analysis)

Exhibit 7 (MA(2) VS MA(3))

Exhibit 8 (Price forecasting)