If the lowest price always wins, students are not learning pricing strategy. A useful pricing strategy simulation makes every discount answer to willingness to pay, demand response, contribution, customer mix, finite capacity, and competitor behavior. Low price can be defensible, but its opportunity cost must appear in the evidence.
The instructor can reinforce that design by grading rationale and contribution rather than Market Share or occupancy alone. When students know that "sell the most" is not the assessment rule, they are more willing to compare objectives and defend a price position.
Give pricing a defined objective
Before the first decision, ask every Team Company to choose a primary pricing objective. It might seek customer value, volume, Market Share, target return, competitive parity, or contribution. OpenStax’s pricing-policy framework begins with objectives, then estimates demand and costs, examines the external environment, and selects a strategy or tactic.
Require teams to name the measure associated with the objective. A volume objective uses units or occupancy. A target-return objective needs profit or contribution. A customer-value objective needs a defensible relationship between the offer and willingness to pay.
Then add a constraint. For a hotel, room nights expire at the end of the period, but selling a room below a sensible contribution does not create future inventory value. Finite capacity makes both empty rooms and excessive discounting costly.
Teach the contribution logic before competition begins
Students should be able to calculate unit contribution.
Unit contribution = Price – relevant variable cost
Total contribution is unit contribution multiplied by units sold, subject to the scenario’s cost definition. Ask teams to calculate how many additional units a price cut must sell to preserve total contribution. This "break-even volume" question makes the tradeoff concrete before competitors complicate it.
For example, if contribution per unit falls by 20 percent, units must rise by 25 percent to preserve total contribution. Use the actual scenario values rather than treating that example as universal.
Keep profit distinct from contribution when fixed costs, marketing, service investment, capacity, or financing also change. A decision can improve room contribution while reducing net income after added spending.
Scroll sideways inside the graph and table to see all the data. You can also focus it and use the left and right arrow keys.
Use a fictional hotel with 100 available room nights and a $40 variable cost per occupied room. The original plan sells 60 rooms at $100. A proposed $88 rate is expected to sell 70 rooms. Keep service, capacity, and all other costs unchanged. These figures are a teaching example, not Hotel Revenue Strategy settings.
| Plan | Room rate | Rooms sold | Unit contribution | Total contribution |
|---|---|---|---|---|
| Original plan | $100 | 60 | $60 | $3,600 |
| Discount forecast | $88 | 70 | $48 | $3,360 |
| Required volume | $88 | 75 | $48 | $3,600 |
The rate cut reduces unit contribution from $60 to $48, a 20% fall. Preserving $3,600 requires 75 rooms, a 25% increase from 60. Capacity permits 75 sales, but the forecast supports only 70. Total contribution excludes fixed costs and is not net profit.
Use customer mix and rate fences
One posted price can leave value uncaptured when customer groups differ in willingness to pay or flexibility needs. A hotel context makes rate fences legible. A standard rate may appeal to price-sensitive leisure and group demand, while a flexible or refundable rate may be more valuable to business travelers.
A rate fence must be tied to a real difference in the offer or purchase conditions. The lesson is to align a price plan with distinct value, restrictions, and demand patterns, not to label customers and charge arbitrarily.
Ask teams to state which customer group each rate is intended to serve, what feature supports the difference, and how much capacity they will reserve. When the demand mix changes, students must decide whether to adjust rates, allocation, or both.
Prevent the first Round from becoming a race to the floor
Use three safeguards in the lesson design.
First, do not announce a prize for highest Market Share or occupancy. Second, require a price rationale and predicted contribution before submission. Third, show multiple measures after the Round, including price, units, occupancy, revenue, contribution or profit, unused capacity, cash, and relevant investment.
If a simulation includes guardrails such as price bounds, explain them. Guardrails can stop degenerate strategies, but they do not replace economic reasoning. Students still need to decide where within the feasible range the price supports the objective.
Do not instruct teams to avoid low prices. A disciplined discount can be rational when incremental demand covers the lost unit contribution, capacity would otherwise expire, and the customer or timing conditions support it. The point is to make that case with evidence.
Run a four-phase pricing lesson
Phase 1: Price, demand, and utilization
Teams set the initial standard rate and room availability, state an objective, and predict units, occupancy, and contribution. After the Round, compare a high-rate and low-rate company without declaring either approach correct.
Phase 2: Customer mix and differentiated rates
Introduce the flexible rate and changing leisure, business, or group demand. Ask whether the spread between rates reflects a meaningful value difference and how capacity is allocated.
Phase 3: Capacity commitment
When durable capacity investment becomes available, ask teams to distinguish a current pricing response from a long-term capacity decision. More rooms are not useful if expected contribution does not cover the commitment and associated risk.
Phase 4: Competitive response
Ask teams to anticipate one rival move and decide whether to match it, differentiate, or hold position. They must name the evidence threshold that would trigger a response. This reduces reflexive undercutting.
Debrief the price war as a collective outcome
Display price dispersion and contribution over several Rounds. Ask when a sequence of individually understandable cuts produced a weak collective result. Then examine deviations. Did any Team Company defend contribution through customer mix, service, or capacity discipline?
Use these prompts.
- Which price change increased units but reduced total contribution?
- Where did high occupancy conceal a weak rate?
- Did the flexible rate capture different willingness to pay or merely shift customers?
- Which capacity decision increased availability without weakening cash or profit?
- What rival action would justify changing price next Round?
Avoid saying that one variable caused the outcome when other decisions changed. A useful two-company comparison holds capacity and service reasonably close while examining rate differences, or holds rates close while examining demand mix and allocation.
Connect pricing to elasticity without confusing the concepts
Elasticity describes responsiveness. Pricing strategy combines that response with objectives, costs, positioning, capacity, and competition. A segment can be price-sensitive and still be unprofitable to pursue at a deeply discounted rate. An inelastic segment may support a higher price, but customer value and competitive alternatives still matter.
Ask students to estimate the direction of elasticity from two suitable observations and then perform a contribution check. The companion lesson on teaching price elasticity with a simulation provides the midpoint calculation and cautions about stockouts and simultaneous competitor moves.
Grade a pricing memo, not the lowest rate
Require a short memo with the objective, rate plan, demand assumption, break-even volume, capacity constraint, competitor expectation, and two pieces of Round evidence. Students should recommend hold, raise, lower, or differentiate, then identify what would make the recommendation wrong.
Grade consistency and evidence. A Team Company that maintained a high rate can be wrong if it ignored unused capacity and customer mix. A company that discounted can be right if it anticipated incremental demand and protected contribution. Neither price direction earns marks by itself.
Use Hotel Revenue Strategy for the lesson
Price Wars: Hotel Revenue Strategy is ClassTycoon’s eight-Round Pricing Strategy scenario, designed for about 75 minutes. Team Companies manage standard and flexible rates across leisure, business, and group demand, then add promotion, service, capacity, and financing decisions. Unused room nights expire after each Round, so both empty capacity and careless discounting remain visible.
Hotel Revenue Strategy is available with Pro. Explore it in the simulation library and review access on Pricing. Set the assessment rule before play. Reward the quality of the price decision and its evidence, not the spectacle of the lowest number.
Frequently asked questions
Should I impose a price floor?
A scenario may use a floor as a guardrail against implausible play. Explain it, but still require students to evaluate contribution, capacity, and customer value within the allowed range.
Is high occupancy always good for a hotel?
No. Occupancy must be evaluated with average rate, contribution, customer mix, and capacity cost. Filling rooms at a weak rate can underperform a more disciplined plan.
How do I discuss competitors without encouraging collusion?
Ask teams to anticipate and respond to published market evidence, while keeping private future decisions independent. Discuss coordination as an economic counterfactual after decisions close.