In your efforts to take your hotel revenue management up a notch, you’ve probably crossed paths with dynamic pricing. It’s quite understandable that you find yourself confused, especially if you have never encountered dynamic pricing before.
What exactly is it? How do you implement it? Is there something that can go wrong? These are just a few questions that can potentially bother you. This is why we decided to provide you with a hotel dynamic pricing guide.
What is the meaning of dynamic pricing in the hotel industry?
Dynamic pricing is just one in the line of many pricing strategies that you have at your disposal. As the name suggests, dynamic pricing refers to a pricing strategy where you continually tweak the room prices in real-time. The price tweaking is based on the hotel pricing algorithm and can be applied to all subdomains of hotel price classification, including luxury, all suites, economy, and budget.
The algorithm takes into account a number of factors to determine room rates in real-time. The factors range from competitor pricing and consumer demand to current occupancy and seasonality. Dynamic pricing is becoming more popular as automated revenue management becomes a paradigm in the travel and hospitality industry.
What are the benefits of dynamic pricing for hotel revenue?
The most noteworthy benefit of dynamic pricing for hotel revenue is improved hotel revenue. Dynamic pricing can help you significantly improve profits. Its primary goal is to increase occupancy, which directly translates into revenue. Since the dynamic prices are based on market trends and competitors’ pricing, your prices will be more competitive, and you can increase RevPAR.
Dynamic pricing can help you attract more price-sensitive customers without raising suspicion by offering significantly lower prices. Dynamic pricing can help you understand your target customers better. You can fine-tune the algorithm to adapt even better average room rates, the ones that reflect current customer behavior and market trends.
Hotel static or fixed pricing vs. dynamic pricing
Before you decide to adopt a certain pricing strategy, you need to know more about it. Let’s see the outcome of hotel static or fixed pricing vs. dynamic pricing lineup. Fixed pricing is often referred to as cost-based pricing in the hotel industry. Up until recently, it was the most dominant strategy in the tourism industry. The prices reflect the hotel costs and have nothing to do with optimization and market segmentation.
On the other hand, dynamic room pricing is rooted in price optimization. It’s time-based and changes in real-time. It’s handled by specialized software, which means you don’t have to spend a minute of your time dealing with it. Static pricing is done manually and requires significantly more time. Finally, platforms for dynamic pricing can provide you with accurate RevPAR forecasts.
Generally speaking, dynamic pricing is a far better and more advanced pricing strategy for hotels.
Examples of dynamic pricing strategies
Hilton was among the first to adopt dynamic pricing. The hotel started doing it back in 2004 when access to technology was limited. Today, with the right revenue management software, the hotel has completely switched to dynamic pricing, even expanding it to its loyalty program. The results — added flexibility, increased cost savings, and increased revenue.
Another great example is the renowned boutique hotel by the name of Matildas located in Santiago, Chile. The hotel implemented a revenue management system with a price intelligence engine. The results were outstanding — more competitive prices, increased revenue, and decreased labor costs.
How to implement it?
Dynamic pricing is made possible thanks to data. What data are we talking about? Here are the main data pipelines that power dynamic pricing-enabled hotel booking:
- Your business KPIs (to help you clearly define the goals of dynamic pricing);
- Market pricing, supply, and demand;
- Trends in guest behavior, wants, and needs;
- Pricing of main competitors.
Due to the numerous factors mentioned above, implementing dynamic pricing without proper software is borderline impossible. By the time you manage to collect data from all the channels, the chances are that at least one element will change, making your pricing strategy less relevant for that exact point in time.
This is why hotels interested in implementing this pricing model look for hotel revenue management software with a pricing intelligence engine. It enables them to implement dynamic pricing effortlessly. They basically install the system, and from that point on, everything is automated.
The pricing intelligence engines are based on the Delphi method, fuzzy cognitive maps, or both. Some of the best systems are also based on Machine Learning which helps them to excel at identifying patterns and forecasting price predictions.
While it is quite interesting learning about these systems and how they work, as a hotel owner or manager, you might be more interested in what to look for when shopping for these systems on the market.
Having a fully automated system is great, but you should never let go of control 100%. The two most important things to look for in a price intelligence tool before adopting and implementing it include:
- Built-in alert systems — these notification systems are designed to alert you whenever a certain condition is met. For instance, you can configure the system to alert you when the competitors lower their prices.
- Manual configurations — the best tools in the market will allow you to view rates in real-time and even filter rates by price, occupancy, room type, and so on.
Dynamic Pricing and its approaches and techniques can be applied to room upgrades and other upselling and cross-selling efforts. As one of the leading brands in the industry, UpStay brings an excellent software solution. It uses dynamic pricing to drive more guests to opt-in and buy room upgrades – this is the primary function, but you also have auxiliary functions, like adding a better meal plan, and more.
Dynamic pricing implementation was a daunting and expensive pricing strategy to implement just a decade ago. However, thanks to the emerging technologies, it is not available even to small hotels. When it comes to implementation, the most important thing to do is to pick the price intelligence engine and revenue management system that reflects your hotel’s unique needs and goals.
Graduated from Standford University, Arielle has over 5 years of experience in the Hospitality industry. She holds an MBA in business administration from the IDC Herzliya, Israel. She currently works as Account Manager at UpStay, building and maintaining strong, long-lasting customer relationships. She is deeply passionate about helping hoteliers unlock significant new revenue streams from unsold premium inventory.