In today’s dynamic travel landscape, static hotel pricing is quickly becoming a thing of the past. Enter hotel dynamic pricing – a strategy that many hoteliers deploy, on the basis that it is widely accepted to be conducive to greater profitability.
In this article, I state what hotel dynamic pricing is, how it differs to static pricing, its pros, cons, how hotels use it, how to implement a hotel dynamic pricing strategy, how to ascertain if dynamic pricing is right for your hotel and the risks of static pricing.
What Is Dynamic Pricing In Hotels?
Dynamic pricing in hotels is a strategy that uses data and analytics, in real-time, to automatically adjust prices, based on various factors, for the purpose of maximising revenues and profitability.
For example, a consequence of hotel dynamic pricing will likely see guests pay more for a hotel room in London when Wembley is hosting the FA Cup Final than they would on a Sunday in January! Why? The price of the hotel room has been dynamically adjusted to reflect demand and local market conditions.
What Is The Difference Between Static And Dynamic Hotel Room Rates?
Static hotel room rates will remain at the same price, irrespective of competitor prices, demand, events and seasonality, which makes it easier for hoteliers to set up and subsequently maintain prices.
Dynamic hotel room rates, however, will instead fluctuate based on various factors, such as competitors prices, demand, events and seasonality, but this makes them more complex to manage and requires algorithms and/or software, such as a Revenue Management System (RMS), to analyse data and compute optimal prices.
The Pros Of A Dynamic Pricing Strategy
A hotel dynamic pricing strategy offers several advantages for hotels, both in terms of revenue and efficiency. The key benefits are:
- Competitive Advantage – Respond quickly to competitor price changes and market fluctuations, avoiding over/under pricing your rooms.
- Data-Driven Decision Making – Gain insights into customer behaviour and market trends, informing future pricing strategies.
- Improved Occupancy – Sell rooms that may otherwise remain unsold by adjusting prices to match demand, leading to increased revenues and greater resource utilisation.
- Increased Profitability – Charge more on high-demand days, during peak times and attract budget-conscious travellers during the low season, maximising profitability.
- Reduced Price Sensitivity – By effectively communicating the rationale behind dynamic pricing, hotels can mitigate against a perception of unfair pricing that may be held by customers.
The Cons Of A Dynamic Pricing Strategy
Whilst a hotel dynamic pricing strategy has its advantages, there are also some drawbacks that are worthy of a hotelier’s consideration, such as:
- Complexity & Time Required – Managing hotel dynamic pricing algorithms, monitoring data and subsequently making manual adjustments requires specialist expertise which can also be time-consuming.
- Implementation Costs – Requires investment in data analysis and technology and can increase operational costs.
- Technical Errors – Algorithmic flaws and/or inaccurate data can lead to sub-optimal prices, leading to lost revenue and/or potentially deterring customers.
How Do Hotels Use Dynamic Pricing?
Hotels leverage dynamic pricing like a chameleon utilises its ability to change colour to adapt to its environment – they constantly adjust room rates based on real-time market conditions. Here’s how it works:
Gather Intel:
Hotels gather intel on factors that may influence how many rooms they sell and the prices at which those rooms are sold. This will include their own past data, such as booking trends and seasonality, which is combined with forward-looking data to predict future demand and subsequently compute or generate optimal price recommendations.
Make Adjustments
Based upon the recommendations, hotels can adjust room rates, which may be adjusted based upon factors such as availability, competitor prices, economic trends, guest ranking, local events, market data and travel industry fluctuations. This may happen daily or even hourly depending on how quicky demand fluctuates and/or how many rooms have been reserved in those time periods.
Find The ‘Sweet Spot’:
Hotels continually strive to find the pricing ‘sweet spot’ that allows them to maximise revenue whilst continuing to attract guests and remain competitive, but are careful not to raise prices too aggressively, which can damage brand image and lead to unhappy customers.
How To Implement A Dynamic Pricing Strategy
Implementing a dynamic pricing strategy for your hotel requires detailed planning and meticulous execution.
Below are 5 steps you can follow to create a dynamic pricing strategy:
- Define Your Goals – What is it you want to achieve? Do you want to increase occupancy, maximise revenue, or both? Which customer segment(s) are you targeting?
- Collect & Analyse Data – Analyse historical booking trends, day of week patterns and demand seasonality. Monitor ongoing factors like availability, competitors prices and guest ranking. Keep informed about broader economic trends, local events and market data and industry changes too!
- Choose A Revenue Management System (RMS) – Invest in an RMS (many of which cater to different budgets and hotel sizes), that analyses data, computes optimal prices, enables the implementation of those algorithm-based suggestions and can combine this with pre-defined rules for increased flexibility, to maximise revenues for your property.
- Develop The Right Tools –Integrate your chosen RMS with your desired or existing systems, if possible, such as your Property Management System (PMS), Channel Manager and Booking Engine and ensure seamless data flow between them all.
- Implement & Monitor Your Strategy – Implement your dynamic pricing strategy, continuously analyse your data, monitor your performance, record your results and subsequently make adjustments to your chosen strategy, if appropriate.
Tip! Appoint a revenue management expert to assess the algorithm-based suggestions and to intervene or override suggested prices to address any perceived issues and retain control. They can also provide tailored advice in regards to creating pricing structures that cater for a variety of targeted customer segments and room types!
Is Dynamic Pricing Right For Your Hotel?
Whilst dynamic pricing in hotels is the right choice for some, it is not necessarily the most suitable choice for every hotel. Below are some key considerations, when assessing the suitability of dynamic pricing:
Factors Favouring Dynamic Pricing:
- Competitive Market – If your hotel is operating within a dynamic local market with fluctuating demand and varied competitor pricing, dynamic pricing will enable you to remain competitive and react quickly to market changes.
- Multiple Room Types & Segments – If you cater for different guest segments or offer a range of room types, dynamic pricing enables you to tailor pricing strategies accordingly.
- Revenue Management Expertise: Implementing dynamic pricing in hotels effectively requires data analysis and strategic decision-making. Consider if you have the requisite resources and if not, if you have a budget to invest in revenue management expertise.
Factors Against Dynamic Pricing:
- Limited Competition & Stable Demand: If you operate in a relatively static market with consistent demand and little competition, dynamic pricing may not offer significant benefits.
- Limited Resources: If you do not have a budget for dedicated revenue management expertise, the complexity of hotel dynamic pricing may prove overwhelming.
- Simple, Transparent Brand Image & Targeting Budget-Conscious Travellers: If your hotel prioritises a clear, predictable approach to pricing and targets highly price sensitive customers, implementing dynamic pricing may contradict your brand values and deter prospective guests.
The Risks Of Static Pricing
Static pricing, whilst offering simplicity and ease of budgeting for travellers, can come with several risks for hotels:
- Inefficient Occupancy: High fixed rates during low demand periods can lead to empty rooms and offering the same rate all year round might attract so many bookings during peak times that it compromises service quality.
- Reduced Competitiveness: An inability to respond to sudden shifts in competitor pricing, demand or other external factors can leave you at a disadvantage against competitors who employ dynamic pricing, which may force you into unsustainable price reductions in a bid to remain competitive.
- Revenue Loss: On high demand days, during events and peak season, static pricing may see you fail to obtain full market value for your rooms, limiting your hotel’s revenue potential. Conversely, on low demand days and/or during the off season, fixed rates may be too high to attract budget-conscious travellers, leading to empty rooms.
Does Your Hotel Need A Better Pricing Strategy?
The optimal pricing strategy depends on various factors specific to your hotel, local market dynamics and your targeted customer segments. Conduct thorough research into your competitors and evaluate the needs of your property before making a definitive decision.
At MavREV, we specialise in providing outsourced revenue management expertise remotely at a fraction of the cost associated with employing a full-time revenue manager. We maximise RevPAR using MavPERFORM RMS, an algorithm-powered, cloud-based and responsively designed RMS and Price Optimiser that saves valuable costs and time!
Interested? Get in touch to book your free 1-2-1 consultation now!
