Dynamic pricing — Airlines practice it. So do online retailers and sports event organizers. Should hotels be an exception, then? Also known as time-based pricing, dynamic pricing strategy is a revenue-management strategy employed by various industries, involving real-time tweaking of prices of products or services on the basis of their demand and supply.
Dynamic pricing in the hotel Industry
Thanks to sophisticated technology and the internet, the pricing operations of hotels have never been more efficient and profitable. Hotels now have much headroom to experiment with revenue management approaches. We now witness their drift from the old fixed pricing approach, wherein the prices of every factor of booking, right from the rate of room to the length of stay would be categorically fixed and the only variable factor would be the number of rooms allotted to each category.
Now, RMs can do quite the opposite. Through regular checks on demand and availability of rooms, the prices can be changed immediately to maximize sales and earn more profits every day.
At low demand levels, low rates can aid in attracting guests and as the demand increases, so can the prices. Of course, customer segments would still be categorized on the basis of their preferences, types of rooms and time of arrival. But the prices for each category will be dictated by the forces of supply and demand. And, pricing managers can do all this with just a mouse-click and a revenue management system in place!
A GBTA Survey on 200 travel managers revealed that 22 percent of them had started using the dynamic pricing method and were already leveraging it with at least one hotel company. This betokens a positive reception of the new approach by the industry.
Revenue managers described the below-mentioned benefits of dynamic pricing, using the pricing structure:
- Cost savings – 47% of adopters
- Access to more types of rooms – 33%
- Transparency of rates – 25%
(Source: GBTA)
How does dynamic pricing work?
Hotels can start the day with a pre-determined forecast of bookings till a specific time of day, say afternoon. If the number of bookings exceeds or meets the estimate by that time, new and increased prices can be quoted for the next bookings owing to the observed demand surge. On the flip side, lower prices can be quoted if the bookings fail to match the forecast.
Understanding Dynamic Pricing Strategy in Hotels
Take an example to understand the concept of dynamic pricing further;
Consider the case of the above-shared table of two scenarios A and B; the hotel has two-tiered pricing in scenario A with a group rate of $90 and a transient rate of $130. In scenario B, the hotel has a multi-tiered pricing: a low-demand rate of $90 and other rates of $110, $130, and $150, offered at increasing occupancy levels.
Scenario B produced $2,600 more in revenue, witnessed an ADR increase of $10.40, and a RevPAR upsurge of $8.67.
Note that in scenario B, the revenue manager closed the $90 rate after 80 rooms were booked and set the rate $110. After 60 more rooms were booked, this rate was closed and the next 60 rooms were booked for $130. When the next 60 units were booked and the hotel had 200 rooms booked, a rate of $150 was offered for the last 50 bookings.
This approach increased room revenue, ADR, and RevPar by 9.8 percent without selling more units
But, that is not where it ends.
Instead of adopting the common, “low to high” approach described above, the “high to low” approach can be used wherein a hotel quotes high prices at the start of the day and lowers the prices later if the demand fails to materialize.
Consider this scenario to understand this concept;
Consider a case where a revenue manager has forecasted a 75 percent occupancy for the day, only to realize that the day opens looking at only 60 percent ROB (rooms on the book) with a $150 BAR.
Assuming that the missing 10 percent occupancy can be realized from walk-ins and same-day bookers, but by early afternoon, there is no demonstrated new demand for the posted rate. Late afternoon, the revenue manager decides to mediate and lowers the BAR to $139. And booking starts coming in; by 6 P.M., the hotel has picked up enough same-day bookings to expect 80 percent occupancy.
Next, by shopping the comp set, the RM learns that some of the other competitor hotels are starting to sell out of certain room types. The revenue manager at this point decides to change tactic again. At 6:15 P.M., the RM closes down the discounted rate and posts a new rate for walk-ins of $180.
Such is the power of dynamic pricing in the hotel business.
Another way to ensure consistent profit maximization is to go the ‘U’ way. Hotels can keep a limited time window for which low booking prices would be offered, say, within 30 days from the booking date. Prior to this time window, high prices would be quoted. As the demand would increase within the 30-days-window, increased rates can be declared.
What is in it for hotels?
- Due to countless ever-changing factors, the room rate striking the fancy of a customer from one market segment would almost always differ from that of another market segment. Dynamic Pricing Strategy in Hotels tap to into multiple segments with a temporary reduction or increase in prices.
- Offering the lowest price is the easiest way to squeeze into the buying window while enhancing the likelihood of visitor-to-buyer conversions.
- Prices of competitors can be observed for comparison and the hotels who have priced the bookings low can increase the prices to match the market price trend and increase their RevPar (revenue per room).
- Dynamic pricing simplifies rate management as discounts would be offered dynamically for all room types throughout the year, with more access to different room types for the guests being an obvious corollary.
Points to consider
While continuous price-tweaking may always seem like a win-win situation, the possible perils merit attention.
- It may lead to customer estrangement due to customers getting upset on being a target of price discrimination and it undermines price integrity of a brand.
- Decreased adherence to a hotel brand may occur because volatile prices will make customers make the room rates their top most priority and they may overlook other qualitative considerations as a result.
- Increased competition due to fading customer loyalty can engender the bidding down of room prices and reduction in profit margins, which may affect hotels.
Then, should a given hotel compete on price? That is a strategic decision to make. If a revenue manager makes a measured decision to use pricing as a competitive weapon, dynamic pricing can become one of the most effective tools in the combat for price-sensitive customers.
Hence, caution must be practiced while carrying out pricing operations in a highly competitive market. Demand forecasts should be made by thoroughly studying aspects such as arrivals, reservations, conversions, cancellations, group bookings, no shows, seasonality and customer loyalty.
Pricing intelligence software tools are most needed now, to compare prices, track inventory, to give hotels the market information they need and aid their pricing decisions and distribution while they stay competitive and kicking!
