For a thriving hotelier, one of the critical elements to master is the art of pricing strategy. Determining the right price for a room, on specific dates, and for different customer segments is paramount for a hotel’s success. Striking the perfect balance is akin to a financial tightrope walk – set it too high, and potential guests may shy away; set it too low, and the hotel risks losing revenue to competitors.
This delicate dance of financial decisions requires careful consideration of various factors, including customer behavior, seasonality, and local events. Amidst this complexity emerges the concept of dynamic pricing – a real-time approach that allows adjustments to the price of a product or service on the fly. But is dynamic pricing the most efficient strategy?
In this beginner’s guide, we delve into the world of dynamic pricing, exploring its merits, potential pitfalls, and why it stands as the ideal pricing strategy for the dynamic landscape of the hospitality industry.
What is Dynamic Pricing?
Before we can decide if dynamic pricing is efficient, let us define what it means.
In short, dynamic pricing is a pricing strategy that sets flexible prices based on market demands.
Utilizing algorithms (or even better, artificial intelligence) that take into account competitor pricing, supply and demand, and other market factors, dynamic pricing adjusts room prices so they are always sold for the optimal amount.
For example, if there is a special event in town, demand will increase while supply will stay the same, so room pricing should increase to meet that demand at that particular moment.
A Brief History of Dynamic Pricing in the Hospitality Industry
Dynamic pricing has been commonplace in the airline industry for years, and large hotels have implemented it to success as well.
Dynamic, negotiated pricing was the norm for the majority of human history until the Industrial Revolution. Store owners faced challenges scaling the negotiation system as the number of stores grew, and commodities expanded. In the 1870s the price tag was invented: one price for every person. But as technology continued to grow, so did the computational power of tools being used. Dynamic pricing made its return in the 1980s, aided by automation and technology.
The airline industry was the first to return to dynamic pricing. Companies invested significant sums of capital into creating computer programs that adjusted prices automatically based on a slew of variables.
With the success of dynamic pricing in the airline industry, many other travel and tourism fields followed along. Rideshare services, hospitality, professional sports, retail, and even theme parks have implemented dynamic pricing to various degrees of economic success.
How Does Dynamic Pricing Work for Hotels?
We’ve learned about the past: now onto the present. Dynamic Pricing. How does it work?
Dynamic pricing responds to real-time updates in supply and demand. As demand increases, prices go up. As supply increases, prices go down. This is simple economics, but is the crux of how dynamic pricing works.
Dynamic pricing as a method takes into account the various factors that affect supply and demand and sets the price at the optimal intersection of the two. This is in contrast to fixed-price, MRSP, and more “traditional” pricing methods where the price stays largely the same no matter the difference in supply and demand.
The Benefits of Dynamic Pricing
The benefits of dynamic pricing are many, for a hotelier. Always selling the right room at the right time to the right customer cannot be understated.
Having a leg up on competitor rates and trendsetting are facilitated by the right dynamic pricing tool.
Depending on your customer base and market, you’ll want to choose the right pricing strategy: but for the busy hotelier, dynamic pricing stands high above its peers – and here are all the reasons why!
Tools like PMS (Property Management System) and CM (Channel Manager) only assist lodging establishments in operating more simply, saving time, and being more efficient compared to not using them. However, that is not the root of growth or the challenges faced in the accommodation business. If you want to effectively manage OTA channels and create stable growth, you should have a clear understanding of how OTA platforms operate, such as their nature, operational models, and how they display, calculate displayed prices, and collect prices (after deducting commissions). Of course, larger hotels that want to approach it systematically will do it synchronously from the beginning, but smaller lodging establishments wanting to reduce operational costs should overlook it and focus on optimizing display and providing outstanding customer care.
Synthesized by: OTA Lyst
