Market fluctuations can happen instantly in the hospitality industry, affecting customer demand. These changes in demand
- A Deep Dive Into Developing a Dynamic Pricing Strategy in Hotels
Table of Contents
Static pricing and seasonal room rates are no longer the frontrunners in maximizing revenue and boosting profitability for most hotels. Revenue managers and hoteliers must consider supply and demand, allowing prices to fluctuate to increase your property’s occupancy. This is where dynamic pricing becomes handy.
Dynamic pricing leverages real-time data and algorithms to guarantee maximum occupancy and improve overall revenue. And it’s more than just the profit and money your hotel will get. It’s also about establishing more strategic planning to always meet consumer demands.
Discover the ins and outs of dynamic pricing, how it works, its benefits, and various effective strategies for your hotel’s success.
What is Dynamic Pricing for Hotel Revenue?
Think of dynamic pricing as a flexible price tag on your favorite goods and services. The rate increases or decreases based on several factors and real-time data. Like plane fares that constantly change ticket prices on specific days and routes, dynamic pricing also increases hotel revenue.
Through algorithms and data fluctuations, dynamic pricing can automate revenue management to implement room rates to increase your hotel’s sales and profitability. For dynamic pricing to be effective, it must consider:
- Competitor pricing
- Consumer demands
- Current occupancy
- Other external factors
Like a chameleon that easily camouflages to its environment as its defense mechanism, dynamic pricing increases rates during high demand and decreases prices when demands slow down. This is a way for hotels to adjust to the present environment using historical data, current market trends, and supply and demand.
How Does Dynamic Pricing Work in Hotels
Revenue managers can release pre-determined forecasts of room rates until a specific time of the day. When the number of bookings meets or exceeds the quota by that time, your hotel can release increased rates for the following bookings because of the demand surge. At the same time, revenue managers can lower the prices when the bookings don’t match the forecast.
Another way dynamic pricing works is by using the “U” method. Low booking prices are offered in limited time windows, and booking periods before and after the window can go up. This ensures hotels can maximize revenue and boost the property’s occupancy.
Hotel dynamic pricing algorithms must also focus on the following:
- Different market segments
- Day of the week patterns
- Occupancy demand
- Guests’ average length of stay
- Guest booking patterns
- Room type preferences
Moreover, revenue managers must be familiar with their hotels’ shoulder, peak, and off-seasons, market segment performance, areawide special events, and other market demand generators. Detailed market research is also essential to achieve maximized revenue and increased ADR and RevPAR.
Advantages of the Dynamic Pricing Model in Hotels
An effective dynamic pricing model in hotels can establish more competitive rates and achieve more room occupancies for an overall increase in profitability. This strategy boosts sales and matches the best prices to meet consumer demands. Plus, dynamic pricing also allows hotels to better understand customer behavior.
Generates Higher Level of Demand
Consumers love trusting brands that offer prices reflecting current market trends, making the business appear more reliable. When a price-sensitive individual is looking for the cheapest room rate, there’s a high chance he will be excited to get the room when your hotel offers a quick price drop.
Dynamic pricing also helps minimize lost revenue because of unsold rooms. The strategy can offer the rooms at cheaper rates for price-sensitive guests.
Better Insights in Customer Behavior
Dynamic prices adjust room rates based on customer behavior, allowing revenue managers to monitor and understand various audience segments, their room preferences, and booking patterns. Considering these critical factors can help you determine the most attractive segments that will make your property benefit the most.
Always study how different customers are affected by seasonal peaks and special occasions, and adjust standard room rates based on the guests’ changing preferences.
Generating effective pricing strategies needs a significant amount of time to analyze data and trends from various processes. With a dynamic pricing tool in place, your team members can have more time to focus on other duties, including the following:
- Developing business strategies
- Creating marketing campaigns
- Event management
Proper communication of the tools used in dynamic pricing also allows for quicker decision-making, higher occupancy percentages, and better RevPAR performance.
What is One Benefit of Dynamic Pricing
The most crucial benefit of dynamic pricing in the hotel industry is paving a sustainable way to succeed. This strategy allows revenue managers to maximize revenue, stay competitive, and deliver well-deserved value to the guests.
Dynamic pricing strategies allow companies to adjust the prices of their products or services in real time based on demand, market conditions, competition, and customer behavior. By doing so, hotels can optimize their pricing to capture the highest possible value from each transaction.
More than an effective strategy, dynamic pricing is an essential tool for your hotel’s long-term growth in the dynamic hospitality field. It aligns room rates with the current demand so that pricing will not dissuade potential guests during peak seasons.
This flexibility in price adjustment not only enhances revenue but also helps in better resource allocation and inventory management, leading to increased profitability and a more competitive position in the market.
Dynamic Pricing Strategies Hotel Managers Should Implement
A common reason a few hotels still prefer static pricing is that the operators and hoteliers don’t know where to start. Thankfully, simple strategies exist that can help hotels boost their confidence in generating fitting room prices.
Hotel Dynamic Pricing Strategy
Adjust stay restrictions to sell rooms
Boost overall occupancy
Change room prices based on occupancy
Selling all rooms and becoming fully booked becomes easier
Look at competitor activity
Considering your comp set to act quickly and change rates immediately
Price Skimming (sets rates above the highest rates of a hotel’s competitors)
Maximize revenue for every room sold
Adjust Stay Restrictions to Sell Rooms
It’s more common for hoteliers to prioritize busy nights and neglect slower nights, losing the opportunity to gain more revenue by allowing guests to book rooms for longer periods. Adjusting minimum stay restrictions allows your property to boost occupancy.
For instance, when there’s an upcoming concert near your hotel, you can implement a minimum length of stay or MinLOS for two to three nights at an affordable rate. Even though the prices are cheaper, the boosted occupancy can still increase your overall revenue.
When the concert is approaching, you can remove the restrictions to allow other guests to book the remaining available rooms. Additionally, implementing stay restrictions is also helpful during busy weekends and slow weekdays.
Change Room Prices Based on Occupancy
More occupancy means higher demand, so you’ll likely increase your rates. We understand that hiking your room rates is the first reaction during a surge in demand, but measured approaches can also be practical.
For instance, let’s say your hotel has 20% occupancy. Instead of spiking the rates to more than twice the original price, consider gradually increasing them to test the waters. This decreases the risk of potential consumers looking at your competition because of overpriced rooms, which also increases the chance of your property going full house.
Look at Competitor Activity
Your competitors’ rates are also significant, besides current market trends. Always pay close attention to your Compset, which refers to five or more properties in the same area that share the same guest segments with your business.
Sudden price changes in your competitors can signal they are preparing for a fall or spike in reservations. And you must act quickly to set effective pricing opportunities.
Before lowering your room rates to match all guests’ demands, try adjusting the prices to the maximum amount your guests can afford. This is a quick strategy to maximize your rooms’ profitability and overall revenue. Over time, you can lower your room rates to cater to more price-sensitive individuals.
How to Build a Dynamic Pricing Model
Your hotel’s customers are the pillars of building an effective dynamic pricing model and adequately implementing it. As business leaders, there must be a clear line between clients that contribute the most to your overall revenue and those that don’t.
1. Develop Price Differentiation
Price differentiation is critical, mainly because there are no two consumers who are alike when booking rooms. Part of offering different prices is quantifying your customer personas by acquiring the following data sources:
- Google Analytics—determine demographics and how customers found your site
- Social media analytics—information about your audiences’ age, location, and gender
- CRM data—helps identify whether the guests are staying for business or leisure
- Human insights—based on interviews, guest reviews, and group planners
Based on your quantified buyer personas, you can adjust room rates, bringing in dynamic revenue for your hotel.
2. Use A Proper Value Metric
A proper value metric is essential because it ensures that pricing decisions are aligned with the core objective of revenue optimization while providing a fair and competitive rate to customers. The value metric serves as a fundamental input, determining how prices are adjusted based on various factors like demand, seasonality, and competitor rates.
Proper value metrics in the hotel industry include customer segment, room occupancy, or booking lead time. These can help a hotel tailor its dynamic pricing strategy to cater to market conditions and customer segments.
Moreover, a proper value metric maintains customer satisfaction and loyalty. It ensures that pricing remains competitive and aligned with the value of the hotel's services, creating the right balance between revenue management, generation, and customer value.
3. Incorporate Time Within an Auction-style Model
Time-based factors play a fundamental role in revenue optimization, offering the best value to customers. Time encompasses various aspects, including the following:
- Day of the week
- Time of day
- Lead time before the booking date
For instance, during peak seasons or high-demand periods, revenue managers can elevate prices to capture maximum revenue and offer lower prices during off-peak times. This strategy attracts cost-conscious customers and maintains a steady stream of bookings. Furthermore, considering lead time enables hotels to incentivize early bookings or fill last-minute vacancies.
Other Helpful Tips
Other helpful tips and best practices to utilize when building a dynamic pricing model include the following:
- Familiarize yourself with the market - understand peak, shoulder, and low seasons to determine opportunities and fluctuations
- Consistently monitor trends - help adjust your pricing model to boost occupancy and increase RevPAR and ADR
- Know the risks - prioritize your loyal guests because they can provide lifetime value to your property
- Use the right tools - to accommodate large-scale operations and processes
Dynamic Pricing Vs. Static Pricing Strategy
The main difference between static and dynamic is the former provides fixed and rigid room rates while the latter adjusts based on real-time data and market trends. Static pricing was the traditional way of setting room rates, which generally included the following:
- Elevated weekend rate
- Standard weekday rate
- Price increases during peak seasons
External factors like changes in competitor behavior and guest demands don’t affect static rates.
On the other hand, dynamic pricing aims to maximize revenue all the time. Room rates may differ daily, depending on current trends, the competition, and the demand. Today, this strategy is a more effective and valuable way to generate better profit and income for the hotel business.
The most common types of dynamic pricing strategy include:
- Personalized pricing
- Segmented pricing
How it works
This strategy allows you to set different room rates based on the day of the week, seasonality, or time of day. For instance, you could charge more on weekends or for last-minute rooms during the evening.
This strategy focuses on adjusting prices based on the levels of demand for hotels and rooms in a particular area. For instance, you could implement surge pricing during holiday periods, charging more for rooms at this time.
This pricing strategy involves leveraging guest data and reservation history to provide individualized pricing to specific guests. This often works by displaying customized rates based on a user’s purchase behavior and browsing history.
Based on geography, this pricing strategy could mean you charge more for rooms in areas that have a higher annual cost of living, and therefore guests who are likely to have higher income. Or, you could charge more in a heavy tourism area.
Factors to Consider
There are certain factors you must consider when choosing between static and dynamic pricing strategies. One of the most important ones is conducting a thorough market analysis. This means revenue managers must look into tracking trends, market demand, and annual fluctuations.
Gaining insights from your competitors and their pricing strategies is equally valuable in shaping your approach. The nature of your business, whether a chain hotel or an independent or boutique establishment, also has a pivotal impact on your pricing considerations.
Understanding your target audience and their preferences is also necessary. Recognizing customer demographics like age, income level, and the purpose of their travel, whether business or leisure, can influence the pricing structure that aligns with their expectations.
Another factor to consider is your competitor. The geographical location of your hotel significantly impacts the demand and, consequently, your pricing strategy. A hotel in a bustling tourist hotspot may experience heightened demand, justifying higher prices, particularly during peak travel seasons.
The Hybrid Approach
A hybrid approach refers to utilizing both fixed and dynamic pricing strategies for effective revenue management. Your revenue manager can combine certain elements in the dynamic and static pricing models for room rate optimization and better overall profitability.
In a hybrid approach, a balance is achieved by integrating flexibility in dynamic pricing and stability in static pricing. Hotels can establish a base rate in each room to ensure minimum revenue, and that rate can remain constant. Business leaders can apply dynamic pricing to a part of their room inventory to capitalize during high demand and respond to market changes.
A hybrid approach is also helpful in maintaining relationships with corporate clients. Your hotel can offer discounts on the BAR or the best available rate to these customers instead of offering fixed contract rates.
How HouseCount RMS Provides a Real-time Dynamic Pricing Strategy
HouseCount RMS leverages advanced algorithms and data analytics to constantly analyze and respond to changing market conditions.The following are essential key features to establish a practical real-time pricing approach:
HouseCount RMS integrates data sources from current room availability, historical booking data, local events, and competitor pricing. This management system also considers the weather and other external factors that can allow business leaders to view the market comprehensively.
Demand forecasting is essential to help anticipate changes in the demand for various room types during different times of the day. HouseCount RMS can analyze current market data and historical booking patterns as well.
Through demand forecasting, HouseCount RMS can also optimize prices and adjust room rates, especially during high-demand periods. The software can raise the prices during peak season and offer discounted rates during off-season, maximizing occupancy and revenue.
Rate recommendations help hoteliers and revenue managers determine the best price ranges to generate maximum revenue. HouseCount RMS removes the hassle of guesswork out of pricing decisions from the hotel staff and generates price points based on the software’s advanced analysis and algorithms.
HouseCount RMS can also integrate with various distribution channels, including online travel agencies (OTAs) and the hotel's direct website, to automatically update prices across all platforms simultaneously.
The system monitors competitor pricing in real-time, enabling hotels to stay competitive. When competitors adjust their rates, HouseCount RMS can automatically respond, ensuring that a hotel's prices remain attractive in the market.
Using the insights from competitor analysis, HouseCount RMS can generate dynamic pricing recommendations to help the hotel maintain competitiveness and maximize revenue. For example, it might suggest adjusting rates based on the competitive landscape.
How HouseCount RMS is the Best Dynamic Price Strategy Software to Increase Hotel Revenue
HouseCount RMS stands out as the best dynamic pricing strategy software for hotels regarding revenue maximization and optimization. It comprises comprehensive features and advanced innovations, making it an irreplaceable asset for hotel revenue management.
This all-in-one revenue management system also excels in demand forecasting, real-time data analysis, and competitor tracking. It consistently monitors market conditions, allowing hotels to adjust their prices in response to fluctuations in demand, seasonality, and competitive pricing.
The system's ability to provide real-time rate recommendations, considering a wide selection of data sources, ensures that hotels can optimize their pricing strategies.
By offering dynamic pricing recommendations and considering factors like lead time, room types, and local events, HouseCount RMS empowers hotels to maximize revenue while maintaining competitiveness.
HouseCount RMS provides seamless integration with distribution channels, offering rate parity checks and consistent pricing across various platforms. It also provides detailed benchmarking data, allowing hotels to benchmark their performance against competitors and make data-driven pricing decisions.
How LuxSell URS Uses Dynamic Pricing for Hotel Upgrades
LuxSell URS features an innovative upsell tool that allows your hotel to boost and maximize your revenue. Gone are the days when the opportunity to sell all empty rooms and suites was missed. LuxSell ensures revenue managers can offer the most ideal rates to targeted customer segments.
LuxSell URS allows 24/7 optimization and management, upselling pricing solutions to meet the needs of various customer segments. With its easy accessibility, you can communicate and reach various guest touchpoints, from the web to the front desk and even your phone.
Through the platform’s micro-experimentation, revenue managers and hoteliers can monitor channel and agent performance in real time. This ensures your hotel can readily adjust prices depending on relevant historical data and sudden market trends and changes.
LuxSell also features guest segmentation based on the customers’ booking behavior, preferences, and loyalty status. This allows LuxSell URS to offer personalized upgrade options to different customer segments, maximizing the chances of upselling.
Implementing a dynamic pricing strategy in the hotel industry is a transformative approach essential to keep up with the competition. By leveraging advanced technology, data analytics, and real-time insights, hotels can adapt their pricing strategies to align with market demand, seasonality, and the actions of competitors.
This flexibility not only maximizes revenue and profitability but also ensures that hotels remain competitive and attractive, allowing returning guests to stay loyal and potential individuals to become convinced and book rooms.
Dynamic pricing allows hotels to optimize rates, offer discounts during off-peak periods, and capitalize on peak demand, all while maintaining rate parity across distribution channels.
With the help of a successful revenue management system like HouseCount RMS, hotels can continuously thrive and gain the revenue they need to grow in the industr
This system gives hotels the intelligence to make real-time pricing decisions that align with market dynamics and customer demand, ultimately leading to increased profitability.
Schedule a demo today to see how it works and how it can help your hotel properties.
About The Author
Get Hooked! Sign Up to get the latest catch sent to your inbox.