Dynamic pricing can be a contentious topic. Consumers often view it as an exploitative pricing strategy in which brands try to charge the highest possible price for their products or services. For example, in the fast-food industry, the introduction of dynamic pricing has gone down like a lead balloon.
However, despite the backlash some brands have received, there are industries where dynamic pricing, while not necessarily welcomed, is generally accepted. The airline industry is one example, with airlines charging more for passenger tickets when demand for travel to a particular destination is high. Travel accommodation is another, with Airbnb offering a ‘Smart Pricing’ feature that automatically adjusts a host’s nightly price based on demand.
Dynamic pricing is also an accepted practice in the hotel industry. Most guests know they’ll pay more to stay at a city center hotel on the weekend compared to a Monday or Tuesday. Given that dynamic pricing is expected by customers, it makes sense to use it, especially as it can be an effective way to drive revenue growth and create a competitive advantage.
What is dynamic pricing?
Dynamic pricing is a strategy where the price of products and services rises when demand is high and falls when it’s low. The aim is to maximize revenues, manage customer demand, and increase sales during quiet periods.
Dynamic pricing is commonly used in industries where the supply of a product or service is fixed but demand can fluctuate dramatically. The hospitality industry is a prime example, as supply, such as the number of hotel rooms available, is fixed, while demand rises and falls based on factors like seasonality and events in the area. By increasing prices when you’re busy and reducing them when you’re not, you can optimize the average guest spend throughout the year and enhance your occupancy rates.
Many organizations use AI-powered predictive analysis to power their dynamic pricing strategy. It analyzes historical and real-time data to determine appropriate prices in response to changing market conditions. Organizations can change prices multiple times a day, with companies like Amazon repricing millions of products every few minutes. However, it’s argued that keeping prices relatively stable and making less frequent changes can reduce the risk of alienating diligent customers.
What are the benefits and challenges of dynamic pricing in the hotel industry?
In terms of the upsides, dynamic pricing can help keep rooms occupied and boost profit margins during busy periods. The benefits include:
- Higher occupancy rates – Dropping your prices during quiet periods helps you increase bookings and cover your overheads.
- More profit – Charging more when demand is high enables you to sell your available rooms at the best possible rate and boost your margins.
- A better understanding of booking behavior – Predictive analysis gives you more insight into customer behavior and helps you stay one step ahead of the competition.
- No guesswork – AI tools enable you to set prices based on data rather than emotion and guesswork. That prevents you from leaving money on the table.
Dynamic pricing is a good fit for the hotel industry and the benefits are compelling, but as with any pricing strategy, there are also some potential drawbacks.
- Frustrated customers – You must find a balance between profitability and customer satisfaction. Constantly changing prices can affect customers’ loyalty and trust in the brand and reduce repeat bookings.
- High implementation costs – The cost of misjudging price points is high. To avoid that, you should invest in potentially expensive systems that can integrate seamlessly and ensure your data is accurate and up to date.
- Damaged brand perception – There is a risk that price points that are excessively high or low can alienate your guests and devalue your brand.
- Harmful to your relationships with booking sites – Travel companies and travel agents may find it more difficult to book with you due to constantly shifting prices. That could impact their relationship with you in the future.
How to use dynamic pricing in the hotel industry
If you think the benefits of dynamic pricing outweigh the challenges, here are a few tips to help you apply this strategy in your hotel and enhance your competitive advantage.
Keep an eye on the competition
As well as demand and events in the area, another factor that heavily influences your optimum price point is the competition. For example, if your occupancy rates are low, setting lower prices than the competition will help you drive demand. On the other hand, if demand is high, it’s worth checking when rooms in competitor hotels sell out. Once they do, you have a monopoly on supply and can potentially push your prices higher.
Consider the demand for different room type
It’s not just demand for hotel rooms in general that changes. Over the year, certain room types will be more in demand than others. For example, family rooms or rooms with a view may be at a premium during holiday periods, while single rooms may be more requested during the working week. Adjusting your prices to account for these shifts will help you balance demand and profitability.
Remain agile
While predictive analytics enables you to price rooms according to historical trends and forecasted demand, it may not help with unexpected market changes. For example, if there are air traffic control issues or weather disruptions at your local airport, unpredicted demand can suddenly peak. Being aware of what’s going on around you and being agile enough to make quick pricing changes can help you maximize profit and attract last-minute bookings.
Segment guests based on their behaviors
Rather than thinking of hotel guests as a single entity, segmenting them into categories based on their reasons for staying, booking patterns, and travel habits will give you additional insight into their behaviors. For example, what type of guests book last minute and what time of the year are they most likely to stay? Do they want an early check-in option and are they likely to request parking? You can then forecast demand more accurately and refine your pricing accordingly.
Be competitive every day of the year
Dynamic pricing is more than just a pricing strategy for hoteliers. It is a tool for long-term growth that allows you to maximize profitability and influence demand. It can also be used by everything from small, independent hotels to global chains. That helps to level the playing field and enables you to offer the optimum room rate to achieve your goals.The principles of dynamic pricing can also be applied to the hospitality industry’s labor challenges, with benefits for revenue management. Adjusting wages dynamically could be a good way of getting more staff on board when they are most needed. This would work by increasing the hourly wage for housekeeping positions when there’s a labor shortage, or for undesirable shifts. An AI-driven system could calculate the wage levels that job seekers would be willing to accept and assess whether hiring at those wage levels would be profitable for the hotel, taking into account expected revenue and all other associated costs. This is just another facet of the way that AI-driven tools can assist hotel managers to analyze and apply revenue management strategies.
