Dynamic pricing in hotels is a strategy used to improve revenue and ensure maximum occupancy for the hotel based on supply and demand. It is also known as “time-based pricing” due to the fact that these prices are manipulated in real time based on algorithms.
In this article, we’ll delve into the world of dynamic pricing in order to understand how it can improve hotel revenue. We’ll also look at the benefits of this kind of technology to the hospitality sector. So let’s get started.
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What is dynamic pricing in hotels?
We’re all familiar with algorithms at this point, as many of the tools we use on a regular day are based on algorithms. Type anything into google and a complex system of data retrieving goes into action in order to deliver the best possible results for a query; scroll through your instagram feed and the results you will see are calculated by an infamous algorithm that social media experts are constantly trying to overcome.
Nowadays, hotels can also use algorithms that take into consideration data fluctuations in order to calculate prices in real time as a way of automating revenue management, known as dynamic pricing.
This strategy takes into consideration factors that affect market demand such as seasonality, competitor pricing, current occupancy, consumer demands and other external factors. With this in mind, revenue managers can adjust the supply of rooms and adapt a pricing strategy using a hotel revenue management system to understand these trends and implement rates that aim to increase sales and profitability.
How revenue management systems can work in your favor
By choosing a revenue management system like the one Mews offers, with the capability of API integration, you can easily be connected with other hospitality tech software that will help you with revenue management and POS systems. This in turn will help you make better-informed decisions about revenue management.
Revenue managers can monitor demand and room availability and adjust prices accordingly. A simple example is that when demand is low, hotels can offer low prices, and as demand increases, they can offer higher prices.
These decisions can be based on a bookings forecast generated by the algorithm, which sets minimum amounts until a certain time of day. If the bookings surpass the estimates, prices can be adjusted for successive bookings based on demand (whether the strategy be from high to low or low to high).
What are the benefits of dynamic pricing in hotels?
Dynamic pricing has many benefits, which we will explore in further detail below. This revenue management strategy can boost sales, maximizing profits while matching prices to reflect demand. Furthermore, it gives insights into customer behavior. Let’s take a look at each benefit in detail.
Boost sales and maximize profits
The main goal of revenue managers is to minimize the chance that a room goes unsold and maximize the price that is being paid for that particular room. By implementing rates that fluctuate based on the market, RM can boost sales when demand is low by offering lower prices and as a result, mitigate the losses by rooms that go unsold.
By understanding the market trends, you can price hotel rooms at a rate that meets the market price or comes in just enough below the market price so that potential customers choose your hotel over the competition and thus increase occupancy. Increased occupancy, of course, typically means maximized profits.
Prices reflect demand and create higher level of demand
Prices that reflect the market trends give peace of mind to potential clients. From a customer’s point of view, there’s nothing more suspicious than when all hotels are expensive for a given period of time and one hotel has a surprisingly low rate. However, if these trends match the market trends, it’s much more reliable. If a price-sensitive customer is window shopping for the cheapest rate, sometimes a low price or a quick drop in price can put the customer over the edge to book.
Using revenue management software, hoteliers can make demand forecasts that keep in mind seasonality and customer loyalty, while studying reservations data, conversions, cancelations, group bookings and no shows to better adapt the price to what the customers are willing to pay. These dynamic prices can be used to attract new price-sensitive customers who would usually have a high barrier to entry at respective price points.
Since demand levels can be highly variable, dynamic prices can be used to minimize the revenue loss due to unsold rooms. Obviously, unsold rooms equate to zero revenue. If the day arrives and the rooms are still available, rooms can be offered at a lower price to some potential clients, allowing you to maximize your profits by accessing the revenue share available for that particular day.
Understand customer behavior
Since dynamic prices adapt average room rates to meet customer behavior, you can also use this pricing system to better understand customer behavior. The algorithm can be used to monitor different segments of your target audience, their booking patterns, the average stay length, their room preferences, and thereby understand the segments of your hotel that are most attractive. You can see how your customers are impacted by special occasions and seasonal peaks, and adapt your average room rates accordingly. Average room rates can also be adjusted to meet their changing preferences and increase occupancy.
Furthermore, with a changing hotel pricing strategy you have the chance of attracting other market segments that wouldn’t normally book with you by offering lower prices temporarily.
How can dynamic pricing improve your hotel revenue?
Now that you've seen how this strategy works and understand its benefits, let's look at how it can improve your hotel revenue.
Dynamic pricing adjusts room rates to increase occupancy, hence increasing revenue. By monitoring the market trends and comparing your prices with the competition, you can increase RevPAR (revenue per available room), matching your hotel's room prices to the market value.
Another way it can be used to maximize hotel revenue is the “U” pricing strategy in which a certain low price is offered within a certain time window prior to the booking date. Prior to this date, a higher price would be quoted, and as demand increases, you can increase rates once again.
Furthermore, you can adjust those rates to what your guests are willing to pay, so it's a win-win scenario. Guests are happy because they’re paying a fair rate and the hotel is happy because they have a high occupability. Plus, the rates for unsold rooms can be managed in an intelligent manner so that you can potentially decrease your chances that these rooms go unsold, no matter the season. Increased occupancy leads to increased revenue.
In implementing a pricing strategy that mirrors the dynamic market, you’ll be able to charge based on the perceived value of the room, and the rates will be adjusted so that you can increase the likelihood of selling unsold rooms.
As we have seen throughout this article, having fluctuating prices in hotels is a fundamental strategy in order to maximize revenue and decrease the possibility that rooms go unsold. By using machine-learning, hoteliers can adjust their prices to meet the demand and mirror the market trends. Carefully monitoring the competition, hotels can also outsell the competition by offering prices just below the market value. By offering prices that meet the market value, hotels will no longer run the risk of charging less than the perceived value of the room, and more than what guests are willing to pay. In conclusion, analyzing data and adjusting the rates using a dynamic pricing strategy can ultimately increase occupancy and revenue.
Eva Lacalle | 26 April 2021
Eva has over a decade of international experience in marketing, communication, events and digital marketing. When she's not at work, she's probably surfing, dancing, or exploring the world.
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