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A Guide to Hotel Dynamic Pricing

In the ever-evolving hospitality industry, staying competitive means keeping up with the latest trends and strategies. One such strategy that has proven to be a game-changer for many hotels is dynamic pricing. This pricing model, based on real-time supply and demand, allows hotels to optimise their revenue and stay competitive in a fluctuating market.

In this blog post, we delve deep into what dynamic pricing is, how it works, its benefits, and how it can be easily implemented even by small and medium-sized businesses. We will also explore the importance of understanding customer behaviour and how analysing this data can lead to more personalised and effective pricing strategies.  Whether you’re a seasoned hotelier or new to the industry, this post offers valuable insights into the power of dynamic pricing.

What is Dynamic Pricing?

Dynamic pricing, also known as demand-based pricing or time-based pricing, is a pricing strategy that allows businesses to change the price of their product or service based on market demand. In the hotel industry, this means adjusting room rates based on factors such as occupancy, time of year, day of the week, and upcoming events. This strategy is crucial for revenue management as it allows hotels to maximise their profits by capitalising on high demand periods and minimising losses during low demand.

How Does Dynamic Pricing Work in Hotels?

Dynamic pricing is a crucial strategy for businesses, particularly in the hospitality industry. It revolves around comprehending the elements that affect demand and adjusting prices accordingly to optimise revenue. Here are some essential dynamic pricing concepts to keep in mind:

  1. Base Price: The base price is the minimum amount a hotel is prepared to charge for its rooms. It acts as a benchmark, setting the stage for any potential increments based on fluctuating demand. This flexible model ensures that the hotel never operates at a loss, as the base price typically covers the cost of operation and maintenance.
  2. Seasonal Demand: Travel patterns vary with the seasons, and this has a direct impact on the demand for hotel rooms. During peak travel periods such as summer vacations or winter holidays, there’s an upsurge in demand, providing hotels with the opportunity to increase their prices. Understanding these trends can help hotels maximize their profits during high-demand seasons and strategize effectively for low-demand periods.
  3. Day of Week Trends: The day of the week can also significantly influence room demand. For instance, leisure travelers usually prefer to travel on weekends, while business travellers are more likely to book rooms during the weekdays. Recognising these patterns allows hotels to adjust their pricing strategies, charging higher rates on days with high demand and offering discounts or incentives during slower periods.
  4. Holidays and Events: Special occasions, festivals, and large-scale events like concerts or sports championships can cause a dramatic surge in demand. Hotels can take advantage of these situations by charging premium rates. It’s crucial for hotels to stay informed about upcoming events in their vicinity so they can prepare and adjust their prices in advance.

By keeping a close eye on these factors and making necessary price adjustments, hotels can ensure they are maximising their revenue potential. The key is to strike a balance between demand and supply, ensuring that the rooms are priced attractively enough to draw in customers, but also high enough to make the most profit possible.

 

Dynamic Pricing Example

Let’s take a look at an example of dynamic pricing in action in the hotel industry. Consider a popular beachfront hotel in Miami. During the high season, which typically includes the summer months and winter holiday period, demand for rooms is at its peak. Let’s say a standard room is usually priced at $200 per night. However, due to increased demand during these peak periods, the hotel might increase their rates to $300 per night. This allows the hotel to maximise its profits during periods of high demand.

On the other hand, during the off-peak season, say in the fall, demand for rooms might decrease significantly. To avoid unoccupied rooms, the hotel may choose to lower their prices to attract more guests. So, the same standard room that was priced at $300 during peak season might now be offered for $150. This strategy helps the hotel maintain consistent occupancy levels throughout the year, while also catering to budget-conscious travellers during the off-peak season. Therefore, with dynamic pricing, the hotel successfully manages to balance demand and supply while optimising revenue.

Performing Data Analysis and Price Adjustment

In the world of dynamic pricing, data is king. It’s through meticulous analysis of customer behaviour, market trends, and other relevant factors that hotels can make informed decisions about their pricing strategies. By scrutinising past and present data, hoteliers can identify patterns in demand, predict future trends, and adjust prices accordingly.

For example, during periods of high demand, such as a local event or holiday season, the hotel could raise its room prices. Even if it increases the average rate by just $10-$20 per booking, the total revenue can substantially grow. For example, if the hotel was fully booked at this higher rate, it would mean an additional $1,000-$2,000 in revenue per night – a significant increase in the RevPAR.

Conversely, during periods of lower demand, the hotel could lower its prices slightly to attract price-sensitive customers and maintain occupancy levels. This approach ensures the hotel maximises its revenue potential across different market conditions, thereby improving its RevPAR consistently.

In essence, dynamic pricing provides hoteliers with the flexibility to adapt to market fluctuations and optimise their revenue for every room, every night. Thus, continuous data analysis and timely price adjustments form the backbone of a successful dynamic pricing strategy.

Dynamic Pricing Advantages

Dynamic pricing is a powerful tool that offers several benefits over traditional static pricing. Here’s an in-depth look at how it benefits businesses, particularly those in the hospitality industry:

  1. Boosts Room Sales: In periods of low demand, hotels can use dynamic pricing strategies to lower their room rates. This tactic can attract price-sensitive customers who are always on the lookout for a good deal. For example, a hotel might reduce its base rate by 20% during the off-peak season. This discounted price could attract budget-conscious travelers, helping the hotel increase its occupancy rates during a typically slow period.
  2. Stays Competitive: The hospitality market is highly competitive, with prices fluctuating based on a variety of factors. Dynamic pricing allows hotels to adapt their prices in response to these changes, ensuring they remain competitive. For instance, if a rival hotel lowers its rates, a hotel using dynamic pricing could adjust its prices accordingly to retain its market share.
  3. Maximises Revenue and Occupancy Rates: Dynamic pricing helps hotels to strike a balance between maximising revenue and maintaining high occupancy rates. During periods of high demand—such as holiday seasons or major local events—hotels can increase their prices, capitalising on the surge in demand to maximise revenue. Conversely, during periods of low demand, hotels can lower their prices to attract more customers and keep their rooms filled. This strategy ensures a consistent income stream throughout the year.
  4. Discovers Market Trends: One of the key requirements of dynamic pricing is the constant monitoring of market conditions. This vigilance can help hotels identify market trends, which can inform their pricing strategy. For example, if a hotel notices a consistent increase in demand during a particular month each year, they can plan to increase their prices during that period in the future. Similarly, recognising periods of consistently low demand can highlight times when it might be beneficial to offer special promotions or discounts.

In conclusion, dynamic pricing is a versatile strategy that allows hotels to respond to market fluctuations in real time. By boosting sales, enhancing competitiveness, maximising revenue and occupancy rates, and helping discover market trends, dynamic pricing can significantly enhance a hotel’s profitability and business success.

 

Dynamic Pricing Accessibility for Small to Medium Sized Businesses

Thanks to property management software (PMS) providers like Preno, hotel dynamic pricing software is now accessible to small and medium-sized accommodation businesses. Preno will automatically adjust your room prices according to your available room inventory and the pricing increments you’ve set from within the Preno dashboard. From there, your room prices will automatically update in real-time so you never miss out improving your RevPAR.

If your business uses multiple OTAs to sell rooms, Preno’s Dynamic Pricing allows you update all of your OTA listing prices at the same time, in real-time. As you can imagine, this reduces the time it takes to update your listings and ensures consistency across all platforms.

Importance of Price Optimisation

Price optimisation involves setting the best possible price based on both internal factors (like costs and occupancy rates) and external factors (like competitor pricing and market demand). Dynamic pricing automates this process, ensuring that prices are always optimised for maximum profitability. By constantly adjusting prices in response to changing market conditions, dynamic pricing allows hotels to capture every possible dollar of revenue.

Moreover, the success of dynamic pricing lies in its continuous evolution. It’s crucial to constantly monitor and test your pricing strategies for optimal performance. By doing so, you can gain insights into what’s working and what needs adjustment, allowing you to fine-tune your approach and maximise your revenue potential. This iterative process of testing, learning, and refining is what makes dynamic pricing a powerful tool in today’s competitive hospitality landscape.

In conclusion, dynamic pricing is a powerful tool for hotel revenue management. It allows hotels to stay competitive, maximises revenue and occupancy rates, and provides valuable insights into market trends. With the help of property management software, even small and medium-sized hotels can take advantage of this innovative pricing strategy.

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About the author

Kendra, the Marketing Content Manager at Preno, brings her expertise in Marketing and Communications to help hoteliers stay ahead of the curve. With a deep passion for the industry, she is committed to providing valuable insights and strategies for success.

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