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Dynamic Pricing Strategy: Increase vs. Decrease

Dynamic pricing is a crucial strategy in the hotel industry that aims to optimise revenue and achieve maximum occupancy based on the principles of supply and demand. By dynamically adjusting prices in real-time, hotels can effectively respond to market fluctuations and capitalise on revenue opportunities. In this article, we will explore the concept of dynamic pricing and delve into its significance for the hotel industry.

What Is Dynamic Pricing? Why Use It?

At its core, dynamic pricing involves the adjustment of prices based on various factors such as time, demand, competition, and available inventory. Unlike traditional fixed pricing models, dynamic pricing allows hotels to flexibly adapt their rates to meet market demands and maximise profitability. This approach recognises that pricing is not a one-size-fits-all solution, but rather a dynamic process that requires constant monitoring and adjustment.

One of the primary goals of dynamic pricing in the hotel industry is to optimise revenue. By analysing historical data, market trends, and customer behaviour, hotels can identify patterns and fluctuations in demand. With this information, they can then set prices that reflect the current market conditions, ensuring that rooms are priced competitively and attractively.  This strategic pricing approach enables hotels to effectively balance demand and supply, ultimately maximising revenue potential.

Moreover, dynamic pricing helps hotels stay competitive in a fast-changing market. In this digital age, consumers have tons of information and options to choose from when it comes to accommodation. By using dynamic pricing strategies, hotels can make themselves more appealing to consumers. Being able to offer competitive rates that align with market conditions can give hotels an edge and attract more of their target audience.

Understanding Dynamic Pricing Types

Dynamic pricing is an adaptable pricing strategy that empowers individuals to customise their pricing based on various factors. By analysing inputs such as historical data, market demand, and minimum and maximum rates, individuals can optimise their prices to capture the highest possible value. Considering factors like customer demand, competitor pricing, and external events like holidays or special promotions, individuals can leverage the core principles of dynamic pricing to choose a pricing strategy that aligns with their specific requirements.

Hotels use dynamic pricing strategies to adjust room rates based on factors like room availability, time until check-in, and even customer booking history. For instance, if a hotel is experiencing high demand and there are only a few rooms left, the hotel may increase the prices to take advantage of the limited supply and high demand. On the other hand, if a hotel has many vacant rooms closer to the check-in date, the hotel may lower the prices to attract more guests and fill the rooms.

Demand-Based Pricing

Another term often used interchangeably with dynamic pricing is demand-based pricing. This approach involves setting prices based on the perceived value or demand for a product or service at a given time. For example, during peak shopping seasons like Black Friday or Cyber Monday, retailers may increase prices for popular items due to high demand. Conversely, during slower periods, they may offer discounts or promotions to stimulate sales.

Time-Based Pricing

Time-based pricing is another variation of dynamic pricing that takes into account the time of purchase. For instance, movie theatres often have different ticket prices depending on the time of day, with matinee showings being cheaper than evening screenings. This approach allows businesses to optimise pricing based on customer behaviour and preferences.

Increasing Prices: How & When?

Surge pricing in the context of hotels refers to the practice of adjusting room rates based on the demand and availability of rooms during specific events, such as concerts and sports games. During these high-demand periods, hotels may increase their prices to capitalise on the increased interest and limited supply of rooms. There are several scenarios where increasing prices can be beneficial:

  • School Holidays: During school holidays, many families take the opportunity to travel and explore new destinations. This surge in travellers leads to increased demand for hotels, resulting in higher prices. Hotels can take advantage of this by raising their room rates during these peak times.
  • Long Weekends: A long weekend is a great opportunity to get away from the daily grind and relax with family or friends. As such, many travellers take advantage of this time to enjoy a short break and explore different destinations. Hotels respond to the increased demand by raising their rates during long weekends, allowing them to capture more value from these peak times.
  • Festive Seasons: During popular festive seasons like Christmas, New Year’s, or local festivals, there is always an influx of tourists in the city. Hotels can leverage this heightened demand by increasing their room rates.
  • Conferences: Businesses often travel between cities for large-scale events or conferences, seeking accommodation for participants and staff. During these times, hotels are able to leverage the increased demand and charge higher prices for rooms. This surge in business travel creates a unique opportunity for hotels to optimise their pricing strategies and benefit from the influx of customers.
  • Local Events: a hotel situated near a renowned stadium may opt for surge pricing during a major game, resulting in significantly higher room rates due to the heightened demand from sports enthusiasts. Likewise, when a music festival takes place, hotels in the area might increase their rates to capitalise on the influx of concert-goers seeking accommodation.

Hotels see these busy periods as great opportunities to make the most of their revenue. By adjusting their prices strategically, hotels can take advantage of the high demand and maximise their occupancy rates. However, it’s important for hotels to find a balance between profitability and guest satisfaction. By offering competitive rates and value-added services during these times, hotels can attract and keep customers, ensuring a positive experience for both guests and the hotel itself.

Decreasing Prices: How & When?

In contrast to peak periods, slow periods typically refer to midweek lulls or periods of low demand. During these times, hotels may consider decreasing their prices in order to capture more bookings and fill available rooms. Lowering the rates can result in higher occupancy levels, as customers are often attracted to the reduced cost and greater availability. There are several scenarios where reducing prices can be beneficial:

  • Slow Periods: during slow periods, such as off-peak seasons or midweek lulls, hotels may experience lower demand. In such cases, lowering prices can attract more guests and fill up the vacant rooms. Additionally, when hotels have high inventory and low bookings, decreasing prices can help stimulate demand and ensure that rooms are occupied.
  • Mid-Week Lulls: hotels may experience slow periods during the week, when business and leisure travellers are less likely to be checking in. Offering discounts or special packages during these times can help fill up rooms and increase occupancy rates. Or, lower your pricing and encourage smaller upgrades.
  • Last-Minute Cancellations: this is another situation where adjusting prices can be advantageous. When guests cancel their reservations unexpectedly, hotels are left with vacant rooms that could potentially go unsold. By setting lower prices for these last-minute bookings, hotels can attract spontaneous travellers who are looking for a good deal. This not only helps to fill up the empty rooms but also prevents revenue loss due to cancellations.

Dynamic Pricing Example:

To illustrate the effectiveness of decreasing prices as part of a dynamic pricing strategy, let’s consider a hypothetical example in the hotel industry. Imagine a luxurious beachfront resort that experiences a midweek lull during the winter season. The hotel’s occupancy rate drops significantly during this period, and many rooms remain unoccupied.

By implementing a dynamic pricing strategy and decreasing prices specifically for midweek stays, the hotel can entice travellers who are seeking a serene getaway at a reduced cost. This attracts more guests to the property, ensuring that the rooms are utilised and generating additional revenue that would have otherwise been lost. By dynamically managing pricing and availability, hotels can strike a balance between profitability and occupancy, thereby maximising their overall performance.

By strategically adjusting prices during slow periods, midweek lulls, high inventory/low bookings, and last-minute cancellations, hotels can optimise their revenue and occupancy. The hotel industry can benefit greatly from this approach, as it helps to fill up rooms, maximise revenue, and create a win-win situation for both guests and hoteliers.

The Impact on Revenue Per Available Room (RevPAR)

Revenue Per Available Room (RevPAR) is a key metric in the hotel industry that measures the financial performance of a hotel room. It is calculated by multiplying the average daily rate (ADR) by the occupancy rate.

One interesting aspect of RevPAR is how even small increases in price can have a significant impact on overall revenue. For example, let’s consider a hotel with 100 rooms and an ADR of $100. If the hotel increases its room rate by just $5, the additional revenue generated per night would be $500 (100 rooms x $5). Over the course of a year, this seemingly small increase can add up to a substantial boost in revenue.

However, it’s important to note that implementing a dynamic pricing strategy is also crucial in maximising RevPAR. During off-season periods when demand is low, decreasing room prices can actually lead to improved occupancy rates and ultimately increase RevPAR. For instance, let’s imagine a beachfront hotel that experiences a significant drop in occupancy during the winter months. By strategically lowering room rates, the hotel can attract more guests who might have otherwise chosen alternative accommodations. This increase in occupancy compensates for the reduced room rates, resulting in a higher RevPAR.

The implementation of a dynamic pricing strategy allows hotels to optimise revenue by adjusting room rates based on demand fluctuations, market conditions, and other factors. By analysing historical data, market trends, and competitor rates, hotels can set prices that maximise occupancy and revenue. This approach ensures that rooms are priced competitively, enticing guests to choose their property over others.

Dynamic Pricing Software for Hotels

Now that you know all about Dynamic Pricing, are you looking for a tool that can automate the entire process?

While many Online Travel Agencies (OTAs) offer their own auto-rate pricing, there are undeniable advantages to using a dynamic pricing tool linked directly to your Property Management Software (PMS). Utilising a Property Management System (PMS) with an integrated dynamic pricing tool is a strategic move that can significantly outperform relying solely on Online Travel Agencies (OTAs). The key advantage is the automation of rate updates across all your OTA listings – be it Booking.com, Expedia, Airbnb, Agoda, and beyond. This eliminates the risk of having outdated prices and ensures that your listings align with ongoing market trends and demand changes. Thereby, you are able to react in real-time to market fluctuations, leading to maximised occupancy and revenue, all controlled from the convenience of a single dashboard.

One tool we suggest is Preno’s Dynamic Pricing tool. What sets Preno apart is its ability to provide real-time updates, meaning you’ll never miss out on bookings (or, extra revenue) due to incremental or slow pricing updates. The speed and efficiency of the system ensure maximum profitability and occupancy, as it can quickly adapt to changes in demand.

Moreover, Preno’s Dynamic Pricing tool allows property managers to adjust pricing to their liking and then “set and forget” it. The tool takes care of the rest, dynamically altering the price depending on the number of inventory sold. This not only saves valuable time and effort but also optimises revenue by ensuring that your pricing strategy is always responsive to market conditions.

Dynamic pricing strategies are a powerful tool that hoteliers can use to maximise their revenues and occupancy rates. By strategically adjusting prices based on market conditions, competitors’ rates, historical data, and other factors, hotels can ensure that their rooms are fully utilised and generate greater profits. With the help of dynamic pricing software such as Preno’s Dynamic Pricing tool, hotels can easily and quickly adjust pricing in real-time to capture more bookings. Ultimately, this leads to higher occupancy rates, increased revenue per available room (RevPAR), and improved overall profitability for the property. Hotels that are looking to optimise their performance should consider implementing a dynamic pricing strategy today.

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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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