What Is Dynamic Pricing in Hotels and How Does It Work?

In the fast-paced and highly competitive realm of the hospitality industry, staying ahead requires more than just superior customer service and luxurious amenities. It’s all about innovative strategies in revenue management, like dynamic pricing. But what exactly is dynamic pricing, and how does it work in the context of hotels?

That’s what we will be unpacking in this blog post – by exploring its mechanisms, benefits, and implementation in the hotel industry. Whether you’re a hotelier looking to maximise profits or just a curious traveller trying to understand those fluctuating room rates, this insightful guide will shed light on the intriguing world of dynamic pricing.

What Is the Difference Between Static Pricing and Dynamic Pricing in Hotels?

Dynamic pricing, also known as surge pricing or demand pricing, is a strategy where businesses adjust their prices based on current market demands. This technique takes into account various factors such as occupancy levels, competitor prices, time of booking, and even seasonality. The goal? To optimise room rates in real-time, ensuring you’re always offering the most competitive pricing.

For quite a long period, the hospitality industry operated on a static pricing model, where room rates remained relatively unchanged. Often, a hotel would have a standard weekday rate and a slightly elevated weekend rate, with a minor surge during peak seasons. The existing rates remained the same – despite the market’s fluctuations.  However, the introduction of dynamic pricing has completely transformed this conventional approach, ushering in a new era of adaptability and responsiveness

Dynamic pricing, unlike its static counterpart, adapts to shifts in demand. During periods of high demand, hotels employing dynamic pricing strategies will increase their rates. On the other hand, when demand diminishes, these hotels will reduce their rates to attract as many guests as possible.

What sets dynamic pricing apart is its ability to respond in real time to changes in demand as the check-in date nears, adjusting rates based on remaining room availability. For example, if your hotel is nearing full capacity yet demand remains high, dynamic pricing enables you to further elevate your rates to maximise revenue.

In essence, dynamic pricing provides a more flexible, demand-responsive approach to room rate management, allowing you to capture the most value from every booking.

How Does Dynamic Pricing Work?

Let’s paint a picture of dynamic pricing in action to answer this question:

Consider a popular beachfront hotel, “Sunset Sands”. Their standard room rate is $200 per night during the off-peak season. However, as summer approaches and demand increases, Sunset Sands begins to apply dynamic pricing.

In May, as the weather warms up and early vacationers start to book, demand rises. To reflect this, Sunset Sands increases their room rate to $250 per night. As the peak season of July and August nears, demand surges even more. The hotel responds by adjusting the rate upwards to $300 per night.

However, let’s say a tropical storm is forecasted for a particular week in July. This causes a dip in bookings and an increase in cancellations. Recognising the decline in demand, Sunset Sands reduces its room rate to $225 for that week to attract guests who are willing to take the chance on the weather.

Then, as the storm passes and the weather clears, bookings pick back up. With only a few rooms left and high demand, Sunset Sands raises its rate to $350 per night. This strategy allows them to fully capitalise on their remaining availability.

Advantages of Dynamic Pricing for Hotels

Dynamic pricing is a game-changer for hoteliers looking to maximise their profits. This strategy allows you to adjust your room rates in alignment with demand, ensuring that potential guests are not dissuaded by high prices during low-demand periods or suspicious of unusually low prices during high-demand times.

One of the key advantages of dynamic pricing is its capacity to minimise the chances of rooms going unoccupied or being sold at a discounted rate. By consistently adjusting prices based on real-time market conditions, you’re able to ensure every room contributes its maximum potential to your revenue.

Additionally, it empowers you to develop a precise forecasting model for future occupancy. By analysing historical data and considering current market conditions, you can enhance your ability to anticipate future demand and adjust prices accordingly. This strategic approach ensures the constant need for your staff and allows you to plan ahead more effectively, guaranteeing full-paying guests in your always occupied rooms.

Dynamic pricing doesn’t just enhance profitability—it paves the way for sustainable success in the hospitality industry. It enables hoteliers to stay competitive, maximise revenue, and above all, deliver value to their guests. Hence, it’s more than just a strategy—it’s an essential tool for long-term growth and success in today’s dynamic hospitality landscape.

Challenges of Dynamic Pricing for Hotels

While dynamic pricing offers a significant advantage to hoteliers, it’s important to mention that it’s not without its challenges. For instance, guests who have been accustomed to consistent rates over the years might be surprised by sudden price changes. However, this can be counteracted by offering special deals or locked-in rates for your most loyal patrons.

Furthermore, guests often equate higher prices with superior service, expecting an elevated level of attention and quality. To meet these raised expectations, your team will need to step up their game by providing personalised and attentive service, going above and beyond to ensure a memorable experience for every guest.

Additionally, there can be some public perception hurdles when prices rise during high-demand periods. In these situations, there might be misconceptions of price gouging, especially if the demand surge is tied to unforeseen circumstances or sudden events that increase demand. It is important to address these concerns and communicate transparently with customers to avoid any misunderstandings.

However, despite these potential hiccups, the advantages of dynamic pricing are undeniable. By harnessing technology and integrating market trends into your pricing strategy, dynamic pricing can ease the burden on your revenue team while ensuring your hotel stays competitive all year round. This is why dynamic pricing has quickly become a standard practice in hotels globally. When implemented correctly, dynamic pricing allows you to optimise revenue and occupancy by offering the right rate to the right guest at the right time.

How Can You Automate Dynamic Pricing?

If you’re an accommodation provider looking for a smarter way to manage pricing, you might want to consider Preno’s new Dynamic Pricing tool. Instead of manually adjusting your room rates every so often—which can be quite a task—the tool does it automatically for you from within your Preno account. It takes into account real-time demand and how many rooms you have left, an updates your room rates to align with the pricing increments you set in your dashboard. Preno’s Dynamic Pricing updates in real-time which means you’ll never miss out on getting the best rate for your rooms as all of your listings (including OTAs) are updated continuously. Plus, you get all the added benefits of Preno’s Property Management Software at the same time.

In a competitive industry like hospitality, anything that gives you an edge can make all the difference. So while the Dynamic Pricing tool is certainly a game-changer, it’s also a tool to help you stay competitive in the ever-evolving landscape of hospitality.

In conclusion, dynamic pricing is no longer a luxury but a necessity in the rapidly evolving hospitality industry. The ability to adjust room rates in real-time based on demand, competition, and other factors not only ensures maximum profitability but also keeps hotels competitive in today’s market. While there are some challenges associated with dynamic pricing, such as potential customer perception hurdles and raised guest expectations, these can be mitigated through clear communication and exceptional service.

Moreover, automating dynamic pricing with tools like Preno’s new Dynamic Pricing Tool can take the burden off revenue teams and ensure your pricing strategy is always up-to-date with the latest market trends. This automated approach not only optimises revenue but also helps keep rooms consistently occupied, contributing to overall business success.

In a nutshell, dynamic pricing isn’t just a pricing strategy—it’s a tool for long-term growth and success in the hospitality industry. Whether you’re a small bed-and-breakfast or a large hotel chain, embracing dynamic pricing will allow you to offer the right rate, to the right guest, at the right time, every time. And in the end, that’s what will keep guests coming back and your bottom line healthy.

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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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