When it comes to revenue management, there are a number of game-changing hotel pricing strategies that can help you boost your revenue. One of these is dynamic pricing.
In this post, we are going to discuss what dynamic pricing is, and the two pillars that justify the use of dynamic pricing. We will also share a couple of dynamic pricing trends to help you understand where this pricing strategy is headed now and in the future.
What is dynamic pricing?
Dynamic pricing is a pricing differentiation strategy based on segmentation, customer booking behaviours and market positioning. The approach involves offering different rates to different guests according to their buying behaviour. In other words, in line with when they reserve rooms, the channels they use, and the prices they are willing to pay.
Dynamic pricing also takes into account market conditions including competitor pricing, current demand and occupancy levels, and seasonality. The aim is to offer the right room, to the right guest, at a fair price. That way, you can maintain steady occupancy rates all year round and boost your total revenue.
The 2 pillars of dynamic pricing
Dynamic pricing is based on two key pillars. These pillars are applying a bottom-up pricing strategy and implementing rate fences.
Let’s take a look at what this means exactly.
A bottom-up pricing strategy
Dynamic pricing uses a bottom-up approach to rates. This is where you offer a starting price for a certain date and raise it as the check-in date approaches. An ascending pricing strategy like this can help you find the right balance between offering an attractive rate and making a profit.
Other revenue management approaches to pricing can often be confusing for the customer and detrimental to a hotel’s profitability. For example, many hotels rely on a descending price strategy. This is where the price for a room starts high, then reduces as the check-in date approaches, because the booking pace is slow. On first inspection, this strategy may seem like an effective way to fill rooms that may otherwise be left empty. However, it’s not a very profitable long-term strategy for generating revenue growth. This is because you will often find yourself selling rooms below market price. The strategy also comes with a higher risk of guest cancellations if a customer sees that a room that they have purchased in advance is now being offered at a lower price.
Another commonly used strategy is sporadic pricing. This is where there is no clear pattern of ascending or descending prices. Instead, hotels adjust their prices sporadically rather than following a consistent, long-term global strategy. With this approach, you also run the risk of offering prices that don’t align with market rates. And this form of erratic pricing can confuse guests and cause them to lose trust in your establishment.
In contrast, a dynamic pricing strategy reassures your guests that your rates are transparent and within market ranges. This helps to generate trust and loyalty and increases the lifetime value of your customers.
The other key pillar of dynamic pricing relates to offering fair pricing to all guests. This is important because if guests feel that their expectations and experiences don’t align with what they have paid for a room, then they will be unlikely to return. They are also more likely to leave you a negative online review which can damage your brand reputation.
But what is a fair price? How can you ensure that the prices you offer are well-received?
This is where rate fences come in.
Rate fences involve creating different customer segments and justifying why different guests pay different prices. When you create rate fences, you establish a series of rules that you apply to each of your room rates. This might be, for example, offering a lower price for reservations with a minimum stay requirement, and a higher price for rooms with a cancellation policy. By offering a selection of rates based on different conditions, guests can segment themselves based on what matters to them most.
Rate fences were originally designed to help hotels avoid cannibalising demand. In other words, to sway customers who are willing to pay more away from lower tariffs. Instead, each guest segment opts for the room rate and conditions that best align with their expectations.
Two strategies used for rate fencing
Physical fencing: where rates are adjusted according to the characteristics of the booking, such as room type, location, furnishings and amenities, and having a view.
Demand-based fencing: where rates are adjusted in line with consumer behaviour. Generally speaking, there are three forms of hotel stay restrictions commonly used here:
Minimum length of stay (MLOS): where reservations can only be made for a specified number of consecutive nights (for example, a guest only gets a lower rate if they stay for a minimum of 3 nights)
Closed to arrival (CTA): where guest arrival dates are blocked for specific days (for example, a guest cannot check in on a Friday if they pay a lower rate)
Closed to departure (CTD): where guests cannot depart on specific dates (for example, a guest cannot check out on a Saturday if they pay a lower rate)
Dynamic pricing trends
Let’s finish by taking a look at a couple of dynamic pricing trends that are currently shaping this revenue management strategy.
The market has experienced a high degree of uncertainty since the start of the pandemic. And this has led to a sharp rise in hotel booking cancellations. This is a problem for revenue managers as last-minute cancellations make it difficult to implement demand-based dynamic pricing adjustments. To address this issue, many hotels are now keeping a closer eye on their guest cancellations.
The best way to monitor your cancellations is by using revenue management software to collect and analyse all your bookings. That way, you can monitor your cancellations and pick-up evolution in real-time and evaluate whether your pricing strategy is appealing to all your customer segments. Then you can use this data to adjust your pricing strategy in line with unexpected cancellations and shifts in demand.
The other trend we are now seeing as a result of this market uncertainty is the use of semi-flexible fares. Semi-flexible fares are rates that combine traditional “non-refundable, pay in advance” rates, with added-value perks such as upgrades and late checkouts.
These rates help to redress the balance between the flexibility that consumers are demanding since the pandemic, and the maximum restriction of non-refundable rates. That way, you can implement a dynamic pricing strategy that gives guests the security they need if their travel plans change, whilst still ensuring you are able to offer fair prices and secure revenue growth for your hotel