What Is Dynamic Pricing? What Hospitality Pros Should Know

If you’ve ever booked a flight, ordered a ride share, or stayed at a hotel, the odds are strong you’ve seen dynamic pricing in action. This demand-driven approach to pricing is a well-established staple in hospitality and tourism and is gaining traction in other industries as well.

While this approach is based on the simple market dynamics of supply and demand, there’s plenty for hoteliers to consider when deploying these strategies.

In this blog we’ll get you acquainted with what dynamic pricing is, highlight the benefits, and touch on some of the key considerations to keep in mind if you’re looking to bring this approach to your hospitality organization.

What is dynamic pricing?

Let’s start with the basics. Dynamic pricing is simply the practice of varying the price of a product or service to reflect changing market conditions. Changing prices based on supply and demand factors has been around for centuries, but what makes this approach novel today is technology’s ability to facilitate these demand-based pricing changes at a much higher frequency. Paired with technology to quickly synthesize a variety of relevant market data, this strategy can provide a significant uplift in revenue per available room (RevPAR) for hospitality organizations.

Dynamic pricing vs. static pricing

The benefits of dynamic pricing can be seen in the (admittedly simplified) graphic above—by offering multiple price points based on the state of the market’s supply and demand instead of a single static rate, hospitality providers are able to capture more revenue.

What factors influence dynamic pricing strategies?

While supply and demand are the overarching drivers of an effective dynamic pricing strategy, the reality of implementation is nuanced.

Today, the vast majority of hotels are deploying some form of dynamic pricing, but the tools and methods used to make it happen can vary substantially in sophistication. Many take a highly reactive approach that’s driven primarily by shifts in competitor pricing, while top-of-the-line solutions like IDeaS hospitality revenue management system take a more nuanced, granular, and ultimately effective approach to gauging demand and facilitating closely related pricing decisions.

Proactive vs. reactive pricing

Consider forecasting demand for hotel accommodations. There’s a range of sophistication to this approach, with everything from relatively crude determinative forecasts based on historical trends to advanced stochastic forecasting models that better adapt to uncertainty. To effectively forecast demand, an RMS must consider the full range of demand influences, including:

• Rooms on the books
• Booking pace
• Historical performance
• Market demand
• Competitor behavior
• Price sensitivity
• Uncertainty
• Impact of pricing adjustments

With these factors properly accounted for, pricing changes become much more proactive and refined as new data rolls in. This approach allows the RMS to quickly respond to market shifts and ultimately capture more of the available demand.

Getting granular with dynamic pricing in hospitality

Another area of nuance with demand-based dynamic pricing to keep in mind is that demand for accommodation offerings or “products” doesn’t always behave uniformly. While large market wide shifts in demand exist and can influence pricing strategies across the board, there’s a clear value in breaking down demand forecasting and related pricing decisions into more granular formats.

An advanced revenue management system accomplishes this in multiple ways. One, is to forecast demand by room type. Different room types (e.g. standard rooms through executive suites) have variance in demand patterns, price sensitivity, and competitor influence. By breaking down demand forecasting at this level, the RMS is then able to make ideal, revenue maximizing pricing and inventory control decisions for each room type independently. This is in contrast to a common, but less-effective, approach where only the entry-level room type is dynamically priced and all rooms in the hierarchy adjust by a set incremental supplement (ex: a top-end suite always being priced as entry-level room rate + $150, while a mid-tier deluxe room has a +$75 supplement, and so on).

Another advanced approach positively benefiting dynamic pricing efforts is to look beyond room configuration or amenities and break down demand by “product”. For instance, advanced purchase, loyalty rates, long-stay and package offerings can be priced by the unique demand patterns for each. While you can see how this can get confoundingly complex to manage manually, today’s revenue management systems can weigh all of the above—and how they influence each other—to make optimal adjustments to pricing and availability.

When a property understands demand for each type of business, it can make smarter decisions on which business to accept or turn away and how to adjust prices in a targeted manner to maximize revenue holistically.

Benefits of dynamic pricing

Thoughtfully implemented demand-based dynamic pricing strategies are a key pillar of effective modern revenue management. By tapping into powerful technology that can effortlessly tackle granular demand forecasting and how to make the most of that demand, hospitality providers stand to benefit in a variety of ways, including:

• Increased revenues: Improved agility in response to market forces drive revenue performance—whether that’s selectively discounting where needed during lulls in demand or yielding during peak periods.
• Improving ADR & RevPAR: Average daily rate (ADR) and revenue per available room (RevPAR) often benefit substantially by dynamic pricing’s ability minimize the lows and maximize the highs of guest demand.
• Better inventory utilization: Smarter pricing and inventory decisions help drive additional bookings, whether through controls encouraging bookings on peak demand-adjacent “shoulder nights”, through the better usage of premium room categories, or the implementation of well-tuned overbooking strategies.

Potential challenges of dynamic pricing

While the benefits of an effective dynamic pricing strategy are immense, this approach can include some significant stumbling blocks if not carefully considered.

Some common potential challenges associated with dynamic pricing include:

• Price volatility & impact on guest satisfaction: While most travelers are accustomed to seeing different prices for the same room depending on when they’re looking to book, hoteliers may risk upsetting loyal guests if demand-driven pricing fluctuations are perceived as too extreme. This can be addressed with limits on price fluctuations that stay consistent with room-type hierarchies, as well as frequent incremental pricing updates to minimize guest perception of volatility.
• Unchecked discounting and value perception: Without proper controls in place like pricing floors, demand-driven dynamic pricing could spark a “race to the bottom” with competitors through prices that may hurt the perception of your property’s value or risk overall profitability.
• Maintaining rate parity and distribution: Frequent pricing changes based on demand can make maintaining rate parity across booking channels incredibly challenging without the right tools and systems to facilitate. Revenue management tools must have strong integrations with property management systems and distribution tools to make accurate decisions and streamline pricing distribution.
• Data accuracy: Demand forecasts and the decisions related to them require accurate data to respond optimally. System data inaccuracies or incomplete user inputs can skew outputs and require additional manual intervention than what’s ideal.

Fortunately, most—if not all—of these challenges can be avoided with the right solution backed by a trusted success management team.

Take the plunge into dynamic pricing

For hospitality providers, the value of today’s revenue management system-driven dynamic pricing approaches is hard to ignore. If you’d like to learn more about how IDeaS can improve your organization’s approach to dynamic pricing and more, contact us today.

Still looking to learn more about demand-based dynamic pricing? Check out our Lessons in Revenue ebook, “Breaking the Rules with Demand-based Dynamic Pricing: How Hotels Drive More Revenue by Shifting Away from Rules-based, Reactive Pricing”