07 Jun Dynamic pricing in hospitality business
Why to use? How to use? What to use it for?
If you are running a hospitality business, you definitely had to meet with fluctuating prices and pricing strategies. In order to increase profits, you have to get to know your customers, your way of working and even predict the future. One of the most popular strategies for setting up your rates is Dynamic Pricing.
During my years working with accommodation management system, I met some customers who prefer to stick with Static pricing and doesn’t want to change their prices through the whole year. But fact is that those customers are either mostly working with travel agencies and selling pre-agreed prices all the time, or property managers think that there is no need for price change during the season, so they keep same rates sometimes for years.
So what is this Dynamic pricing? How it can be differentiated and how to be sure that you are applying it correctly?
Dynamic pricing also can be called as real-time pricing because you are adjusting your rates based on market demand and other factors. It requires a lot of planning and forecasting. Hoteliers have to foresee their prices for at least one year ahead. This doesn’t meant that prices, once entered in the management system, can’t change – quite opposite. The beauty of dynamic pricing is hiding in its’ name – you have to review your given prices, adjust them based on unplanned circumstances and other factors.
What are the factors that you should take in consideration when planning your rates?
Demand. It is mostly related with seasonality. Many accommodation providers adjust their prices based on the demand or flows of the guests.
It became usual to increase prices during the high season and drop them once season is over. This strategy is working in a way, that hotels earn most of their income in the high season while selling with higher price and then during the low season they can offer their rooms for the price which would basically cover just a simple operational cost.
Best example for demand based dynamic pricing is work of airlines and the flight ticket pricing. They are having tons of different factors related with demand and that’s why plane ticket prices are fluctuating almost daily or even hourly.
Another time-related strategy is increasing prices for weekends or special events. When guests are searching for a place to stay during some special even in the area, they know what to expect and they are willing to pay higher price. As demand is getting higher on weekends, most of hoteliers are also slightly increasing their prices for Friday/Saturday. Usually price increase is being followed by minimum nights restriction. In this way, hoteliers guarantee that guests will stay longer than one night at their place for a higher price.
Is it always a good idea? Lets imagine that you have higher price for New Year’s Eve and also have a restriction of min 3 nights. But what about those, who need to stay at a place just 1 night? They might be willing to pay even bigger money in order to get the possibility to book the room. But with min 3 nights restriction you close doors for them to book and also loose the money that they would be willing to pay for that one night. Here comes the point where you need to consider more rate plans, more options what to offer.
Talking in general, focusing just on the occupancy, is not the best decision, because if you drop your prices just to attract more guests, your ADR will suffer. In a hospitality business, one increased parameter (e.g. occupancy) can lead to decrease the other one (e.g. income), so it is very important to find the balance where all pieces work in harmony. For this matter, you have to know what you are working with, know your guests, know the history of previous business years and also know your competitors. If you want to use dynamic pricing strategy in your business, you have to know what other businesses around you are doing. Check them, analyse and adjust your prices accordingly, but don’t follow blindly!
Market. In order to come up with correct pricing strategy, you have to know your market very well. There are many tools that can help you to analyse types of guests. Later on, you can start planning how and what to offer for each different segment.
What you need to remember when creating different prices for different markets – there can be unhappy customers, who will think that your dynamic pricing can be called rather price discrimination.
Why someone can be unhappy about your dynamic pricing? Well, in general Dynamic pricing stands for selling same product of yours for different groups of people, for different prices at different times. So if one group will find out that other group received lower prices, there might be some unhappy faces. Maybe you have different prices for different corporate partners or different pricing for leisure and business travellers – they might get to know about those agreements.
Despite the unhappy guest risk, almost each and every accommodation provider that I worked with, have different prices depending on who their customers are. Almost always corporate partners have better offers than individual guests, families or bigger groups having higher daily rate than individual travellers and etc.
Rate plans and Discounts. Dynamic pricing can be created not only by setting up your base price and later adjusting it, but you also can come up with several different rate plans or special offers (discounts). This differentiation of rate plans targets different crowd and also opens more different prices that you can offer. Based on my practice, I see that 98% of accommodation providers that I had chance to work with, were using more than one rate plan. Most of the times they make sure to be offering Non refundable rates or X night restriction rate plans. These are a great tool to attract different types of guests, because people, who are sure about their stay will choose to book bit cheaper but with non refundable policy. Those, who are travelling just for short term are okay with paying slightly more than those, who are staying at the same place for a week or so. Rate plans also might differ depending on seasonality and can have other discounts applied.
Travel market is very dynamic, people are moving around all the time, they are looking for the best match. Be prepared when all those different people will land on your website or on your OTA page. If your prices are static, never changing – you are closing doors for all those other guests, who are looking for more options.
Doesn’t matter how big is your hospitality business, you have to get to know the whole game around you. It is a must to analyse your guests, competitors, events and based on that, you need to form your pricing strategy. Nowadays there are many tools that help you to deal with that, but you shouldn’t give your business 100% in the hands of computer systems and online algorithms. It is your business and you have to run it.
SabeeApp can give you a hand with your pricing. System allows you just with few clicks to set your pricing, create multiple rate plans and discounts, set minimum nights stay, change rates for particular time periods and also allows you to set automatic price modifications depending on availability changes. All this will help you to target wider audience of potential guests. Don’t loose your opportunity!