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Throughout the development of the hotel industry, setting the right room rates was difficult for a long time because many factors and parameters determine how the correct—or supposedly correct—prices are calculated. Pricing is a complex and extremely important task in its own right, as it determines the level of a hotel’s revenue. That is why revenue management, which focuses on optimising revenue, is so important, along with dynamic pricing, which has emerged through advances in technology.
Dynamic pricing has now become an established pricing strategy in the hotel industry, but it is still less widespread in Hungary, especially among small and medium-sized accommodation providers. In this article, we briefly explain what dynamic pricing is and examine its benefits for hotels.
What is dynamic pricing?
Put simply, dynamic pricing means that a hotel continuously changes the prices of the rooms it offers for sale by considering supply and demand factors—as many of them as possible—with the aim of generating the highest possible revenue. Prices need to be determined as accurately as possible at every moment so that they align as closely as possible with supply and demand.
A few examples of factors that determine demand for hotel rooms:
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the hotel’s own inventory,
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supply outside the hotel itself—in other words, competitors and their prices,
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continuous monitoring of demand, including the volume and pace of incoming bookings (pickup data),
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an understanding of guests’ booking habits,
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seasonality,
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events that affect hotel occupancy.
RoomRaiser’s pricing system automatically determines suitable room rates based on the factors mentioned above. The goal is for the hotel to sell its rooms and other services at the most accurate possible price at every moment by continuously considering demand factors and dynamically tracking their constant changes. This allows the hotel to sell rooms at the highest possible price at any given moment and generate the highest possible revenue.
Because of the volume of calculations involved, pricing should ideally be carried out using computers and algorithms, for which sophisticated software is now available. One such solution is RoomRaiser’s hotel room-pricing software, created specifically for the needs of small and medium-sized hotels.
Where did dynamic pricing begin?
Although it was not originally called dynamic pricing, changing product prices according to supply and demand has been with us for thousands of years. Just think of the concept of scarcity in economics.
In the 1980s, American airlines—with American Airlines leading the way—introduced dynamic pricing on a new scale, calling it yield management. Within tourism, this approach was first adopted in the hotel industry by large international hotel chains, and today, with the original approach expanded, it is known as revenue management.
Over the past decade, small and medium-sized hotels have increasingly adopted this approach, and in recent years technology has advanced enough to deliver dynamic pricing digitally at a reliable standard.
The benefits of dynamic pricing and software
Dynamic pricing offers hotels many benefits. Let us look at the most important ones:
1. Generates higher revenue and profit
Dynamic pricing helps hotels sell:
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the right rooms,
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at the right price,
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to the right customer,
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from the right segment,
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at the right time—for example, it may not be wise to sell every room six months before the arrival date—
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through the right channel—for example, not through an OTA charging a high commission.
Ultimately, this can deliver higher revenue and profit. For a hotel that already uses dynamic pricing to some extent but relies on manual solutions, an RMS (Revenue Management Software—a system that provides dynamic pricing) generates roughly 5–25% additional revenue on average. These figures can be much higher for a hotel with a weaker pricing strategy.
2. Reduces the number of working hours
When dynamic pricing is carried out with suitable software, the hotel saves work in addition to generating higher revenue. Human resources that were previously used to calculate rates are freed up. Employees can therefore focus on other important tasks—such as ensuring guest satisfaction—while the software also helps reduce monotonous work and the possibility of errors.
3. Increases demand
By using a dynamic pricing strategy, hotels can attract additional guests precisely when they need them most. During periods with more vacant rooms, they can offer those rooms at a lower price, even to a completely new, more price-sensitive group of guests. This not only increases demand but also maximises profit.
4. Helps hotels understand guests’ booking habits
Dynamic pricing automatically determines current rates according to guest behaviour. It can therefore help hotels understand their guests’ booking habits better. Algorithms make it possible to track which rooms and services guests in different segments prefer, how many nights they book on average, and which events or periods are most attractive to them.
In addition, dynamically changing room rates can help reach guests in market segments who would not normally choose the hotel because they prefer lower-priced or, conversely, higher-priced services.
Summary
The aim of dynamic pricing in the hotel industry is to track continuous changes dynamically so that the hotel sells its rooms and other services at the most accurate possible price at every moment. This can increase both revenue and demand without wasting valuable human resources, while also providing a deeper understanding of guests’ booking habits.
If you would like to use dynamic pricing to make the most of your hotel’s potential and maximise profit, try RoomRaiser!
