Dynamic Pricing, How to Do It Right?

The total operating revenue of a hotel is significantly influenced by the pricing strategy it adopts. For example, when flying to a city, if we ask fellow passengers sitting nearby, we may find that each person has paid a different price for their ticket, despite being on the same flight, headed to the same destination, and receiving the same service. Similarly, hotel guests may pay different rates for the same room type on the same night. Advances in computer systems and IT have allowed hotel pricing to be influenced by time, multiple sales channels, and the basic principles of supply and demand. The goal of these pricing adjustments is to maximize total monthly revenue.

Dynamic pricing is the opposite of static pricing. With a static rate, the same price applies across all conditions and sales channels—essentially, one price for everyone. In contrast, dynamic pricing adjusts rates based on various conditions and different sales channels. Conceptually, dynamic pricing is not difficult to understand or accept. However, the real challenge lies in implementing it effectively. The objective of dynamic pricing is to generate more revenue than a static pricing model would. However, if poorly executed, it may result in the opposite outcome.

Consider this simple mathematical example for a hotel with 10 rooms:

• Static rate: 10 rooms x 500 = 5,000
• Dynamic rate: 4 rooms x 400 + 3 rooms x 500 + 3 rooms x 600 = 4,900

This example highlights that simply adopting a dynamic pricing strategy does not guarantee higher revenue compared to a static pricing approach. If dynamic pricing is not implemented correctly, it can lead to underperformance.

So, how can dynamic pricing be implemented effectively? The first step is to develop a proper budget from the outset. The budget must be based on reliable statistical data and prepared by someone with a solid understanding of revenue management, the market, and local competition. This ensures that all variables, including pricing, are accurate. The dynamic pricing strategy should be broken down into a detailed rate structure and planned revenue streams. Once this is done, you’ll have a strong foundation for implementing dynamic pricing aimed at maximizing revenue. Budgeting must take place before the implementation phase.

When it comes to execution, dynamic pricing cannot be fully optimized if done manually. Software tools are necessary to automatically manage the system based on the budget that has been input. It’s crucial to have someone with knowledge of which software is appropriate, how to input and configure the budget within the system, and how to periodically monitor the effectiveness of the strategy.

Without these elements in place, the success and effectiveness of a dynamic pricing strategy will be uncertain.