One of the most challenging and important aspects in revenue management is providing the right price for the right customer at the right time. It can be a struggle to mix together pricing strategies that won't fall flat in a complex and time-consuming process.
Over the years, hotels have been steadily moving away from fixed pricing strategies toward dynamic pricing strategies. Dynamic pricing is the continual adjustment of prices based on the value of demand for the remaining available capacity. There are a lot of variables that contribute to successful dynamic pricing, and the ultimate goal is to determine the highest price that a guest is willing to pay to stay at your hotel.
Dynamic pricing strategies don't focus on only setting prices. Rather, successful dynamic pricing optimizes a hotel's demand and revenue to maximize total revenue performance. These are the two crucial aspects for hotels to balance because the combination of the two will have the greatest impact on overall revenue performance.
This is also where analytics of your revenue management technology become a critical component in organizing and deciphering data to employ an optimal dynamic pricing strategy. Dynamic pricing approaches use three main analytical components that complement one another:
- Demand. Dynamic pricing approaches demand as a function of price. It basically follows the school of thought that if the price increases, the demand will drop and if the price decreases, the demand will be higher. While simple in nature, it becomes infinitely more complex when looking at market conditions, competitive dynamics and a myriad of market segments. Analytics help hotels determine the optimal prices to sell, the achievable demand at different price points, and any corresponding revenues that can be attained for each market segment.
- Inventory. Taking maximum advantage of the available inventory is a primary goal that challenges revenue managers. Using analytics allows you to determine optimal prices based on not just the demand, but the available inventory or capacity in the hotel. The best hoteliers understand that managing pricing together with inventory will maximize revenues.
- Pricing Sensitivity. How prices affect guest booking behavior is important in dynamic pricing, because it helps offer specific pricing to market segments and optimize total revenue. Low price sensitivity means that changes in price have a relatively small effect on the quantity of the rooms demanded, while high price sensitivity means that changes in price have a relatively large effect on the quantity of rooms demanded. To maximize overall revenue, you'll want to determine whether the market segment has low or high sensitivity, and understand the number of rooms those market segments are booking.
These analytical components are at the core of dynamic pricing and should be accompanied with the evaluation of additional elements such as costs, competitors, demand for products and services, and the overall quality of products and services. It is also important to consider the type of organization. For example, a limited service hotel will generally have a different pricing strategy than a full-service property. The key to successful pricing is combining technology with the human knowledge that revenue managers know firsthand.
Using a dynamic pricing approach with a strong analytical base that evaluates demand, inventory and price sensitivity is a proven industry strategy that will help create the right prices for the right customers at the right time.
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IDeaS, a SAS company, is the world's leading provider of revenue management software and services. With more than 30 years of expertise, IDeaS delivers revenue science to more than 30,000 properties in 154 countries. Combining industry knowledge with innovative data-analytics technology, IDeaS creates sophisticated yet simple ways to empower revenue leaders with precise, automated decisions they can trust. Results delivered. Revenue transformed. Discover greater profitability at ideas.com.