Dynamic Pricing defined: A guide to setting competitive hotel rates

As a hotelier, you need to make sure your room prices are right on the money and updated in almost real-time to maximize Revenue Per Available Room (RevPAR) at your hotel.

 But, how best to go about that when you’re lacking time and resources?

Today’s industry gold standard when it comes to optimizing your hotel’s room rates is referred to as dynamic pricing, in which prices change dynamically (hence the name) according to real-time data to capture the full potential of your available room revenue and occupancy rates.

With the right technology in place, hotel dynamic pricing can be automated at your property so room prices are optimally set with little to no effort, you get time back in your day to look after your guests and you put yourself in pole position in your market. 

Let’s take a closer look.

What is Dynamic Pricing?

Dynamic pricing is a hotel room pricing strategy in which rates aren’t fixed but are adjusted multiple times each day based on real-time data, encompassing market demand, market trends, competition, occupancy, time of booking, customer behavior, and other factors that influence booking patterns.

Dynamic pricing provides the most optimal room prices for any given time, resulting in the best balance between Average Daily Rate (ADR) and occupancy. It is also an increasingly popular strategy due its flexibility in an industry which is incredibly fast-moving.

Imagine it's a bustling, hot summer weekend in the city, and your hotel is ideally located near the main attractions. With dynamic pricing, your room rates rise to match the heightened demand, capturing the market of eager tourists who are willing to pay more for the convenience.

Fast forward to a quiet Monday after this weekend when the rush has subsided. Instead of staring at empty rooms and missed revenue opportunities, dynamic pricing kicks in once again, but this time to lower your rates. 

This can attract business travelers and last-minute bookers in the lookout for a good deal, ensuring your rooms don't stay vacant and you continue to generate revenue.

Dynamic pricing turns the tide in your favor, whether it's a busy weekend or a quiet weekday, ensuring your hotel's profitability doesn't just depend on the calendar, but on smart, data-driven decisions.

Dynamic pricing helps hotels drive revenue

As seen above, Dynamic pricing enables you to strike a perfect balance between demand and supply, ensuring maximum room occupancy at optimal prices, and consequently, driving revenue growth.

During periods of high demand, such as a big event or seasonal uptick, you can harness the power of dynamic pricing to adjust your room rates upwards to match current market conditions. 

This not only capitalizes on the increased demand but also caters to a market segment that values immediacy and convenience, and is prepared to pay a premium for it.

On the flip side, during off-peak periods or times of lower demand, you face the risk of vacant rooms and lost potential revenue. This is where dynamic pricing comes in again. By judiciously lowering room rates, hotels can attract cost-conscious travelers, effectively turning potential revenue loss into a steady income stream.

As you can see, dynamic pricing enables you to seize every revenue opportunity that comes the way of your property. Additionally, it safeguards against revenue loss that can occur due to inaccurate pricing from human error, as dynamic pricing, as we'll discuss later, leverages technology for automation.

There is also the powerful impact it has on your occupancy. The last thing you want as a hotelier is empty rooms, that’s lost revenue you can never recover. By always setting prices that meet current market demand you are also optimizing your occupancy. 

During off-peak periods, you can stimulate bookings by setting lower prices, and conversely raising prices during peak season mitigates the risk of overbooking. While having personalized settings within your chosen software means that rates never get set beyond your chosen preferences. 

Being able to quickly comprehend and respond to demand fluctuations and competitor pricing in real-time with the appropriate automated price point, will give you a real competitive advantage in your market. If you’re trying to do this all manually, you’ll know there are certainly a lot of factors to consider.

3 factors that inform pricing in the hospitality industry

In an increasingly fluid hotel industry, determining the best room rates has become more complex than ever.

Your pricing strategy can be influenced by a myriad of factors - from monitoring multiple channel partners, keeping tabs on competition, adapting to evolving traveler trends, to scrutinizing demand forecasts. Below are three pivotal factors to consider.

Seasonality

Historical data strongly indicates that hotel occupancy fluctuates between high and low seasons, typically aligning with holidays and weather patterns. 

Holidays in key source markets can also precipitate a surge in demand during certain periods. It's crucial to stay cognizant of these shifts and adjust your prices accordingly to optimize both your occupancy and revenue. 

Recognizing these demand variations, from macro to micro scales, is essential to devising a pricing strategy that secures your rightful market share.

For example, Miami Beach has clearly defined high and low seasons due its tropical climate, with hotel prices to match.The traditional high season is from November to March, due its warm temperatures, low humidity and lack of rainfall.

In March 2023, average hotel prices peaked at $465, then in mid-August of the same year, average hotel prices sank to $148 - a 177% difference. However, seasonality can be more micro and include different days of the week and weekend that may typically see periods of higher demand.

Supply and demand: Taking your competition into account

Optimal pricing at any given moment hinges on the supply and demand dynamics of hotel rooms in your market. 

Just as your hotel has a finite inventory, the supply of rooms within your locale is also limited. Competitor prices also have a big influence on demand.

If your competition lowers their room prices, it might attract a larger share of the market, potentially reducing demand for your rooms. And vice versa if they decide to raise their prices. 

If your customers are highly sensitive to price changes (high price elasticity), even small price differences between you and your competitors can significantly impact demand.

Therefore, you have to be mindful of your competition and how they are pricing their rooms. 

Armed with information on the pricing strategies of other local hotels, you can fine-tune your own rates, potentially gaining a competitive edge in the market. 

Without a transparent understanding of your competitors' offerings, it's impossible to guarantee that your rooms are truly competitively priced for consumers and are in line with the perceived value and market position of your property.

It's also essential to ensure that you're competing with appropriate properties and have accurately defined your competitive set. This should take into account factors such as star rating, amenities, and accommodation type to achieve optimal pricing. 

Adjusting your competitive set should be done on an annual basis, as for example new hotels may be built in your market, increasing the local supply of competitors. 

The level of demand in your market can fluctuate more unpredictably - the most obvious example being the nullifying effect of the pandemic on travel and hotel demand. 

But, there are a number of ways in which demand can shift for a market such as seasonality and the activity of your competition as mentioned above, traveler trends and major events.

Special events

Events in your market, ranging from major sports competitions and music festivals to smaller business conferences, can trigger a spike in demand for hotel rooms concentrated around specific dates. 

It's crucial to employ a pricing strategy capable of seizing these opportunities and capitalizing on the full potential of this increase in demand. This approach can give you an advantage over your competitors and significantly drive revenue.

A notable instance of this over the last couple of years is what’s now known as ‘The Taylor Swift Effect.’ The music star has become a genuine hospitality phenomenon; when she arrives to perform in a destination there is the very strong potential that hoteliers can yield their highest room rate of the year.

For the duration of Taylor Swift's European Eras tour, hotel prices across concert cities are expected to surge 44% on average. Some cities such as Liverpool, Warsaw and Stockholm, are expected to see hotel prices jump more than 100% during this time.

Establishing a dynamic pricing strategy for your independent hotel

There is almost no time available to react to changeable market conditions with truly accurate pricing. It is simply not feasible to manually collect, collate and analyze data on the factors mentioned above and set your room prices before your data is outdated.

To combat the acceleration of complexity and reduction in time, you need to establish a data-centric approach that compresses analysis, decision-making, and implementation into a much shorter time frame. 

This is where a dynamic pricing strategy comes into play. As this strategy is informed by real-time market data, all the heavy lifting is done for you, so you can make quick and confident room pricing decisions. To implement dynamic hotel pricing you need the right software.

How software helps hotels determine pricing to match market demand

When it comes to optimizing room rates through a dynamic pricing strategy, solutions predominantly come under two categories: Revenue Management Systems (RMS) and Pricing Recommendation Tools. Each has its unique application, depending on your business requirements.

Revenue Management Systems (RMS) are advanced toolkits that streamline and semi-automate hotel revenue management by analyzing historical, future, competitor, and market data in real-time.

RMS are comprehensive commercial solutions, offering significant benefits. They aid hoteliers in optimizing pricing and occupancy rates, deliver data-driven insights for intelligent decision-making and competitor analysis, and enhance operational efficiency. 

However, there can be considerable challenges, particularly for smaller independent hoteliers.

RMS can be expensive, especially when you add on the staff training involved. They are also intricate systems that necessitate a certain degree of expertise and time dedicated for effective use. And to fully benefit from an RMS it needs to be integrated with other hotel systems, which can be complex and time-intensive. 

Generally, an RMS isn’t considered an ideal solution for a small independent hotel aiming to automate a dynamic pricing strategy. On the other hand, a pricing recommendation tool is ideally suited to the needs of independent hotels. 

A pricing recommendation tool automates the process of dynamic, customized pricing at your hotel.

By harnessing real-time data, this tool effortlessly provides room price recommendations (up to a year ahead in some cases), ensuring you are always ready to set optimal rates and capture every revenue opportunity, without diverting your focus from the crucial task of managing your hotel.

This tool's single aim is to effectively automate a dynamic room pricing strategy. There are no superfluous features, it just enables you to make superior, data-driven pricing decisions for full optimization of your room revenue with utmost ease, and without complications.

Simplify dynamic pricing with a pricing recommendation tool

For small hotel owners with limited time and resources to perform extensive, manual rate analysis, a pricing recommendation tool is the ideal solution. Dynamic pricing software helps increase revenue through accurate pricing and eliminates labor-intensive tasks from your workload, affording you more time to attend to your guests.

Pricing Manager by Lighthouse easily allows independent hoteliers to maximize their bookings and revenue with automated dynamic rates. It instantly displays priority opportunities and price recommendations, to optimize daily pricing for up to 365 days in the future

It’s time to stop manually sorting through pricing data and losing time and revenue to your competitors. By choosing the right pricing recommendation tool, you can simplify and automate an effective pricing strategy at your hotel to maximize RevPAR.