05Dec

The 3 Key Components of Your Dynamic Pricing Optimization Strategy

Author: Avanti Joglekar

In the past decade, pricing in the hospitality industry has come a long way.  Thanks to advances in technology and methodology, hotel pricing has never been more efficient or profitable.  With the rise of OTAs and distribution costs, it’s also never been as competitive.  Having a firm grasp of the core concepts of dynamic pricing optimization is crucial to having an effective strategy.  Here, we’ll address the three pillars to dynamic pricing optimization so that your pricing strategy is as competitive and profitable as possible.

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Start With a Solid Forecast

Dan Skodol, Vice President of Revenue Analytics at Rainmaker says that to have dynamic pricing, you must start with an accurate revenue management forecast.  “There’s really no effective way to apply dynamic pricing without a revenue management forecast,” says Skodol.  “A revenue management forecast will look at your hotel’s inputs and potential demand and help you make decisions to determine what your ideal mix of that demand that for your hotel to reach your best forecast result.”

Rates Will Adjust for Guest Segments and Demand

A thorough awareness of your hotel’s guest segments is a crucial component of dynamic pricing.  “You’ll start by forecasting at a segment level to understand the value of each guest segment,” says Skodol.  By looking at each segment’s booking patterns, you’ll determine both who the most valuable guests are and what price to offer based on the value of each segment to your hotel.  Your revenue management system must also factor in variables like channel cost, segment loyalty, ancillary spending, and so forth to assess each segment’s value and ideal rate.

A dynamic pricing optimization strategy is also able to adjust for any fluctuations in demand on a daily or even hourly basis.  By closely monitoring demand and inventory over time, you’ll be able to adjust pricing to maximize bookings and profits.  For example, if your bookings for a particular day exceed your demand forecast, your RMS will suggest higher rates for the following booking period.  Conversely, it will also adjust rates down if bookings lag behind the forecast’s expectations.  

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Adopt a Multi-Tiered Pricing Strategy

Another way to drive profits using dynamic pricing optimization is to combine both of the above concepts into a multi-tiered pricing strategy.  With this method, your revenue manager would utilize either what’s known as a ‘high to low’ or a ‘low to high’ approach.  After determining the rates for each segment, you will then split each segment into two or more smaller segments.  If bookings are at a lower volume, you’d use the ‘high to low’ approach, and vice versa for higher volume.  With the ‘high to low’ approach, you’d begin booking your rooms a higher rate for each segment then reduce the rate after a certain time, which helps to increase occupancy if bookings aren’t matching forecast expectations.  The ‘low to high’ approach would increase room rates as occupancy increased.

Dynamic pricing optimization provides hotels with the ability to efficiently make informed choices about their rates.  Being able to determine the best price for each of your customer segments while adjusting them based on real-time forecasting data provides you with the information you need to drive profits.  It also requires revenue management systems that are the latest and most sophisticated to keep pace. 

Want to learn more behind the psychology of pricing? Click below to watch our recent webinar on the topic.

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If you’re interested in learning about how Rainmaker’s revenue management solutions can optimize your pricing strategy, contact us today for a free custom demo.

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