Dynamic Pricing Strategy for Accommodations

Imagine for a moment that you use static pricing to price your rooms, campsites, villas, or whatever other accommodations you offer. You might change your pricing every season or when it’s very obvious that an adjustment needs to be made, but otherwise, your prices are pretty much the same all year round.

Now imagine that due to being exceptionally busy, you didn’t know that a huge music festival was coming to a town nearby. Suddenly, vehicles start filing into your campground, RV park, or hotel. You quickly sell out of accommodations in record time—which is great—but you also find out that other accommodations in the area, from campgrounds to hotels, were charging double what you were—and still getting full occupancy.

Maybe you don’t want to charge more and are just happy with selling out. But the reality is, when you price significantly lower or higher than your competition, potential guests are going to wonder why. If you price lower, are your services less compared to others in the area? Is the resort or campground not as nice as the competition? If you price higher, guests may dismiss your business entirely as being out of their budget or expect a luxury experience that you may not be prepared to provide.

Sure, you can work hard to determine the best price for your property based on value and reputation, checking your competitors every once in a while to ensure that you’re still at that pricing sweet spot. But then, an event in a nearby town comes along and throws a wrench into your plans. Or a swanky new amusement park opens up. Or the number of tourists visiting per year keeps increasing. Maybe all three of these examples happen at the same time. How are you, as an accommodation provider, supposed to keep up with constant factors happening around you that affect your pricing? Maybe you’ve heard of dynamic pricing already, but how exactly does it work, and what strategies can you use to get the most out of it?

In this article, we go into detail about dynamic pricing strategy, including what it is, why you need it, and much more.

Dynamic Pricing Definition: What Is It?

Dynamic pricing is a flexible strategy in which businesses set variable prices for products or services depending on current market demands. It can be a feature in property management software or offered as a stand-alone solution. This approach to pricing enables accommodation businesses to maximize their profits and remain competitive in fast-moving markets.

Factors Influencing Price Changes

Unlike fixed pricing, dynamic pricing allows for the adjustment of prices in real-time based on factors such as customer demand, competitor prices, time of day, and other external elements like weather or seasonality.

• Customer demand: Prices are directly influenced by changes in customer demand. For example, prices typically rise during peak tourist seasons when demand for hotel rooms increases. Conversely, prices may decrease during off-peak times to attract more customers.
• Competitor prices: Dynamic pricing algorithms frequently monitor competitor prices to ensure that a business remains competitive. If competitors lower their prices, a hotel might also reduce its rates to prevent losing market share.
• Time of day/week: Many businesses adjust their prices based on the time of day or week. For instance, hotels might offer lower rates on weekdays versus weekends, or restaurants might have different pricing for lunch and dinner.
• External elements: Various external factors, such as weather, local events, or even economic conditions, can influence pricing decisions. For example, bad weather might lead to lower prices due to decreased demand, while a major local event could cause prices to spike.

6 Types of Dynamic Pricing

There are several key types of dynamic pricing that businesses might employ, as described in the table below:

Type of Dynamic Pricing	Description
Time-Based Pricing	Prices are adjusted based on the time of day, week, or season. When weather conditions are ideal, prices typically increase for hotels or other accommodations.
Peak Pricing	Similar to surge pricing, this involves increasing prices during times of high demand. It’s commonly used in the transportation sector, like ride-sharing services during rush hour.
Penetration Pricing	This strategy involves initially setting a low price to enter a competitive market and raising it once a significant customer base is established.
Segmented Pricing	Different prices are set for different market segments based on variables like location, customer age, or membership status.
Real-Time Pricing	Used extensively by airlines and hotels, this involves adjusting prices in real-time based on changing factors such as booking patterns and cancellations to maximize revenue.
Yield Management	This involves carefully pricing inventory to maximize profit from a fixed, perishable resource, such as airline seats or hotel room nights.

Dynamic Pricing Examples: How Dynamic Pricing Works

Dynamic pricing strategy involves adjusting the price of a product or service in real-time based on factors such as demand, market conditions, and competitor pricing. In the accommodations industry, this approach is particularly effective because it allows property managers and hoteliers to optimize their revenue by adapting to changes in the market quickly. 

Here are some practice dynamic pricing examples that showcase how pricing works in the hospitality industry:

1. Time-Based Pricing: A beach resort may offer lower room rates during the off-peak season (e.g., fall and winter) to attract guests when demand is typically lower. Conversely, rates might be significantly higher during the summer months or during spring break, when demand is at its peak.
2. Peak Pricing: During a popular local festival or event, a city hotel might increase its room prices due to the high demand from visitors attending the event. This peak pricing takes advantage of the higher willingness to pay during specific high-demand periods.
3. Penetration Pricing: A new luxury hotel in a competitive market might initially offer lower-than-average room rates to attract guests away from established competitors. Once the hotel builds a good reputation and gains regular clientele, it could gradually increase its prices.
4. Segmented Pricing: A resort might offer discounted rates to senior citizens or members of a partner organization (like AAA or military personnel). This type of pricing acknowledges different spending powers and brand loyalties within different customer segments.
5. Real-Time Pricing: A hotel near a major business conference venue might adjust its room rates dynamically based on the number of conference registrations and the booking pace of rooms. As the event approaches and availability decreases, prices may increase. The hotel could also lower prices at the last minute if there’s unexpected availability to maximize occupancy.
6. Yield Management: An all-inclusive resort might use yield management techniques to adjust pricing for stays during different times of the year based on previous booking patterns, cancellations, and no-show rates. For example, the resort may increase prices for periods that have historically shown high demand and decrease them when past data predicts lower occupancy.

The Importance of Dynamic Pricing Strategy for Property Managers

In the competitive hospitality industry, the ability to adapt quickly to market changes can significantly improve a property’s performance. Dynamic pricing strategies allow property managers to respond to fluctuations in demand and supply, competitor pricing, and other market dynamics in real-time. This responsiveness is crucial not only for maximizing revenue but also for maintaining high occupancy rates.

Dynamic Pricing Strategy Advantages	Insight
Market adaptability	Property managers can adjust rental prices based on current market conditions, such as an increase in demand due to a local event or a downturn in the economy. This flexibility helps maintain competitive edge and occupancy rates.
Optimized revenue	Property managers can maximize revenue across different seasons and market conditions by increasing rental prices during peak demand times and lowering them during off-peak times.
Improved decision-making	Dynamic pricing models typically rely on data analytics, which can provide deep insights into market trends, guest behavior, and financial performance. This data-driven approach supports more informed strategic decisions.

Benefits of a Dynamic Pricing System

Implementing a dynamic pricing strategy can transform how property managers operate, driving higher profitability and operational efficiency. By leveraging technology that enables real-time market analysis and pricing adjustments, property managers not only enhance their properties’ financial performance but also improve their service delivery, ensuring guest satisfaction and loyalty.

Here are some benefits of dynamic pricing:  

1. Enhanced Financial Performance

• Increased revenue: Dynamic pricing allows property managers to raise prices during peak demand periods, boosting overall revenue.
• Reduced vacancies: Lowering prices when demand is low makes properties more competitive, which can reduce vacancy rates and the costs associated with unoccupied units.

2. Efficient Market Alignment

• Real-time adjustments: Pricing can be adjusted in real-time to respond to immediate changes in the local rental market, ensuring the property remains competitive without leaving money on the table.
• Demand forecasting: Advanced analytics can predict when demand will be high or low, allowing for proactive adjustments to pricing strategies.

3. Competitive Advantage

• Tailored marketing strategies: With insights gained from dynamic pricing analytics, marketing efforts can be more effectively targeted to attract tenants during slower periods.
• Customer satisfaction: Offering competitive rates can improve tenant satisfaction and retention, as tenants feel they are getting a fair market rate.

4. Operational Efficiency

• Automated pricing decisions: Reduces the administrative burden on property managers by automating pricing decisions based on pre-set criteria and real-time data.
• Integration with property management systems: Dynamic pricing software can integrate with existing property management systems, streamlining operations and reducing the likelihood of errors.

5. Scalability

• Multi-property management: For property managers handling multiple properties, dynamic pricing systems can scale across portfolios, providing centralized control and consistent strategy implementation.
• Adaptable to various property types: Dynamic pricing tools can be adapted to suit different types of real estate, whether managing residential, vacation, or commercial properties.

6. Rapid Response to Competitor Actions

• Competitor price tracking: Dynamic pricing systems enable continuous monitoring of competitors’ rates, allowing property managers to adjust their own prices in real time to maintain competitiveness.
• Market positioning: This agility ensures that properties can quickly capitalize on opportunities when competitors are priced higher or adjust their rates defensively when competitors lower their prices, thus maintaining a strategic market position.

7. Enhanced Revenue Management

• Optimal price point identification: This process utilizes advanced algorithms to determine the best pricing strategies for different times of the year or specific market conditions, optimizing profit margins across various scenarios.
• Revenue optimization: Property managers can significantly increase their revenue by precisely aligning prices with market demand, especially during peak demand periods or special events.

8. Increased Pricing Flexibility and Experimentation

• Market testing: Dynamic pricing allows property managers to experiment with pricing adjustments in real time, allowing them to explore what strategies work best in attracting guests and maximizing revenue.
• Risk mitigation: Short-term experiments with pricing adjustments minimize long-term risks, providing empirical data to guide future pricing decisions and strategy adjustments.

How to Implement Dynamic Pricing for Your Property

Implementing dynamic pricing for your property involves strategic planning, utilization of the right tools, and ongoing management to optimize pricing dynamically. This approach can significantly boost revenue and occupancy rates if done correctly. Here’s a comprehensive guide on how to implement and utilize dynamic pricing for your property, along with a discussion on different dynamic pricing strategies.

Steps for Implementing Dynamic Pricing for Your Property

Here are some steps to implement dynamic pricing for your accommodation business.

1. Analyze historical data: Begin by gathering and analyzing historical booking data. Look at trends related to peak demand times, off-peak seasons, customer demographics, and price sensitivity. Understanding past performance is crucial to predicting future trends and setting baseline prices.
2. Set pricing goals and objectives: Clearly define what you aim to achieve with dynamic pricing. Goals might include increasing revenue, improving occupancy rates, or optimizing seasonal bookings. These objectives will guide your pricing strategy decisions.
3. Choose the right technology: Invest in dynamic pricing software that integrates with your current property management system. The software should be capable of analyzing large datasets, monitoring market trends, and automatically adjusting prices based on pre-set rules.
4. Define your pricing rules: Establish rules based on your data analysis and business goals. These may include how much to adjust prices in response to demand changes, the maximum and minimum price limits, and how often prices should be updated.
5. Test your strategy: Before fully implementing your dynamic pricing strategy, run a pilot test on a portion of your inventory. Monitor the outcomes closely to ensure that your strategy is working as expected, and make adjustments as necessary.
6. Monitor and optimize continuously: Dynamic pricing requires ongoing management and optimization. Continuously monitor the performance and tweak your strategy based on current market conditions, competitive actions, and booking patterns.
7. Educate your team: Ensure that all relevant staff understand how dynamic pricing works and why it’s being used. This includes front desk personnel, reservations teams, and marketing departments.
8. Develop advanced analytical capabilities: Develop or invest in more advanced analytical tools that can process complex datasets for more accurate demand forecasting and nuanced market segmentation.

How to Utilize the Dynamic Pricing Model

Utilizing the dynamic pricing model effectively requires a deep understanding of various factors that influence pricing decisions and the ability to leverage technology to manage these variables in real-time. Here’s a more detailed approach to how to utilize the dynamic pricing model efficiently in your property management strategy:

1. Leverage Real-Time Data Analysis

Dynamic pricing thrives on real-time data. Property managers should use software that integrates with external data sources to continually update pricing based on:

• Market demand: Adjust prices as demand for rooms increases or decreases.
• Competitor pricing: Automatically track competitor pricing and adjust your rates to stay competitive without undervaluing your offerings.
• External events: Input data about local events that could influence demand, allowing the software to adjust prices accordingly.

2. Segmentation Strategies

Different market segments react differently to price changes. Implement segmentation strategies to tailor pricing:

• Customer type: Differentiate prices for business travelers, families, solo travelers, or large groups based on their booking patterns and value sensitivity.
• Booking channel: To maximize revenue from each channel, offer different prices based on the booking channel (direct vs. third-party booking sites).
• Length of stay: Adjust prices based on the length of stay, encouraging longer stays with proportionally lower rates to increase occupancy.

3. Incorporate Advanced Technologies

Modern dynamic pricing models benefit significantly from AI and machine learning:

• Predictive analytics: Use AI to predict future booking patterns based on historical data, enabling proactive pricing adjustments.
• Machine learning algorithms: Allow machine learning algorithms to continually learn from booking trends and market conditions, improving the accuracy of your pricing strategy over time.

4. Optimize Price Sensitivity

Understanding and monitoring the price elasticity of demand in your market is crucial:

• Elasticity analysis: Regularly analyze how sensitive your customers are to price changes. This understanding can help set how aggressive your dynamic pricing adjustments should be.
• Price floors and ceilings: Establish minimum and maximum price thresholds to prevent rates from dropping too low or soaring too high, which could alienate potential guests. Most dynamic pricing software solutions, Newbook included, have the functionality to set minimum and maximum prices built into the software. 

5. Integrate with Marketing

Dynamic pricing should work hand in hand with marketing efforts:

• Targeted promotions: Use insights from your pricing strategy to inform marketing campaigns, targeting specific customer segments with tailored promotions during expected low-demand periods.
• Real-time offers: To capture immediate booking opportunities, push real-time pricing offers through digital marketing channels, such as email or social media.

6. Continual Testing and Feedback

Dynamic pricing models should not be static; they require continuous testing and feedback:

• A/B testing: Regularly test different pricing strategies to see what works best for various segments or seasons.
• Customer feedback: Monitor customer feedback related to pricing satisfaction. High rates of booking abandonment or complaints about pricing may indicate a need for adjustment.

7. Compliance and Ethical Considerations

Ensure that your dynamic pricing strategy adheres to legal and ethical standards:

• Transparency: Explain to guests how prices are determined and any factors that may affect the rates they see.
• Regulatory compliance: Stay informed about any regulations that may impact pricing strategies, particularly in different geographic markets.

Implementing Dynamic Pricing: Tools and Technologies

To implement dynamic pricing effectively, accommodation providers often rely on specialized software that integrates with their existing reservation and management systems. This software uses algorithms to analyze vast amounts of data, including:

• Historical booking data to understand demand patterns.
• Market analysis reports to gauge overall industry trends.
• Competitor pricing, which can be gathered through online scraping tools.
• Real-time bookings and cancellations to adjust pricing instantaneously.

Final Thoughts on Dynamic Pricing Strategy

In this exploration of dynamic pricing, we have delved into its definition, importance, and execution, particularly in the accommodations industry. We’ve seen how dynamic pricing allows accommodation providers to adapt their pricing strategies swiftly and efficiently in response to various market conditions. This flexible pricing strategy is not just about increasing prices during high-demand periods but also involves lowering them when necessary to boost occupancy rates.

Dynamic pricing offers a substantial advantage by utilizing real-time data to make pricing decisions that are aligned with current market trends, competitor actions, and consumer behavior. For instance, a hotel might leverage peak pricing during a major local event to maximize revenue while also employing time-based pricing to encourage off-season bookings at reduced rates. These strategies ensure that the property remains competitive and profitable throughout the year.

Implementing dynamic pricing requires a thoughtful approach to technology integration, market segmentation, and continuous performance evaluation. By employing advanced analytics and machine learning, properties can predict future demand and adjust prices proactively, ensuring optimal financial performance and customer satisfaction.

Ultimately, the adoption of dynamic pricing is a transformative strategy for property managers aiming to navigate the complexities of the modern accommodations market. It empowers them to act with precision and agility, turning potential challenges into profitable opportunities and ensuring their property stands out in a crowded marketplace.

Discover how Newbook’s property management software, with dynamic pricing built-in, can help you organize your business and boost your revenue. Reach out to us today for a demo!