What is dynamic pricing?
Dynamic hotel pricing is a pricing strategy where a hotelier tweaks their room rates based on real-time demand, competitor pricing and other market forces. The aim is to charge the maximum that a guest will be willing to pay for a room on a given date. While this strategy can be attempted manually, it is more common to use hotel software or a hotel dynamic pricing algorithm. Little Hotelier grants a hotel access to the information they need to set their pricing to the perfect level, months in advance.
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Who benefits from dynamic pricing?
The short answer: hotels. More specifically, hotels that are looking to fill rooms while maximising profit are the ones that will benefit from dynamic pricing.
Hotel dynamic pricing is an industry term that describes the practice of maximising the revenue generated by a finite supply of rooms. If you charge the same flat rate every single day of the year, you’ll probably find yourself empty over the low season and booked up over the high season, though you won’t be earning as much as you could during peak periods.
When demand is high, guests are willing to pay more to secure a room. When demand is low, guests need to be lured in by great deals in order to choose your hotel over other available options.
This is the idea behind dynamic pricing. You consider how demand for your rooms will vary throughout the year, then you apply room rates that align with the demand, thus ensuring you earn as much as you can from each room each night.
What is an example of a dynamic price? Consider a standard double room in a four-star Manhattan hotel. On 25 December, when a huge amount of New Yorkers are back in town for the holidays, the hotel charges $800 per night. In late-February, when visitors to an icy NYC are at their lowest, the hotel might choose to charge $120 for that very same room, in order to attract a few of the very limited supply of travellers.

How do hotels use dynamic pricing?
How can a hotel use dynamic pricing to adjust its room rates based on the demand? The key is to understand that demand, to check what competitors are charging, then to set your room rates accordingly.
Step 1: Set your price tags
Begin by setting up some guide posts for your pricing. Figure out the following rates for each of your rooms:
- Bottom price: The minimum price you can possibly charge (may be loss-making in order to spur demand).
- Starting price: The lowest price that you’re comfortable setting (e.g. as a baseline in low season).
- Sales price: The standard room rates you set and dynamically change (at least a year in advance).
- Equilibrium price: The rate at which supply and demand meet, allowing you to fill any remaining available rooms free of risk.
- Resistance price: The point at which bookings begin to slow.
- Rack price: The highest possible price (used on a handful of nights throughout the year).
To set your dynamic prices, such as sales price, move onto step two.
Step 2: Understand demand
Look at your historical sales and use your intuition to identify how demand will fluctuate throughout the year. Identify your high season, shoulder season and low season, as well as shorter peak periods such as public holidays, long weekends and local events.
Step 3: Check competitor pricing
Use technology to track what your direct competitors are charging for their rooms. The Little Hotelier Insights feature gives you total clarity by offering up competitor rates in real-time.
Step 4: Set your room rates
Armed with your price tags, competitor rates and an understanding of demand, you’re ready to set your room rates. Do so at least a year in advance.
Step 5: Regularly revisit your rates
Never set and forget your hotel dynamic pricing model. Set aside some time every week to review your rates and ensure they are set at an optimal level.
Factors that influence dynamic pricing for hotels
In days gone by, dynamic pricing was a very manual process based largely on guesswork and assumptions – “it’s Christmas, I think people would be willing to pay $X for a room”. But that’s no longer the case, thanks to the wealth of hard data that modern hotels now have access to.
By collecting and analysing data related to the following factors, you can gain a far clearer idea of the maximum room rate you can charge to earn bookings throughout the year.
Seasonality
Traditional peak periods – summer, the festive season, school holidays, long weekends – are a golden opportunity to maximise the revenue and profitability at your hotel.
Past occupancy trends can guide future rate setting, so use historical data to predict peak and off-peak periods. By understanding these patterns, you can set your prices nice and early, and give yourself maximum time to secure bookings at your optimised rates.
Supply and demand
You will always be competing against other accommodation providers in your area, so your dynamic pricing must be informed by what your competitors are charging. If a number of competitors drop their rates, it may be wise to adjust yours accordingly. The same applies to a rise in competitors rates.
By conducting regular price comparisons, you not only get a clear idea of the going rate for your rooms, you also develop an understanding of competitor pricing and promotion strategies – knowledge you can use to outcompete your rivals.
Consider tying pricing to real-time demand indicators: if competitors are selling out quickly on certain dates due to discounted rates, you might consider raising your rates as supply diminishes, to capture more revenue.
Special events
Beyond traditional peak periods, there might be local events that also increase demand, such as festivals, concerts, industry conferences, sports tournaments and other community events.
You should proactively research upcoming events, and work to understand their expected impact on travel demand, by getting a sense of the capacity of an event, and how widely it’s being marketed.
But be warned: accusations of price gouging can be damaging, and not worth the extra revenue you make during a big event, so keep your rates fair. Offering free breakfasts or early check-ins can also be handy ways to get guests on-side and justify higher rates.
Advantages of using dynamic hotel pricing tools
What are the advantages of dynamic pricing tools? Amongst a wealth of perks, here are four of the most compelling.
Boost bookings and revenue
The most obvious advantage of using a dynamic pricing tool is the boost in bookings during low season (thanks to lower pricing) and the boost in revenue during high season (thanks to higher pricing).
Increase demand
When dynamic pricing is used well, your hotel will be booked out more often. This can form a handy marketing tool to increase the demand for your hotel even further, as it implies that you offer a guest experience that many are seeking out.
Understand customer behaviour
The process of applying dynamic hotel pricing is one of gaining a better understanding of your customers, your competitors and your market – insights that you can also use to enhance your guest experience.
Balance occupancy
A hotel that is over-reliant on peak periods is not a healthy business. Dynamic pricing helps you to balance occupancy throughout the year, reducing your need to make all your hay while the sun shines.
What are the risks of dynamic pricing?
A dynamic pricing strategy isn’t without risk. There are a few potential issues that hotel owners should be aware of and work to avoid, including:
- Customer dissatisfaction: High rates and frequent price fluctuations can frustrate guests, especially if they perceive prices as unfair or inconsistent. This can lead to a loss of return business if a guest doesn’t feel like they’re getting good value, or being rewarded for their loyalty.
- Price wars: Aggressive pricing strategies can lead to unsustainable competition with nearby hotels. It can turn into a race to the bottom, which can quickly erode your profit margins.
- Overreliance on technology: While you shouldn’t have a problem if you use a quality dynamic pricing tool properly, lower quality tools might recommend rates that are too low (profit loss) or too high (reduced occupancy).
- Reputation damage: Perceptions of price gouging during peak demand, like during a local event or an emergency, can harm your image.
- Regulatory scrutiny: If accusations of price gouging are loud enough, might attract attention from regulators (depending on your local laws).
How to choose the best hotel pricing software for your hotel
When it comes to choosing software for your hotel, it’s important to remember not all solutions are created equal.
What does the best hotel pricing software look like?
In the case of Little Hotelier, you don’t just get a pricing tool. You get an all-in-one booking and property management solution that is crafted specifically for small, independent hotels. A key part of the Little Hotelier offering is the Insights feature, which offers real-time analysis of competitor rates, to help you understand where to position your pricing in order to win more business.
By Dean Elphick
Dean is the Senior Content Marketing Specialist of Little Hotelier, the all-in-one software solution purpose-built to make the lives of small accommodation providers easier. Dean has made writing and creating content his passion for the entirety of his professional life, which includes more than six years at Little Hotelier. Through content, Dean aims to provide education, inspiration, assistance, and, ultimately, value for small accommodation businesses looking to improve the way they run their operations (and live their life).
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