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 Insights grants a hotel access to the information they need to set their pricing to the perfect level, months in advance.

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Little Hotelier Insights delivers you real-time rates of your direct competitors, allowing you to set the precise rate that will attract more guests.

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Why do hotels use dynamic pricing?

A single, simple reason is behind the widespread use of dynamic pricing in the hotel industry: most hotels want to maximise profit.

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 does hotel dynamic pricing work?

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.

Advantages of using dynamic hotel pricing

What are the advantages of dynamic pricing hotels? Amongst a wealth of perks, here are four of the most compelling.

Boost bookings and revenue

The most obvious advantage enjoyed by a dynamic pricing hotel 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.

How to choose the best hotel pricing software for your hotel

What does the best hotel pricing software look like?

Little Hotelier is 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).