What is Dynamic Pricing?
How does dynamic pricing work?
Why do you need dynamic pricing?
Benefits of dynamic pricing tool
How to choose a dynamic pricing tool?
How to implement a dynamic pricing strategy?
Make your pricing intelligent with PriceLabs
Have you ever checked the cost of an Uber and then saw the price jump up just a few minutes later? That’s dynamic pricing in action. This pricing has been around since the 1980s and is especially common in the hospitality and travel industries. Vacation rentals have also been using dynamic pricing to maximize their revenue.
This blog covers dynamic pricing and why it is essential for your business.
What is Dynamic pricing?
Dynamic pricing is an example of price intelligence that has emerged since the 1980s, when airlines adopted dynamic pricing. It has since been prioritized over fixed pricing in many industries, such as hospitality, travel, public transport, and retail. These industries have realized the importance of dynamic pricing in setting flexible rates for their products and services.
Now, let’s answer what is dynamic pricing in the vacation rental industry. In the industry, dynamic pricing is a price optimization technique for your vacation rental based on market supply and demand, days of the week, lead time, seasonality, etc.
Though e-commerce is the biggest user of dynamic pricing today, vacation rental owners have also started answering the question – what is dynamic pricing for their business? Once they understand the benefits of dynamic pricing, they don’t rely on manual pricing as heavily as before. It helps them optimize their revenue and occupancy during varying demands.
Why is manual pricing not the best option?
In the past, property managers stuck to fixed prices that didn’t adapt to market changes or seasons. But that strategy doesn’t work anymore.
You can manually tweak your prices for holidays or local events, but demand is unpredictable and can change without warning. What worked last year might not work this year. Unexpected events can drastically shift demand, making your past data unreliable.
Comparing your rates to competitors manually is possible but incredibly time-consuming, especially if you do it multiple times a year.
That’s where dynamic pricing comes in. It automatically adjusts your rates based on real-time data, keeping you competitive and responsive to market changes without the constant hassle.
Types of Dynamic Pricing
Time-based Pricing
Time-based pricing happens when prices fluctuate based on demand at specific times. Businesses use this strategy to encourage quick purchases.
For example, you might pay extra for same-day delivery. Cab prices surge during rush hour, and booking airline tickets well in advance usually costs less. Limited-time offers are another way businesses push for quick decisions.
Segmented Pricing
Segmented pricing means setting different prices for the same product based on customer segments. This works well when different groups perceive your product’s value differently.
Think about plane tickets: business class versus economy. Or sports tickets, where prices depend on team popularity, the athletes, and seat locations. When using segmented pricing, consider:
- Customer demographics: Are some personas more likely to buy?
- Location: Does the location of your business or customer affect pricing?
- Product type: People might pay more for a physical board game than a digital one.
Peak Pricing
Peak pricing is common in transportation and hospitality. Prices go up during high-demand periods.
For example, if you plan to stay in the Coachella Valley during the music festival season, expect higher prices. Similarly, airfare tends to rise during the holidays.
Examples of Dynamic Pricing
Airlines: Airline ticket prices are a prime example of dynamic pricing. Prices change based on factors such as the number of seats left, the type of seat (economy, business, first class), and the time remaining until the flight departs. Last-minute bookings are often more expensive due to limited seat availability, while early bookings might offer discounts. Flights during peak travel times or holidays also typically cost more due to increased demand.
Electricity: In the utilities sector, dynamic pricing helps manage demand and supply efficiently. Utility companies may charge higher rates during high usage periods, like hot summer afternoons when air conditioning is high. This strategy helps balance the load on the electrical grid and encourages consumers to reduce their usage during peak times.
Hotels: The hospitality industry extensively uses dynamic pricing. Hotel room rates vary based on factors such as room size, view, season, special events or festivals, and day of the week. For example, a beachfront room costs more during the summer vacation than a regular room during off-peak periods. Prices also rise during weekends or significant local events when demand for accommodation spikes.
Vacation Rentals: Vacation rental prices fluctuate based on location, season, and local events. For instance, a rental property near a popular tourist destination may have higher rates during peak tourist seasons or holidays. Additionally, rentals can be more expensive during major local events like music festivals or sports tournaments. Owners adjust prices dynamically to maximize occupancy and revenue based on demand.
Ride-Sharing Services: Companies like Uber and Lyft use dynamic pricing to adjust fares based on demand and supply in real-time. During peak hours, such as rush hour or significant events, ride prices can surge significantly. Conversely, prices may drop during quieter times to attract more riders.
E-commerce: Online retailers often use dynamic pricing to stay competitive and maximize profits. Product prices can change based on competitor pricing, time of day, or the customer’s browsing history. For example, an e-commerce site might lower the price of an item if a competitor is having a sale or increase prices during high shopping periods like Black Friday.
Sports and Entertainment: Ticket prices for sporting events and concerts are another example. Prices vary widely based on factors like the popularity of the teams or artists, the seats’ location, and the purchase timing. Tickets for a championship game or a concert by a top artist will likely be more expensive and fluctuate more than those for less popular events.
How does Vacation Rental Dynamic pricing work?
The dynamic pricing tools for short-term rentals will use your average base rate as a starting point. For example, if your average nightly rate in high season is $300 and $100 in low season, your base price will be $200. Although each tool calculates costs differently, essentially, they consider the following factors:
- Seasonality: The tools consider the season. To do this, they analyze historical trends of vacation rentals and hotels in your region.
- Days of the week: They analyze the price of accommodation in your area based on the day of the week and apply the necessary increases or discounts.
- Lead time refers to the time between the moment users book their rental and their check-in date. Dynamic pricing tools use this data to offer discounts to last-minute reservations (to fill in the gaps in your calendar) or bookings made in advance (to guarantee the maximum possible occupancy).
- Vacation days and important events: These tools will determine the most in-demand dates after analyzing the occupation of your local competitors. You can also add a list of the main events in your area to reduce the margin of error.
- Orphan days: There’s nothing worse than having gaps in the middle of your busy calendar. For this reason, these tools will generate automatic discounts to incentivize booking these orphan days.
- Personalization: Ultimately, the owners and managers decide which strategy to pursue. Therefore, you can establish a minimum and maximum price range that the tools will respect no matter what.
Why do you need dynamic pricing tools for your vacation rental?
Now that we know what dynamic pricing is, let’s understand what is a dynamic pricing tool and why you need one. Dynamic pricing software is a tool that uses real-time data to suggest an optimal rental price. Several factors go into making dynamic pricing work. These include:
- Re-evaluating your vacation rental’s nightly price because the algorithms analyze the market data and your properties’ performance. It then suggests prices a guest will be willing to pay for your vacation rental.
- It ensures that your nightly prices are always competitive according to your market so that you never offer your property too low or too high.
- Dynamic pricing also allows you to maximize your occupancy by facilitating you to put minimum night restrictions in place for your listing. By mandating a certain number of nights for each booking, you can ensure that you are not incurring added maintenance and cleaning costs because of one-day bookings. Also, it ensures that you don’t have unbooked nights during high-demand seasons and periods when you are likely to get paid more because of events or festival celebrations in your vicinity.
- Since everything is automated and the decisions are made based on daily market data updates, you don’t have to spend hours doing market research and updating your prices. This leaves you with a lot of free time that you can use to focus on other administrative aspects of your business.
If you constantly spend too much time on any of these three areas, you might want to consider a dynamic pricing tool to automate some of these processes and become more successful.
Benefits of a dynamic pricing tool
In the vacation rental industry, technology gives you a competitive edge. Using sophisticated tech solutions to manage your pricing and revenue is no exception.
According to the Short-Term Rental Tech Report, one-third of property managers use dynamic pricing software.
A dynamic pricing tool analyzes historical and market data to provide tailored automated pricing recommendations. Below are some of the benefits of using a dynamic pricing tool.
- Dynamic pricing software allows you to react quickly to an actively changing market.
- Advanced dynamic pricing solutions are based on intelligent algorithms considering all relevant external factors, seamlessly adapting to the market conditions and the revenue manager’s strategy.
- Dynamic pricing solutions allow you to optimize your rental’s performance by frequently adjusting your nightly rate based on real-time market data.
- The price-setting process is almost entirely automated, allowing the property manager to focus on more strategic tasks. This means they can become more competitive, increase profitability, strengthen their price image, and successfully implement set KPIs (key performance indicators).
- Vacation rental owners can maximize their occupancy by setting minimum night restrictions. The software automatically implements these restrictions and alters them according to the customizations set for orphan days, adjacent day bookings, and long-term and short-term bookings.
Now that you know why you need a dynamic pricing tool for your rental business, let’s discuss how to choose one.
How do you Choose a Dynamic Pricing Tool?
By now, you must be intrigued by dynamic pricing tools and want to try one out. However, before you choose software for your business, ask yourself these questions to ensure you choose the right fit.
- Which dynamic pricing tool is integrated with your property management software or vacation rental channel manager? Your PMS may not be integrated with every tool, and you want to choose one that can seamlessly integrate with your channel manager and PMS.
- What is your budget for the tool? Depending on your annual revenue, you may choose a monthly payment plan. However, paying a percentage for each booking will make more sense if the booking volume remains undetermined. While the fee seems small monthly, it can become hefty over time, especially if your portfolio grows.
- Which software has a more user-friendly interface? This question is about your personal preference. What would you prefer more? You can sign up for free trials of dynamic pricing software to understand which one clicks for you.
How do you Implement a Dynamic Pricing Strategy?
By now, we know what revenue management is, what to look for in a revenue manager, and the key metrics used to evaluate your listing’s performance and form a pricing strategy.
Let’s talk about how you implement this information to see your results.
- Manually manage rates: You can regularly alter the daily rates of each listing after reviewing your competition and evaluating external influences like local events, news, weather, and more. This will give you complete control over your prices, but it is time-consuming and prone to human error.
- Hire a contract or in-house revenue manager: Delegate the revenue management task to a full-time resource or outsource it to a revenue management company. Hiring a full- or part-time employee to help manage your vacation rental pricing can allow you to focus on other aspects of your business. They will also come with relevant experience that will contribute to your overall growth.
- Implement dynamic pricing and revenue management software: Vacation rental managers increasingly employ dynamic pricing tools. These tools have great potential to increase your ROI by optimally pricing your properties and helping you improve your occupancy.
- Blend data with human experience: A tool built for vacation rental managers, with a dedicated revenue manager who knows how to utilize these tools’ full potential can give you a robust set of resources that allow you to be detailed in your approach.
Make your pricing intelligent with PriceLabs.
Forget the old “set it and forget it” model with fixed nightly rates for weeknights or weekends, high or low seasons. It’s time to empower your listings with dynamic pricing, automating nightly rates based on data-backed pricing suggestions.
To create a more sophisticated Airbnb pricing strategy, consider factors like seasonality, minimum night restrictions, gap nights, and occupancy. Adjusting prices in real-time with the PriceLabs Dynamic Pricing tool can significantly boost short-term rental earnings.
Implement Minimum Stay Restrictions
Vacation rental owners and property managers often use minimum length of stay restrictions to manage bookings effectively across different seasons and booking windows. This advanced feature helps optimize occupancy rates.
For instance, during high-demand seasons, such as a week-long festival, property managers might require a minimum stay of seven days to capitalize on the influx of guests seeking longer bookings. This strategy ensures higher occupancy during peak periods and compensates for lower occupancy during off-seasons.
However, using minimum stay restrictions requires a thorough understanding of your market and booking trends. Setting a longer minimum stay when the trend favors shorter stays can lead to missed booking opportunities. Anticipating guest needs and aligning your strategy with market demands can make this approach highly profitable.
More Beds Equal More Guests
Travelers often prefer larger groups to split costs, making accommodation more affordable. You can attract more guests by making your vacation rental suitable for larger groups and providing more sleeping arrangements. Additionally, you can charge extra to accommodate additional guests, increasing your rental income.
Target Business Travelers During Non-Peak Seasons
Seasonal tourism can make it challenging to secure bookings during off-peak months. However, business travelers and digital nomads travel year-round. You can maintain steady bookings throughout the year by making your rental appealing to this group.
Consider offering discounts for extended stays, reliable Wi-Fi, and a comfortable work-from-home setup. Marketing your property to business travelers and remote workers can help ensure consistent bookings, even during non-peak seasons.
By adopting dynamic pricing and these intelligent strategies, you can maximize your vacation rental’s potential, ensuring higher occupancy and increased revenue.
Key Takeaways:
- Dynamic pricing adapts rates based on real-time market demand, optimizing revenue for vacation rental owners.
- Automated pricing adjustments save time and ensure competitiveness in a rapidly changing market.
- Choosing the right dynamic pricing tool involves considering integration, pricing plans, and user interface.
- Implementation of dynamic pricing strategies, like minimum stay restrictions, targets specific guest segments to maximize occupancy and revenue.
- By embracing dynamic pricing, vacation rental owners can stay competitive, adapt to market changes, and optimize revenue potential.
