Report

dynamic pricing - good or evil?

Front Desk Operations

moss started this discussion 10 years 8 months ago

Hi everybody,

I just stumbled over this article about revenue management of hostels and dynamic pricing in particular

http://www.xotels.com/en/news/case-study-in-revenue-management-for-youth...

According to the article, dynamic pricing is a good way to increase your revenue and react flexible to the market demands. However, if I understand the term dynamic pricing correctly, it means that the price per bed goes up with the occupancy rate, meaning that the last bed could be sold for a ridiculously high price

This, on the other side, goes strictly against my sympathy for last-minute-or-not-at-all-booking -backpacking-style and rewards those who book 200 days upfront and plan their "backpacking" trip to the smallest detail ahead, instead of just seeing how things turn out...

It's pretty late already, but I hope you understand kindof what I mean and maybe have an opinion about it..

cheers :steve:

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slushysnow

10 years

We adjust our prices according to occupancy rates. However you have to bear in mind that it goes in both directions, up and down.

For example, say I am at 80% occupancy (which is very low for us), I would drop my prices to encourage people in - I'd rather sell a bed for a few dollars less than have an empty bed.

Same goes for when I am 99% full and have one last bed to sell, I'll raise the price for the bed, at least initially. So for example if I arrived in the morning and I was already 99% full, then that last bed the price would go up 10% maybe. However as the day goes on, if I still haven't sold that last bed, I might drop it back down to normal price.

I don't think there's anything wrong with yielding in this manner. I know what you are saying about last-minute booking, but sometimes those people may pay more than the odds and sometimes less. Inhouse guests generally don't get the increased prices, I just charge them our standard prices if they extend.

A lot of software can do this kind of revenue yielding automatically based on your % occupancy, however I'm not sure it's wise just to go (purely) by this as there are so many other factors to consider, such as how busy it is, what events are happening in the city, the weather etc.

At the end of the day, dynamic pricing can bring a lot more money in, without stinging the customer unduly - I hate having empty beds and so will happily drop the price (within reason) to bring in more guests.

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Rucksack Brian

10 years

Generally the idea is to raise the price as your occupancy goes up, because there is clearly a high demand for a limited supply of beds.

Many hostels do this on a small level by raising rates on the weekends, in the high season, and during special events. A much smaller number of properties do it on a daily basis to maximize their profits. This strategy works best (and is therefore more common) in areas with a consistently high demand.

Going down with your rates, on the other hand, can be dangerous, especially if you are not in a high demand area. A lot of hostels drop their rates by a very large amount when their occupancy is low. Sometimes to such an extent that they lose money by selling the beds at those prices. This usually has more to do with a panic response than with a yield management strategy. If there is a lot of competition in the city, then it’s easy to convince yourself that if travelers aren’t booking with you then they must be booking with your competitor.

The problem is that when demand is low, frequently there are no guests booking with your competitor either. If there is low demand during a particular period, then dropping the price won’t necessarily attract more people to the area. It will just earn you less money from the people you were already attracting. You actually lower your profit in this case.

There are times when it makes sense though. For example, if you need to collect a crowd in order to create a nice atmosphere. This may present a loss in the short run, but generate positive reviews and word-of-mouth buzz that can earn you more money down the line.

The entire yield management concept is a nice game for businesses to play, but guests don’t appreciate it. Imagine a telling a guest that tonight’s price for the same bed they slept in last night is now $5 higher because those guys over there are here tonight. Not only will the guest not be happy with you, but they may also adopt a “screw those guys” attitude towards the other guests, ruining your atmosphere.

SlushySnow presented a nice solution to this, by letting in-house guests extend at their previous rates.

Here is an older thread with more discussion about dynamic pricing.

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rjd1983

10 years

Dynamic pricing back in London has definitely caused some problems between us and the guests. A lot of them don't realise we operate dynamic pricing because when they book, it only shows an average nightly price instead of per night price. When they do come to extend in the morning, "oh that is so expensive, I only paid £8 last night, and now it's £12? How come it's more expensive??!!".

I had a situation with this American girl: when she first stayed, she booked 3 nights through HW, paying about £8 a night for a 6 bed dorm. She booked with us as we were the cheapest hostel when she booked. About 2-3 days after checking out, she comes back as walkin (didn't check the rates before she arrived), and that day we are really busy that week, so our prices were high, and we had no problems in selling beds at the higher price. She walkins and asks how much is it for 2 nights, and I said it was £12/£14 a night for a 15 bed dorm (the only room left), then she was asking me how come it's more expensive? I said we adjust prices according to demand - when you fly, every day is a different price depending to demand, and you really got a good price when you first stayed.

I said for her to even use the Wi-Fi and look for something else. I think she did, but either way in the end she decided to stay with us paying that higher price. Later that day, I look at HW reviews (I look a couple of times a day at reviews) and I see a new one, and it is from her. She slates us! She says we price gouge, misrepresent ourselves, not honest, dirty hostel, bad location etc.

I didn't know what to do, should I e-mail her, should I speak to her in person, etc? In the end, I got caught up with another bad review that didn't go so well for me (got myself into hotwater over replying to it).

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slushysnow

10 years

Hi rjd,

I've had this problem before as well as we regularly adjust our prices.

My advice would be to just respond to the review on HW, explaining why the prices changed etc.

Technically, she shouldn't be leaving a review which references her experience on her second stay, as only the first stay was booked through HW. Her experience with the price change only occurred on her 2nd stay, meaning technically she shouldn't really be reviewing that aspect of the stay.

You could maybe try appeal the review with HW, but I wouldn't hold your breath about it being taken down.

Negative reviews aren't necessarily a bad thing as long as you respond in the right way. Just make sure you explain but don't criticise

Bear in mind that they cannot respond to your management response to their review ;)

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feradz

10 years

I recently had a chat with a hostel owner in Barcelona who was reluctant of increasing their prices even if they are 99% occupied. The reason she stated is that they are a hostel and that guests typically have certain expectations for the price they pay. She gave an example that she does not want to charge any guest a hotel room price even in high demand and 99% occupancy because this guest will later have unmet expectations and leave a negative feedback which in long turn will have negative effect.

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rjd1983

10 years

This is about 3-4 months ago, and never got around to replying to it. I just don't understand why she was so angry at us. She chose to come back a second time, and stayed a second time. I'm fairly certain she went on the Wi-Fi (whether she looked at other hostels, I don't know), but she chose to stay a second time, paying a higher price. You don't slate easyJet/RyanAir because one day you got a good deal, and the next day you have to pay more as you didn't book ahead. Well, bad example, a lot of people will slate them (or any airline) for that. But you understand what I mean.

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feradz

10 years

Hi rjd1983. I think you should look at this review as a feedback that there is another opinion that does not like dynamic pricing, especially if the price increases :) Unlike the example I gave as a drawback of increased price due to dynamic pricing yours case is a second example. Probably you should have to offer the guest at least the same price to keep her happy.

What you want is that the guest (or the readers here) try to understand you. This is fine. But also to realize and tackle the problem you should also try to approach with understanding the other side involved.

Ferad

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Peter K.

10 years

I would like to add a comment from a guests point of view.
Whenever i see this type of automated money-squeezing i get the feeling its the perfect opposite of hospitality. It's not hey you are welcome as a guest but hey we want your money. As much as possible. So you are really wondering why people are feeling disgusted by beeing treated as cash-cows?
Do you think this is compatible with the idea of hostelling of bringing people together from all over the world? For me its a perfect no-go.
I do understand different pricing for different seasons or weekends, but things like that give me the feeling of beeing ripped off. So giving the worst review possible is quite understandable, as you really give the guest a bad feeling, a very bad one. I am shure this american girl mentioned here by rjd will remember this as one of the worst moments of her stay at London. Travellers generally dont think in terms of bookkeepers, who enjoy maximising profits, and i am shure there are a lot of them out there who will really take disgust from this.
Peter

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five star creations

10 years

Its a strategy that would work better in a hotel, backpackers are too price conscious, a couple of dollars turns into a big deal sometimes. Plus a hostel is more sociable and the guests end up talking to each other. it soon comes out that one person pays less for a bed in exactly the same dorm, and everyone else feels overcharged

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John Moriarty

10 years

I feel this is creeping in to hostels and coming from bigger hostels who use this and also this is coming from OTA's who like the concept as it makes them more profit.

I think for most we have certain seasons and times of the year that are low and high season and usually that extra money in the high season is what keeps you going for the rest of the season.

But this yield management and dynamic pricing coming from the airline industry and hotel industry does not fit with the hostel industry I believe.

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