Introduction to the concept of “Dynamic pricing”.
“Dynamic pricing” is a revenue management pricing strategy in which companies set flexible prices for products or services based on current market demands. In other words, companies change the prices of their products according to various factors such as, to simplify, the supply/demand ratio, the variation in the costs of raw materials or the transport of goods or the spending capacity of potential customers. The factors taken into consideration are many, but the example should have given the idea.
It is not a recent strategy: it has been around as long as commerce has existed. It has transformed over time and at different times it has been adopted by different market sectors.
As it is easy to imagine, with the advent of technological marketing tools and the increase in the ability to collect consumer data and their purchasing habits, “Dynamic pricing” has assumed significant weight throughout the e-commerce sector. – trade. We have all had to deal with this pricing strategy, perhaps even without realizing it. Think, for example, of buying an airline ticket online. You will surely have noticed that not only do prices change for one day compared to another, but they are often different even for the same day if consulted at different times (sometimes even for a few hours). For example, the price of a ticket may have increased because, after you saw the price, another customer bought a ticket for the same route and now the number of tickets available has decreased.
“Dynamic pricing” in the short-term rental sector
Now that we have broadly clarified what Dynamic Pricing consists of, let’s take a closer look at its impact on the short-term rental market. Since the inception of the online short-term rental phenomenon, there have been attempts to apply “Dynamic Pricing” strategies to the short-term rental market.
At first, it was more about experimentation but today the tool has evolved and has become increasingly important for the management of property prices. And, many online services, including Airbnb itself, have begun to offer their customers the possibility to use this tool.
Since the emergency due to the pandemic ended and it was possible to travel again, the use of “Dynamic pricing” has become fundamental because three situations have occurred jointly:
- There has been a huge growth in the travel demand. The phenomenon, known as “revenge travelling”, exploded following the desire of people to take a well-deserved vacation which they had not been able to enjoy, due to the restrictions, in the previous period.
- This sudden increase in demand has accelerated investment by those already involved in short-term rentals, and the number of available accommodations has increased significantly.
- The increase in widespread prices (especially of raw materials and energy costs) has caused the rank to rise globally, and many families have found themselves in difficulty and those who had a second home to rent took the opportunity to have a second economic entrance. Globally, the number of hosts increased in the year following the pandemic alone, by about 50%.
Thanks to the increase in demand due to “revenge travelling” demand has however kept the occupancy rates of the available properties stable and everyone has been happy. But the phenomenon of “revenge travelling” is almost exhausted today and demand is returning to the pre-pandemic one.
In host communities around the world, you can find hundreds of messages from people complaining that last year their property was almost always booked while this year they received very few (or even no) bookings. This is exactly the joint result of increased supply/decreased demand.
Many hosts, not carrying out this activity as professionals, have entered this market quickly and traditionally. They tried to understand what the average price of properties similar to theirs was, almost always manually searching for this information on portals and applying a similar price to their property (many hosts even applied the same price for every single day of the year or with generic differences between high and low season). And this worked in the beginning because, thanks to the simultaneous explosion in demand, it was not necessary to establish a pricing strategy. The demand was simply high enough that customers had very limited choices. Today, however, that is no longer the case. And these hosts will be forced out of business (thus giving up the extra economic entry) or they will reduce prices without making a correct analysis (losing a large part of the profit).
The InsideBnB “Dynamic pricing” tool.
We have also created a tool that suggests to the host, day by day, the optimal price to apply to his property and we have called it “Magic Pricing”. In reality, InsideBnB was born precisely because, having to manage some properties, we created tools that helped us define the price, but the existing ones did not bring us satisfactory results. In confirmation of our experience, we found the same criticisms against these tools from other hosts: the suggested prices were exaggeratedly low, the goal was exclusively to rent as many nights as possible, thus neglecting the profit optimization part or they gave data that was too approximate and insufficient to achieve a good result.
We built our tool based on our own experiences and the experiences of hundreds of hosts who have partnered with us with their suggestions. And we managed to create, thanks to proprietary algorithms, a tool that considers both the occupancy rate and profit optimization. The feedback from the hosts has been overwhelmingly positive. But in addition to the “Magic Pricing” we give our hosts much more: we allow them to see with a simple click, the availability and prices of all the properties close to theirs (and to filter them as they prefer).
This sets us apart from everyone else because users can see the data we started from to suggest a price. They can verify that it is real data and do not have to trust that data they do not know comes from where. And they can also decide to directly use data from other properties to establish their strategy.
We are aware that today, despite the advent of advanced Artificial Intelligence systems, there may be cases in which the user’s direct knowledge of the territory cannot yet be completely replaced. And by providing users with real and updated data on competitors in detail, we allow them to make informed choices. We are the only ones who do it.
Using the “Magic Pricing” tool.
InsideBnB’s “Magic Pricing” suggests to hosts the optimal prices apply for the current month and the following 10 months. The suggested prices may be different from the current ones even by just 1 Euro. And it is also important to consider these small differences because the price is one of the main parameters that the portal algorithms consider when calculating the ranking of a property and the difference (even just 1 euro per day) can move our property to the bottom to the list proposed to the tourist (or even make it disappear). For this reason, the suggested prices vary from day to day and they must be constantly updated. But how often?
We have done some tests with our hosts and have established that the prices of the current month and the next two should be updated 4 times a month (every 7 days) and those of the following months at least once a month. Doing it more frequently could improve the result but this refresh rate is a good compromise between time and effect achieved. Even if you couldn’t update this often, it’s still important to do it whenever possible. The worst thing you can do, as we have seen in the previous paragraphs, is to leave everything as it is. In the end, the hosts would be forced, in order not to have too many unsold nights, to lower their prices sharply thus losing, based on our experiences, more than 40% of the possible profit they could have made by dedicating the right amount of time to the activity (about one hour a week).
It will take some time to appreciate the results of this activity. The portals do not update the rankings of the properties continuously but do so on a regular basis. Many hosts have not received a reservation for a long time and then see two or three arrive on the same day. This is precisely due to the updating of the property rankings by the portals. The frequency with which we will update our prices with those that the “Magic Pricing” suggests (or with those that we have decided by looking at the data provided by the other InsideBnB tools) will allow us, when the portal updates the ranking, to obtain greater visibility possible (and to increase the number of bookings received)