Do Dynamic Pricing Algorithms still work during COVID?

I have recently heard suggestions that hotels using Dynamic Pricing algorithms should turn them off during COVID because the algorithms aren’t able to handle the uncertainty of COVID. Is this right? Let’s analyse this suggestion by looking at the facts.

Fact 1: COVID is impossible to predict. We don’t know where or when the next outbreak will be, and we don’t know when the governments will tighten or ease restrictions. Just when NZ went 100 days of COVID free, they were hit with COVID again. Just when the NSW-QLD border opened, it closed again. Just when Victoria got down to a handful of new cases per day, they suddenly went up to 500 cases per day.

Fact 2: The next 12 months will be different from the last 12 months in terms of what room rates your competitors charge, demand from various customer segments, booking lead time, length of stay, and price elasticity of demand. It is no longer OK to keep doing what you have always done. Businesses running on auto-pilot are struggling. The successful businesses in 2020 are those that are innovating and adapting.

Fact 3: As a result of Facts 1 and 2, Nobody (neither hotel general managers nor algorithms) knows how the future will pan out.

In the absence of knowing how the future will pan out, we need to do things a bit differently. Here is a process that can work in the current environment:

  1. Make some reasonable assumptions based on what we do know
  2. Update our room rates based on those assumptions
  3. Continually update our assumptions when new data comes to light. The new data will include changes in guests’ ability and willingness to travel, competitor pricing, booking lead times, length of stay, etc.
  4. Continually update our room rates

Step 3 is really important.  New information is coming to light every day, and things are changing every day.  So we need to be adapting every day.

Then we should be asking 2 questions:

  • Who has the better ability to constantly monitor changes in guests’ ability and willingness to travel, competitor pricing, booking lead times, length of stay, etc?  Hotel Management (who are busy putting out other fires in this difficult environment), or Software Businesses (who specialise in collecting and analysing data)?
  • Who has the better ability to convert those assumptions into optimal room rates which maximise revenue? 

Will Dynamic Pricing algorithms get it right every time? No, they won’t. And nor will hotel management. The more relevant questions are:

  1. Who is more likely to get room rate calculations right
  2. What can the hotel owners do with the additional time saved by not having to worry about updating their room rates every day as conditions change.

The way we see it at Price Wizard – if we need our electricals re-wired, we use an electrician. When we draft a legal agreement, we use a lawyer. And when I want to optimise room rates, which is arguably the single biggest lever you can pull to improve profitability, I also use a specialist.

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