The hotel industry has accepted these principles behind revenue management and dynamic prices. Many of these dynamic pricing strategies are driven by OR- or analytics-based models, too. Too much of a good idea can turn into the opposite of the original intent. Indeed, drastic changes in prices caused by complex real-time pricing strategies can confuse the customer about what is your value proposition.
Let’s take the example of hotels. Hotel cost structure is pretty much all fixed costs; if it is full, it makes money, and when it’s close to empty, it loses money. As there are times of the year where demand is less, they need to make the most of good periods. Adjusting prices to the demand is one basic idea behind revenue management. Another rule – which has been used by airline companies to great effect – is to have different prices for the same seat depending on the time at which the seat is bought and with varying levels of flexibility towards cancellation or date changes.
While as a customer I accept the concept that prices are dynamic, I don’t like prices to fluctuate too much during the time in which I’m trying to arrange travel. If I try to book a hotel which is 100$, I don’t like it when it’s gone to 145$ five minutes later. It happens often to me when I travel by train in Canada, as VIA Rail is often prone to offer huge discounts on a very small number of seats.
Dynamic pricing can also create other distortions. Last November, I was in Brussels for an industrial conference. I wanted to stay at the hotel hosting the conference, but the cost was prohibitive 180 Euros per night. Ouch! On hotel booking websites, the price per night was even higher at around 200 Euros per night (approx. 300 USD). It’s only natural to raise prices when there is higher demand, up to a certain point. For instance, the day before the conference and the day after, I was able to stay there – in the same type of room – for about 50 euros per night. For me, the optimal plan was to stay at that hotel the day before the conference, move to a cheaper hotel during the time of the conference, then get back to the hotel the night before departure.
It’s difficult not to feel robbed when you realize that you – or somebody else – was paying four times less for the same room just one day before.