Real Time Pricing: Why It's Like F1 For Revenue Managers
By Alexandra Fjällman
Last updated January 26, 2022
5 min read
The hotel next door is pricing their rooms faster than you and it’s eating your profits without you ever even noticing. Faster yield management software and real time pricing is like a secret weapon for revenue managers. If your local market competition is employing real time pricing, you are likely bleeding RevPAR so this concept of real time price optimization is especially important to understand and get a grip on. If your competition isn’t using real time pricing yet (which they most likely aren’t), this article will show you how you can use it to beat out the compset.
Imagine a world where one hedge fund (Hedge Fund Lightspeed) has computers that process data every second and another (Hedge Fund Slowpoke) has computers that process on an hourly basis. Both funds are invested in oil.
In our hypothetical, news breaks that Saudi Arabia has decided to decrease oil production meaning that oil prices will go up in the future. Hedge Fund Lightspeed buys up as much oil stocks as they can which drives prices up within minutes. Hedge Fund Slowpoke doesn’t process the data around rising prices for an hour which means by the time they buy oil stocks - prices have already increased dramatically. Hedge Fund Slowpoke doesn’t even realize that they’ve lost money until it’s too late and Hedge Fund Lightspeed has just made billions just by calculating prices faster.
Your hotel may not be losing billions, but you could be leaving thousands on the table if you aren’t pricing in real time.
Real time pricing is a must for every hotel
Not too long ago, the concept of revenue management was all about pulling reports and using historical data to try to predict future demand, comp set data, pick-up pace and future revenue.
This worked fairly well 20 years ago when the competition was pricing their rooms manually. As markets have evolved and become faster paced, hotels have gotten more sophisticated with their pricing strategies. In today’s world, updating hotel room prices once a month, week or even day simply doesn’t cut it anymore.
“Revenue managers need only to look at how the stock market has evolved to see where their trade is moving. Stock traders have everything to lose which has led to massive investment in real time trading. Tenths of a second can literally mean billions of dollars for hedge funds. While hotels don’t see losses at this scale - the concept and importance of real time pricing is exactly the same.” ~Jordan Hollander, CEO at Hotel Tech Report
The challenge for revenue managers today is that they must constantly gather market signals, collect data, determine what the data means for their strategy and be ready to update rates at a moment’s notice. Manual data collection in Excel spreadsheets renders any kind of meaningful analysis nearly impossible simply because it’s too slow and the market has shifted by the time any analysis gets done no matter how good that analysis is (or was in this case).
The problem is that, even if you comb through your reports and try to keep your eyes peeled for slight changes in the market, it is simply not possible for a human being to keep up without the assistance of software.
By the time you get around to analyzing numbers, they are already outdated which means opportunities remain untapped and your hotel leaves money on the table. The most challenging aspect of this is that the lost revenue never shows up on your P&L so most hoteliers don’t even know the leakage is there in the first place.
Modern revenue management systems (RMS) help to improve the situation by offering revenue managers easy-to-apply rate suggestions. Historically the biggest weakness for these systems has been that they aren’t like the stock exchanges updating prices down to the second - a great deal of the data used to make those recommendations is often several hours old.
The reason for this is that each set of price recommendations needs to be optimized or calculated. In order to factor all statistically significant variables more frequent optimization runs are required. Until now, this has meant that if the last optimization run was completed 45 minutes before you logged into your RMS, the prices you are looking at are not fully up to date because by definition they are 45 minutes old.
Real time pricing is the future of revenue management and it’s already here
To make sure your hotel is not missing out on revenue, room prices need to get updated at the highest frequency possible. What used to be a matter of days or even hours can today be a matter of minutes or even seconds – especially in hyper dynamic cities like New York, London or Singapore and even more so in the final hours of the booking window.
Consequently, a fully automated system working in real time gives your hotel an edge over the competition when you need it most.
Real-time rate optimization has for a long time been seen as fiction – but not anymore. By continuously leveraging the newest data points, Atomize, a next gen revenue management system, calculates the optimal rate via real-time optimization algorithms. Atomize can then push those rates back to the PMS through a 2-way connection.
With Atomize, hotels can continuously have real-time rates pushed live, around the clock, 365 days into the future, dynamically for all room types. This ground-breaking new technology brings the hotel industry into a new era – the future is here today.
How does real time pricing work?
To understand how this work we “look under the hood” of Atomize RMS.
In full autopilot mode, Atomize continuously receives data from the PMS and continuously runs real time optimization runs and pushes the optimal rates back to the PMS for all room types and all future arrival dates around the clock where each price point is uniquely calculated in real time.
In addition to considering historical data such as reservations, cancellations and current pickups, Atomize RMS also monitors real time changes, search trends, competitor information and other factors such as local holidays and dynamically sets the price per room type while respecting pricing hierarchy and takes into account the effect on adjacent days and room types.
As any data points above change for any future arrival date, relevant price points continuously need to be updated. In essence, for a typical hotel Atomize RMS technically offers the capability to calculate more than 50 billion price points a year. In practice, so many price changes aren’t usually required even for a hotel in a fast changing, dynamic location but, as markets continue to become more dynamic, it's important to work with a revenue management system that has the horsepower to calculate rates more quickly than the competition.
What hoteliers can gain from real-time rate optimization
In hyper competitive markets, being able to adapt to real-time changes requires you to update prices that are calculated in real time.
For example, you can:
Ensure to have updated optimal prices when a big (or small) event is announced in your city or close proximity. For example, imagine a big concert is announced in your city and as a consequence there is an instant huge increase in demand, booking searches on that specific date hit the roof and hotel rooms are being sold out in your area. Having access to real-time pricing in this scenario will ensure that your rooms instantly, in seconds, increase in price and you don’t risk selling out your rooms too cheap.
Immediately react to changes in dynamic, fast paced markets. For example, if occupancy rate or competitor prices changes rapidly you will be able to respond to that immediately with real-time price recommendations and stay confident you will have optimal pricing on your room at any time and you will have a strong, unique competitive advantage in your market.
Creating this kind of highly dynamic pricing strategy leads to an optimized approach which will have a strong impact on your bottom line.
One of Atomize biggest customers, Gothia Towers in Gothenburg in Sweden explains why real-time pricing is essential to them:
“Gothenburg is a very dynamic market that quickly can turn, that combined with Gothia Towers large proportion of group bookings, means that our occupancy rate can change dramatically in just seconds. Waiting for several hours for a new optimal price to be calculated is simply not sustainable for us. Therefore, it is a great advantage and security for us to work with Atomize that supports real-time pricing, we know that we are always right in price no matter how fast the market turns!” says Johan Forsberg, Revenue Director at Gothia Towers in Gothenburg
Overall, basing revenue management on real-time prices helps you spend less time gathering data and crunching numbers and making sure you are never leaving money on the table. Most importantly, real time price optimization ensures that you are always one step ahead of the competition which is critical for stealing share and maximizing rates during need periods.