Dynamic Pricing for Tour and Activity Businesses: Effective Strategies, Pro’s and Con’s and more
As a tour operator or an activity, you’re likely well aware of the widespread use of dynamic pricing for booking accommodations and airline flights, which has been an industry standard for a long time. This pricing strategy is well-suited for the accommodation and airline sectors because bookings for these services are usually made well in advance. On the contrary, tours and activities tend to be booked within a shorter time frame, typically around 3 days prior to their real-time dates. However, this doesn’t imply that dynamic pricing cannot be applied to the tour and activity markets; it simply requires a different approach and before we get into how Dynamic Pricing works for travel and tour businesses. Let’s first understand what Dynamic Pricing means and how it works.
What is Dynamic Pricing?
Dynamic pricing is a pricing strategy used by businesses to adapt their prices based on fluctuating demand as well as various other factors and market conditions. Unlike fixed pricing, which maintains constant prices over a set period, dynamic pricing involves frequent and often instantaneous modifications to the price of a product or a service.
Dynamic pricing is pretty common in airlines and hospitality. During peak periods like holidays, hotels frequently raise their room rates, whereas during off-peak they become quite affordable. In the tour and activity industry, dynamic pricing is less common and mostly includes early bird discounts, seasonal passes, etc.
Implications of Dynamic Pricing for Tours and Activity Businesses
Sometimes, you wait several hours to finalize your decision about booking a flight, only to discover that its price has increased by $100. Nowadays, consumers are becoming accustomed to the fact that online prices can change frequently, not just during sales periods but multiple times within a single day. Those who have made vacation bookings online are likely familiar with this concept, even if they are not aware of its term, which is known as dynamic pricing. Dynamic prices use an algorithm to change prices depending on different factors. It is believed that this concept is being adopted by different industries and becoming more popular each day.
However, it has different implications for different industries. For instance, in airlines and hotel businesses, most bookings are made well in advance, sometimes months in advance. However, in tour and activity businesses, most bookings are made within 72 hours of that activity. Which means, the time gap between the first and last booking is a lot smaller compared to that of the airline industry. As discussed early on, finding the right approach to effectively use a Dynamic Pricing strategy can be pretty challenging for Tour Operators. Here are a few ways to make it work for you:
Early Bird Discounts
It might look quite intriguing to have an algorithm that changes prices on an hourly and daily basis but it can have a negative impact on the customer’s expectation. Imagine paying extra for the same activity that your friends have paid for, it might feel unjust and leave a bad impression. However, as a Tour Operator, it is pretty risky to run a business where you don’t know the number of bookings made until the last minute of the activity. This is where Dynamic Pricing can help. You can urge people to purchase their tickets in advance and in larger quantities which makes it simpler to plan ahead and effectively manage booking capacity.
Employing dynamic pricing can assist in leveling out revenues throughout the season and also boost the number of direct, early bookings. These advanced bookings, in turn, will aid in effectively allocating the necessary resources, such as buses, equipment, or staff, in a well-planned manner.
Weather-based Dynamic Pricing
Season-based pricing is extremely common in tour and activity businesses. A similar but less-common approach is weather-based pricing. We are well aware that weather forecasts have become quite accurate these days. We can easily predict whether we will be needing an umbrella when we are heading out. A similar approach can be used for your business to maximize profits with confidence. Dynamic pricing can help automate the process of adjusting prices depending on the weather. If the weather is predicted to be bad the entire week, you can offer temporary discounts to attract more customers, helping you plan your promotions and maximize your profit on slower days.
Pros and Cons of Using Dynamic Pricing for Your Tour and Activity Business
Balancing pricing between being too high and missing opportunities, and setting rates too low, potentially undervaluing your tour or activity, is a delicate task. Dynamic pricing helps in this regard. Here are a few advantages and disadvantages of Dynamic Pricing that will help you strike the right balance by helping you utilize this strategy to set the optimal rate for every booking.
Advantages of Dynamic Pricing for Tour Operators
Boost in Sales and Bookings
By implementing dynamic pricing, tour operators can effectively boost bookings by identifying the maximum price customers are willing to pay for the activity. Utilizing customer data, they can distinguish between “early birds” who prefer to book in advance and those seeking seasonal bargains. This allows them to tailor the prices for each target group accordingly.
Better Inventory Management
Dynamic pricing helps with enhancing inventory management. By adjusting prices based on demand, businesses can effectively avoid overbooking or avoid the risk of vacant spots ensuring a more efficient inventory management process. Additionally, it can help with effectively distributing inventory to resellers and other Online Travel Agencies.
Stay Ahead of the Competition
Dynamic pricing offers businesses the advantage of staying competitive in the market. With the ability to swiftly and flexibly adjust prices according to demand, these businesses can gain an edge over competitors who might not employ dynamic pricing.
Disadvantages of Dynamic Pricing for Tour and Activity Operators
Price Discrimination
Too much of anything is bad! Changing prices frequently for instance on an hourly basis might seem unreasonable to your customers. If you don’t use Dynamic Pricing sparingly it might affect the customer experience. Early bird and last-minute discounts are common and easily understood by customers. However, if prices change too frequently and without any justification, it can make you look less reliable than your competitors.
Difficulty in Inventory Management
Managing multiple listings across various locations and channels becomes even more challenging. Apart from consuming a significant amount of time and energy, Tour managers struggle to ensure they have selected the optimal rates for their activities. Even if they manage to determine the best rates, distributing them effectively across different channels remains a daunting task especially if different Online Travel Agencies and travel resellers are involved. Not all OTAs or wholesalers can account for dynamically priced products meaning it can be difficult to keep list prices consistent everywhere you distribute your activities.
Final Word
Dynamic pricing is a strategy that is delicate and challenging to implement. That being said, it’s worth having an understanding of the concept and the challenges it comes with to effectively use it to your advantage. When done right, your strategy should help your revenue management and enhance profitability, and performance.
If you are using a Tour management software/system or channel manager, make sure they support dynamic pricing or integrate with a dynamic pricing solution to maximize your profit margins by setting the optimal rates for your business.