dynamic pricing.fw

Dynamic Pricing for Tour Operators: science, not religion

The owner of the big OTA chuckled at my question. “Every morning we have an entire team checking competitors’ rates and adjusting ours”, he said. “Dynamic pricing is essential today. It was a logical process for us”.

Of course, it was. Less technology-prone patrons dind’t follow the same path, though, and I am having a really hard time trying to verbally explain what the hell this dynamic pricing is to customers and prospects in the travel arena.

Since you’ve read this far, I’m assuming you at least grasp that this is another thrive-or-fade-away subject in modern travel trade… so I’ll do my best to put it down as easy as possible.


If you’re barely familiar with the term, or think it just applies to carriers and hotels, please read first this short but entertaining article from The Guardian >> , then come back.

This ongoing revolution originated during the ‘80s  in a barber’s shop (of all places), from a brilliant airline executive (read the true story here >>) and has since been massively benefiting travel companies. That’s the main reason you don’t see many empty flights these days!

The simplest way I can put it is:

Dynamic Pricing means to adjust rates downward when demand is low, only to raise them up when demand is expected to soar (in order to maximize profits).

Makes sense, and the results are quite pleasing: less empty seats, more profits, early-booking incentive, improved forecasts, higher loyalty, and so on. The next question, then, comes naturally…

Why haven’t Tour Operators massively adopted DP yet?

It’s not surprising, actually; there’s almost no published material on the subject. Granted, people running businesses tend to avoid changing procedures they preceive as working, especially if sales continue to be higher than break-even point.  To that inertia towards change (“I’ve been doing this forever, it works for me!”), maybe we can add uncertainty (“How do I know if it works?”) and arrogance (“Who does this chap believe he is to tell me how I should run my business?”).
There’s more to it, though: DP is easier said than done! While it is feasible for the smallest operator to design and implement a basic dynamic pricing policy with no specific software, it takes a certain “mind for numbers” (uncommon SMB material) to actually put it in place. A larger business, on the other hand, would find it extremely hard to do manually, as people with deep mathematical and statistical skills would have to be hired. Even greater complexity awaits operators with XML distribution means! As of 2016, only large OTAs and monopolists had the resources and back-bone to deploy specialists working out profitable dynamic pricing strategies. They did it quietly, of course, because it wasn’t a good idea to have customers aware of pricing fluctuations, nor to wake up smaller but faster competitors. These days the big guys are showing their kit, as you’ll notice in job portals: check how their HR Departments are looking like crazy for data scientists, data managers, data architects, and so on. Ludicrous attempts, I’ll add, as most job ads denote a complete lack of knowledge in the area: that’s another reason why information shouldn’t be compartmentalized in silos and analytical tools must be used for…
Sorry for digressing, I’ll write an article about this subject later on.

Dynamic pricing demo - REVVA

From 2015-2016 onwards, a few multi-million worth operators realized they could access the technological tools to act revenue management strategies, while the heavyweight boys were starting to experiment with consumer behavioral paths defined by artificial intelligence, as well as chatbots, blockchain, or whatever the buzzword of the day was.

But fear not, my SMB friend: at the present time, there are much cheaper and easier to use analytic and even automation tools that allow small to mid-sized operators to obtain great results and fight the travel behemoths with their own weapons. There are no more excuses, unless you’re planning to shut down and retire in the next couple of years.

On to the ensuing natural question, then.

Which results can be expected from DP implementation?

That’s the only relevant question here, right? Academic and Industrial studies have established long ago that Airlines and Hotels see between 7% and 11% income increases after the first year of deploying revenue management procedures (closely related to dynamic pricing but not the same thing!). According to a paper from the prestigious Boston Consulting Group >> , an average 10% revenue increase is what you ought to experience with DP. Very often I get derided by this seemingly tiny financial improvement; for those not scoring high in the “mind for numbers” grade, I’ll expand the idea with a paragraph from the same BCG whitepaper:

[…] more than 2,800 companies across multiple industries indicates that a 1 percent improvement in price has a far greater impact on operating profit—more than 11 percent—than a similar level of improvement in other critical factors, such as sales volume or variable or fixed costs. Yet while four out of five managers think they have a good handle on costs, less than two-thirds believe they understand their product’s value to their customers, only one-third think they grasp the impact of a price change, and only one-fifth believe they are well informed about their customers’ acceptance of prices charged. […]

Got it, Boss? Next time you tell me “Not interested in Dynamic Pricing, thanks” I won’t feel sorry for you.

Fact is, any tour operator (incoming, outgoing, whatever) will significantly increase their profits just by stop maintaining a fixed-price policy for their products and services. And that’s just a single variable of the equation, there’s still much room for improvement! I realize it still sounds complicated… Bear with me, a noticeably surge in profitability will compensate your patience soon enough.Dynamic pricing - yes or no

How long does it take to see real results from DP implementation?

It depends. If you are somehow doing it already, adopting a specific solution may not bring spectacular monetary gains, but it will happen almost immediately, and the huge chunks of time you’ll save can be considered money as well, I’m sure you’ll agree.
On the contrary, if you have no pricing policy in place, or if your existing one is shabby, it might take longer for DP to bring results, but those will be significant… although probably you’ll see revenue improvement right away.

Dynamic Pricing for Travel Dummies

So far, you’ve sold your packages, tickets or transfers at a more or less fixed price, all year long, near to or on same-day departure date, correct? It’s always been like this, nothing wrong there… except it’s an operational nightmare, for starters. Wouldn’t you like to predict how many passengers you’ll have for a determined date/tour/package, on each sales channel? Can you imagine how much money would that save your Company? How much your profit will go up? Well, it’s perfectly possible combining dynamic pricing and revenue management, a subject I’ll address in my next article.

Now, let’s focus on the pricing portion of the magic formula. I came across a great article from Amanda Campbell at Farelogix >>: although her text focus on the airline industry, she makes great points valid to all travel-related businesses. I hope she doesn’t mind if I replicate here a very useful paragraph she wrote:

  […]  In a nutshell, dynamic pricing is the automatic adjustment of a starting price based on data insights for the purposes of optimizing both revenue and customer uptake. Starting price data can come from any number of sources – ranging from Revenue Management (RM) systems to filed fares – and can be focused on any number of factors, including: 

    • Load factor
    • Season, market, or channel
    • Equipment/product attributes
    • Known customer data (e.g. Frequent Flier Program membership)
    • Historical trends
    • Classic Revenue Management models
    • Data science initiatives […]

The above items -in particular 3 and 6- include operating costs and competitor’s rates (that’s why you need a RCS!>>), so establishing starting price might be easy if you rent two bikes on a beach, or nightmarish without an analytic tool if you produce holiday packages or tours, since evaluating several data sources hastily proves ineffective and problematic.
But defining starting price is the easy part, actually: how is it supposed to fluctuate up or down? Elemental, Watson: it will be directly proportional to DEMAND.


And how do we quantitatively establish demand, you’re surely asking right now? Well, Mrs Campbell was kind enough to give you hints above. Soon I’ll publish a specific article about demand calculation and prediction (hey, seems I like this writing thing), but for now please accept this short list:

  • Know your segments better that your own face. For that, you’ll need a good CRM: sorry if I insistently keep throwing technology at you, but that’s the way it is.
  • Keep a close eye not just on bookings historical, but especially on searches/requests
  • Check your calendar: not only high season, also festivities, sporting events, concerts, etc.
  • Do some stats: which day of week you sell the most? Through which channels? Etc…

No way, you might say: I should devote half of my working hours to organize all that stuff! You should if you were to do it by pencil and brains alone, but by now, you’re certainly aware that affordable and simple to use tools like REVVA exist solely for taking a small amount of your dosh, in exchange of huge time savings and increased revenue.

Or, if you think you are tech savvy, you might argue that your booking engine has a pricing rule engine that “dynamically” adjust prices by date/provider/client/channel/etc*. Excuse me, good Sir / Lady, I would rebate: that’s just differential marking up, or dynamically assigning fixed prices, if you will. Which is surely better than fixed pricing: it’s called Flexible Pricing. However, demand is barely being considered there, and if you did, I can only imagine how hard it would be to perform every day all those adjustments on your back-office. Besides, that’s just ONE sales channel: what about the others?
Check mate, I assume.  Go on and invest in a cloud-based solution already!

*Only top notch Booking Engines like TRAVTION >>  provide that kind of flexible pricing rules

Real-world practical advice

All right, if you stand firm and prefer a DIY manual approach on dynamic pricing, I’ll give you a hand.

Once you flawlessly know your costs, segments and demand for EACH of your product and services, after you checked your competitors’ standpoint and the market in general (exploring dozens of websites or relying on a single RCS – see here >>), the most useful advice I could give you is this:

Based on demand, create as many incremental price points as you can

It’s no personal opinion: it is a macro-economic universal law, vital in any pricing strategy. From there, you might consider the following alternatives to create an ideal dynamic pricing scheme:

  • Season: still pricing by high and low season? Check your historical data. you will surely find out that there are several sub-seasons during the year.
  • Weekday: yes, I am not kidding. Airlines, Hotels and many OTAs not only vary their rates by the weekday you’re looking something in their systems: they do it even by the minute and hour! Think of it, it’s the Barber’s tale, after all.
  • Segment/Market: back to the Barber. Those who can afford it will pay more, it’s another universal rule.
  • Last minute: remember when it came out? It had the opposite purpose it has today. And you better be careful how to apply this, as it might be a double-edged weapon.
  • Event/Holiday Peak: sure, you may predict you’ll have a surge of bookings for certain dates, but you don’t want to lose business for overpricing, or to fill up too quickly at lower rates, do you?

There, I guess you have enough math to do for now. Have fun!

Dilbert on Data


As mentioned in my previous article >> and on this one, it is crucial to employ a rate comparison system (or to be very intimate with your competitors) to start devising a proper pricing strategy. You also need to use a CRM (unless you can count your clients with all your fingers) and some sort of statistical measurement in order to convert your pricing strategy into a truly dynamic one. Although said process can be performed manually, it is extremely hard, time consuming, and results take longer to materialize… Believe me: been there, done that! I reckon it is complex, but results are guaranteed, consistent and permanent.

For the next logical step, though, computer-assisted analysis is unavoidable. I am talking -again- about Revenue Management: a sort of Business Intelligence on steroids, as I like to call it. My advice? Forget the hand-crafted approach and start right away with a tool that would enable you to set up a truly DP strategy based on the rules stated above, in a fast and flexible fashion. It will be easier to step up the Revenue Management ladder later on.

I don’t mean this to be an informercial (not completely, at least). I’ve been in your side of the trench and I know what you deal with every day, every season. My intention is to help, my hope is that you realize Dynamic Pricing is not a religious notion that needs faith to be: quite the opposite, it’s hardcore mathematics and economics, its benefits evident for decades to countless travel firms.
The question is: will you keep praying for thy kingdom come, or will you act?

Thanks for reading

Marcello Bresin

Bonus article, very interesting: https://www.tnooz.com/article/dynamic-pricing-travel-retail