What Is Dynamic Pricing? Everything Revenue Managers Need to Know

February 02, 2022
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Catalate
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Categories Pricing Strategy

Dynamic pricing is a revenue management strategy used by many types of leisure and tourism companies that continuously adjusts prices for admission based on demand, season, day, time of entry, and – most importantly – when customers buy. When implemented correctly, it improves online sales efficiency and maximizes revenue, all while building consumer confidence and trust. 

Revenue management has proven successful over the past decades in industries such as airlines, hotels, and professional sports. Now, savvy resort, tour, and attractions operators are adopting dynamic pricing to grow revenue and increase operational predictability. Ski resorts, theme parks, water parks, and other attractions sit at a critical crossroads as consumer behavior continues to shift online. Dynamic pricing will play an important role in determining how these businesses engage with and convert their potential customers in the future.

In 2019, online channels grew more than twice as fast as offline channels, driven by consumer behavior shifting to online and mobile bookings. That growth only accelerated in the past two years with online sales of activities, tours, and attractions quickly outpacing offline growth. These trends were supported by operators’ increasing adoption of online booking technology and accelerated as many operators saw COVID-related capacity constraints

For example, in 2021, Gulf Islands Waterpark in Gulfport, MS grew online sales of all products (excluding season passes) 38% over 2020 and 172% over 2019. Throughout the 4+ years that Catalate has partnered with Gulf Islands, walk-up admission ticket sales stayed relatively flat, while sales of admission tickets online have increased 3.5x. General Manager Mark Moore says that “online sales, without a doubt, have driven the growth of our business.”

E-Commerce Revenue Theory

As sales shift further online, how well an attractions business optimizes its pricing strategy and e-commerce will impact the success of the overall business. This, in turn, makes e-commerce conversion rates the most important success metric in the game. And while online revenue is the product of intent, conversion, and average order size, pricing has the greatest impact on conversion rate in that formula. Dynamic pricing typically drives higher conversion rates than other methods.

In the above illustration, “intent” refers to all potential customers who are considering purchasing a ticket. It is measured by web/mobile traffic as well as searches for dates or products in direct booking channels. Intent is most often influenced by brand equity and marketing.

Conversion rate is the most critical metric for e-commerce businesses. It is the percentage of the intent that buys and is influenced by several factors. These include product identity and quality, brand equity, customer confidence, pricing, site usability, and marketing messaging.

After product identity and quality, pricing is the primary driver of the conversion rate for ticketing e-commerce. Revenue management, then, becomes the most powerful influencer in a seller’s toolkit.

How Dynamic Pricing Principles Emerged

Dynamic pricing is a part of yield or revenue management—a variable pricing strategy based on understanding, anticipating and influencing consumer behavior in order to maximize revenue or profits. It strategically manages inventory in order to sell a product to the right customer at the right time for the right price. 

Yield management first appeared in the travel industry in 1985 when former American Airlines chairman Robert Crandall introduced “super-saver fares” to compete with low-cost carrier People Express Airlines. Ticket prices fluctuated based on seat availability and the new system resulted in additional revenue of $1.4 billion over three years. Since Crandall introduced this new way of thinking, dynamic pricing has appeared across more industries and transactions including hospitality, rental cars, TV ad sales, sports tickets, and even traffic tolls.

How airlines utilize dynamic pricing

In the 1990s, Marriott International, National Car Rental, and American TV network NBC introduced revenue management and added millions in annual revenue. Even the majority of leading digital companies like Uber, Amazon, and Google now use dynamic pricing strategies as a solution when demand is high and supply low.

The world’s largest theme park operators Walt Disney World and Disneyland were two of the first ticket, tours, and attractions businesses to adopt more sophisticated variable pricing models and move in the direction of dynamic pricing. After historically setting one admission price for every day of the year, Disney introduced variable pricing in 2016 and started charging different prices for admission on different days of the year.

By optimizing pricing based on consumer behavior, demand, and other factors, each of these businesses across a variety of sectors began to maximize their profit potential with astounding results.

Consumers, of course, became more conscious of these principles as they began shopping online. As consumers became savvier about pricing strategies, it became even more important for businesses to exercise dynamic pricing in such a way to maintain and even grow consumer confidence and trust. 

When employed correctly, dynamic pricing can reward loyal guests while providing incentives for new customers to commit. When poorly executed – for example, by routinely promoting price drops at the last minute – consumer confidence decreases and fewer people purchase advance tickets, not trusting the pricing in front of them and assuming that there will be a last-minute price drop.

Therefore, a smart pricing strategy is part of building a strong relationship with customers. The best way to employ that strategy is with a technology partner that makes it easy to collect and act on data while providing a seamless consumer user experience (UX) that improves the overall guest experience. 

Understanding Dynamic Ticket Pricing 

Just like the pricing principle itself, parks, resorts, and attractions businesses are themselves dynamic. There is no ‘one strategy fits all’ approach. 

For businesses considering how to approach dynamic pricing, it’s important to ask the following questions:

  • Is my product considered a one-time event or regular activity?
  • How regularly do customers purchase access to my experience?
  • How constrained is inventory?
  • What is the average time spent on my activity?

Operators that sell frequent activities, such as skiing or golf tee times, would want to consider a slightly different dynamic pricing strategy than infrequent events, such as a reunion concert or scenic airplane tour. 

For activities or attractions that the public consumes with frequency, dynamic pricing is not only about maximizing revenue, but investing in future consumer confidence. Consumer confidence is directly tied to conversion rate. Employing the wrong pricing strategy — for example, reactive last-minute pricing for frequented activities — can destroy consumer confidence and negatively impact future conversion rates.

If you were to distill dynamic pricing down to a few key principles, they would be:

  • Price every day and product as its own opportunity
  • Reward pre-sale (start with low prices and move to higher ones)
  • Use limited quantities of tickets at each price point so you can adjust price based on demand (For example, price moves up as tickets sell out). 
  • Provide clear, fixed walk-up rates to give confidence in the value of the online prices

Advance purchase rates increase as the date of the activity grows closer ,but the highest ticket prices always apply to those sold directly at the ticket window. This strategy rewards consumers who buy far in advance. The fixed walk-up rate serves as an anchor price that clearly highlights the value of the advanced pre-sale purchase rather than potential guests comparing the pre-sale price to an ever-changing rate. The customer can easily see how much they’ve saved compared to buying at the window and feels good about their savings. 

The gold standard is automated dynamic ticket pricing that maximizes potential revenue while decreasing the manual work of constantly adjusting online pricing. By partnering with companies that focus solely on pricing as a product, businesses leverage network data to interpret success and failure and, therefore, unearth more revenue opportunities than those who go it alone.

It also frees up companies to focus on the guest experience. When customers understand the basics of how pricing works (buy earlier to save, wait to pay more), a complex behind-the-scenes strategy yields a simple consumer value proposition – rewarding them for their commitment and getting them excited about their trip. 

Ultimately, each business should define its goals and build a dynamic pricing strategy that strengthens the purchasing behavior they are looking for. They’ll want to build trust with customers to maximize conversion rates in the long term while measuring and tracking performance to make adjustments as needed.

Why You Should Consider Dynamic Pricing for Your Business

By implementing dynamic pricing strategies, businesses drastically improve online sales efficiency and drive incremental revenue. Dynamic pricing is not the end goal; rather, it is a powerful tool to drive results in online sales. Dynamic ticket pricing helps resorts and attractions insulate their businesses against unpredictable weather, drive visitation on slower days (by pricing those days appropriately for demand), and move away from traditional discounting methods.Using dynamic pricing, all kinds of parks and attractions from waterparks to museums to zipline operators can drive presale upsells and group tickets, reduce their reliance on “use whenever you want” discounts, and introduce variable prices for different times of the day based on demand. When implemented correctly, dynamic ticket pricing paves the way to increased revenue and an improved guest experience. It’s important to not only implement the right technology but to partner with an experienced team that can tailor the pricing strategy to meet the revenue growth goals of each specific business. Catalate is a pricing, e-commerce, and distribution company that empowers resorts and attractions businesses to drive more revenue online. Its proprietary dynamic pricing and native e-commerce platform, Cloud Store, has processed $1B+ in transactions and 11M+ tickets and passes across North America and Europe.  With more than 15 years of experience in dynamic ticket pricing, revenue management, and e-commerce, it’s little surprise to discover that Catalate partners see 3.8X median growth in online sales after switching to Cloud Store with dynamic pricing features.

To learn more about how Catalate’s Pricing as a Service (PaaS) and Cloud Store products can benefit your business, schedule a demo today.