If you run a tour or attraction business in a seasonal market, then you know how hard it can be to remain profitable during your low season. That’s where demand pricing can come in.
Demand pricing allows tour operators and attractions to set prices according to the travel industry’s elasticity of demand. As demand for an experience or product changes, so does the perceived value of that service or product. With this pricing strategy, you can adjust your prices to ensure your company makes money year-round.
In this post, you’ll learn how to use demand-based pricing to maximize profits, even during your slowest season.
- What is demand-based pricing?
- Demand-based pricing vs. dynamic pricing: What’s the difference?
- How does demand-based pricing work?
- When to use demand-based pricing
- When to not use demand-based pricing
- 5 examples of demand-based pricing for travel and tourism brands
What is demand-based pricing?
Demand-based pricing, also known as demand pricing, is a pricing method in which the price of a tour or activity changes based on customer demand. In other words, an operator increases the price when demand is high and decreases it when demand is low.
This means that the price of a product or service is not fixed, but rather can vary significantly over time, depending on the level of demand for it. It’s a pricing strategy commonly used in the tourism industry, where consumer demand fluctuates significantly from high to low seasons.
Airlines are a prime example for capitalizing on elasticity of demand. Airlines typically charge higher prices on holidays like Christmas when they know it will be at its highest. Airlines know that many travelers are willing to pay the higher price to see their families during the holidays.
Prices subsequently drop when demand decreases. Then, airlines will offer cheap flight discounts to encourage price-sensitive travelers to purchase flights during the low season.
Demand-based pricing vs. dynamic pricing: What’s the difference?
With demand-based pricing, an operator prices their tours or activities based on how much customer demand exists at a given time. For example, a ski lesson will be more expensive over the holidays than at the end of the season.
The dynamic pricing strategy, on the other hand, involves regularly adjusting the price in response to changes in consumer demand, competitor prices, and other market conditions. This means that prices can fluctuate over time based on current market conditions.
A perfect example is Uber’s surge pricing during peak times. When the ride sharing app notices that demand is exceptionally high — which could be due to bad weather or a big event like a music festival — the rides are quoted at a higher price than usual.
How does demand-based pricing work?
Demand-based pricing helps operators maximize revenue during high and low seasons. To capitalize on the high season, tour operators will leverage price increases on their most popular tours. Then, during slow season, they do the opposite. Operators decrease the pricing to incentivize more bookings when demand is lower. There are many different ways to implement this pricing model in your business, as we’ll explore next.
5 types of demand-based pricing
Demand-based pricing strategies adjust prices according to what customers are willing to pay. Here are five popular approaches:
- Price skimming: Operators charge the highest price of a product that customers are willing to buy and then gradually scale the price down. Apple often does this with the iPhone. When a new model launches, it’ll be priced relatively high. Once competitors like Samsung launch rival products, Apple scales its prices down to remain competitive. In this case, competitor pricing adds pressure on the market, and in response, Apple lowers its prices for the new phone.
- Penetration pricing: Here, businesses introduce a product or service at a low price to quickly attract customers. Once they’ve established a user base and gained a bit of their own market share, prices may increase. Banks often do this to attract new customers. You’ve probably seen them offer a “free checking” account or a similar offer for a limited amount of time. The idea is to attract customers with a discounted service or product and provide so much value that they stick around long-term.
- Value-based pricing: Operators price a tour based on how much customers think it’s worth. For example, Starbucks knows it has a loyal customer base. For its loyal customers, the perceived value of a Starbucks drink is far greater than the actual price of the coffee. They love the experience of walking into a cafe, ordering their favorite drink, and lingering around long after they’re done. As a result, Starbucks knows that it can charge a premium for its drinks, without impacting customer satisfaction.
- Yield management: Also known as dynamic pricing, this method adjusts prices based on real-time consumer demand and other factors. Airlines use it extensively: ticket prices fluctuate depending on how full the flight is and how close it is to departure. By analyzing customer behavior, seasonal trends, and booking patterns, airlines can optimize revenue per seat.
- Geo-based pricing: This strategy sets prices based on a customer’s geographical location. Retail giants like Amazon use this approach to tailor prices according to local market conditions and consumer purchasing power. For instance, a product might be priced higher in an affluent urban area than in a rural region, reflecting the varying economic landscapes and consumer willingness to pay. This method allows businesses to optimize their pricing strategy across different market segments.
When to use a demand-based pricing strategy
Operators often change the price of their tours on a seasonal basis. The first step is pinpointing your attraction’s seasonality. Observe customer behavior, booking patterns and seasonal trends—if you have high-demand periods offset by slower ones, demand-based pricing is a great way to capitalize on these demand fluctuations.
During the holidays, for example, operators can price up their tours since consumer demand is unusually high. The opposite should be done in the low season to encourage guests to book at lower prices. For example, you might charge $50 for a tour during shoulder season and bump the price up to $80 during peak season.
Demand pricing is also a great way to boost profitability in low-competition environments. If your company offers unique tours that customers can’t find elsewhere — in other words, you dominate that market share — they’ll be more willing to pay a higher price for them.
In addition, you might want to use demand-based pricing in a high-inflation environment to generate bookings, especially when consumer spending power is under pressure. By dynamically adjusting prices in response to real-time market trends, you can attract price-sensitive customers in periods of low demand. This initial demand not only helps in maintaining sales volumes but also ensures that the business remains competitive and relevant in a challenging economic climate.
Lastly, you might also want to leverage this strategy as a way to fill gaps in your tours. With Xola’s Lightning Deals, for example, operators can offer last-minute discounted offers to book their tours at max capacity.
Where do we see demand-based pricing in the travel industry?
- Airline ticket prices increase during peak travel season, such as Christmas and New Year’s holidays.
- Hotel room prices will increase during special events or festivals, such as Mardi Gras in New Orleans.
- Ride-sharing apps leverage surge pricing during rush hour or major events like a big sports game.
- Seasonal pricing of amusement parks, where prices typically increase during peak summer months. Disney World, for example, hikes up prices around holidays, including Christmas, New Year’s, and Easter.
- Ski lift tickets will increase during peak winter season or holidays, when market demand is exceptionally high.
- Vacation rentals are a lot pricier during holidays, especially beach homes or cabins in popular vacation spots.
- The pricing of sporting events will change depending on the popularity of the teams playing or the importance of the game.
When to not use demand-based pricing
While demand-based pricing can be an effective way to maximize profits, it is not always the best pricing strategy for every tour business.
This all depends on a few key factors, like fixed costs and competition. If your company has high fixed or production costs, you might not be able to lower your prices during the low season without incurring losses. Or, if you operate in a highly competitive market, other tour companies could undercut your price if you set yours too high.
Demand pricing might also not be the best idea for businesses that already have a strong following. A big brand like Disney, for instance, doesn’t need to lower its prices to attract customers during low season. Disney fans are so committed to the brand that they will continue paying the premium price no matter the time of year.
Demand-based pricing challenges
That being said, there can be some potential pitfalls to using demand-based pricing:
- It’s labor-intensive. This pricing strategy requires a lot of research and an in-depth understanding of your competitive landscape and market trends. Operators need to spend time and money to accurately identify their low- and high-demand periods. They will also need to closely monitor how their customers react to changes in pricing.
- If customer demand is volatile, this strategy can backfire. Let’s say you raise your prices ahead of your high season, and an external factor like weather dampens demand levels. Without the expected demand, the premium pricing won’t make much sense.
- The success of your pricing strategy may be impacted by competitor pricing, similar to the Apple vs. Samsung example shared earlier. For example, if you lower your prices, your competitors might make their prices even lower. While you’ll likely lose customers to those competitors, the real problem here is that the extremely low prices can impact the perceived quality of your tours. And when it’s time to push prices back up, your customers might turn away.
- You can’t forget about consumer preferences. When you raise prices, you risk pushing away long-time customers who are accustomed to paying the initial price for your tours.
- If you execute customer-based pricing poorly, you could be accused of price discrimination.
- If you raise your prices and don’t raise guest experience levels, you could see a big drop in customer satisfaction levels and more negative reviews online.
- It might not work for package deals. If you have a tour with a food and beverage offering or transportation included, you’ve likely chosen a set price for that bundle of services.
5 examples of demand-based pricing for travel and tourism brands
Let’s take a look at how travel brands of all kinds apply demand pricing in real life.
1. Airline industry
Airlines offer one of the most prominent examples of demand pricing. Flight prices fluctuate based on the popularity of each destination and their respective peak seasons. For example, when you search for flights from Miami to NYC, which is a top New Year’s destination, you’ll find that tickets are significantly more expensive during the holiday than later in the month. In February, prices drop across the board.
2. Disney World
Disney uses demand-based pricing for its theme park ticket sales. As you can see in the example above, the theme park operator labels the different pricing tiers as “value,” “regular,” and “peak” seasons. Price-sensitive customers can choose to visit during the week when many days fall under the cheaper “value” category. Meanwhile, peak days like January 16 — Martin Luther King Jr. Day — are priced at a premium.
3. Intrepid’s Vacation Packages
Intrepid Travel prices its tours based on the high and low seasons of each destination. As you can see in the example above, the tour operator notifies customers when they can find the lowest-priced tours. In the “Morocco Uncovered” trip, the lowest price is available on January 11. In March, however, the price rose nearly 25%.
4. Vacation rentals hike up prices during holidays
Vacation rentals in popular vacation spots are often more expensive during holidays and peak travel season. For example, Lake Tahoe, California, is a popular destination for the Fourth of July holiday. During this time, homes are priced between $410 and $625 per night because the homeowners know that demand will be high during those dates. The owners likely decrease the prices during the low season
5. NYC hotels during the New Year’s holiday
New York City is one of the top U.S. destinations for New Year’s Eve. One million people flock to Times Square to watch the famous New Year’s Eve Ball drop every year. As you can see from the Google search above, NYC hotel prices hit an all-time high during that time period. The Four Points by Sheraton boosts its nightly rate to $588 on Dec. 30th and 31st and drops it to $139 on Jan. 3rd.
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Demand pricing is a strategic way for tour operators to maximize profits while riding seasonal shifts. Businesses can charge higher prices when demand increases and lower prices when demand decreases. While it’s not a one-size-fits-all solution, demand pricing can be a useful tool for tour businesses like yours.
