Introduction – Rate management and dynamic pricing
A recent report on a study of the rental market by Bovag (the Dutch motor trade association) in collaboration with KPMG concluded that the majority of local and regional car rental organisations will adopt dynamic pricing in the coming years. In doing so, they will increase their revenue by around 6% per year.
Sounds good, but what exactly is dynamic pricing and how do you make sure it works in practice?
What is dynamic pricing?
Dynamic pricing is adjusting prices based on market conditions. That is actually a vague and broad term that covers just about everything. After all, when setting rates you always look at market conditions. In other words, everyone does dynamic pricing…
…right?
That is true, but when people talk about dynamic pricing, they mean the concept in which prices are adjusted on a continuous basis (in real time) according to supply and demand.
In a nutshell: if there is a lot of demand and little supply, the price goes up. If there is little demand and a lot of supply, the price goes down.
In this article we go deeper into all the variants of dynamic pricing.
"Dynamic pricing is adjusting prices based on market conditions."
What is rate management?
Dynamic pricing is a fine concept, but it only works if there is a good engine behind it. We call this engine rate management.
You can think of rate management as the business intelligence processor for your rates. This can take place in an Excel spreadsheet or through a dedicated (machine learning) program. Conceptually it makes no difference. Based on historical and current data, the optimal rate is calculated and prices are adjusted accordingly.
Can you use rate management and dynamic pricing separately?
Yes and no.
A square is a rectangle, but a rectangle is not a square. The same goes for rate management and dynamic pricing.
Let us explain.
Rate management on its own offers the organisation a lot of valuable insights. For example, you know when it is going to get busy, so you can act on that in ways other than adjusting the price (hiring in vehicles). The data also shows how far in advance people book, so you can adjust course if there are fewer bookings than expected. There are many more advantages that rate management offers the rental organisation.
Dynamic pricing, however, does not work (well) on its own. Of course it is possible to apply dynamic pricing (e.g. a higher Saturday rate for vans), but then you are only using a minimal part of the dynamic pricing concept.
The advantages and disadvantages of rate management and dynamic pricing?
It should be clear that rate management combined with dynamic pricing offers many advantages. After all, the airline and hotel industries do not apply dynamic pricing for nothing.
The biggest advantages are that you i) earn more with the same fleet; and ii) make accurate (data-driven) decisions.
The most frequently heard objection concerns regular (read: returning) customers. Many rental organisations think regular customers will not appreciate it if the price is not always the same as last time.
Although we do not share this fear – provided the dynamic pricing module operates within reasonable limits – it is of course still possible to give returning customers fixed prices.
Click here for a more detailed analysis of the advantages and disadvantages of dynamic pricing.
Which rental software packages facilitate rate management and dynamic pricing?
International car rental software packages aside, there is currently only one rental software package on the Benelux market that offers rate management and dynamic pricing: RentVisie.
How does it work at RentVisie?
As described above, there are several forms of dynamic pricing. These include the 'simple variants' such as preset day-of-the-week adjustments and seasonal fluctuations.
When we talk about real-time dynamic pricing, there are two variants we use within RentVisie: i) rule-based dynamic pricing; and ii) forecast-based dynamic pricing.
Rule-based dynamic pricing
Rule-based dynamic pricing is the simpler of the two. The price is adjusted automatically based on preset rules that mainly look at the vehicles still available in a particular class.
Example. Within a vehicle class (Passenger car A) there are 20 vehicles. For each day, the utilisation rate of the vehicles is checked and the price is adjusted on that basis.
For this we assume, for example, the simplified settings below.
Base price: 100 euros/day
Low scenario (0 – 25% utilisation) => price * 0.9 Medium scenario (26 – 50% utilisation) => price * 1 High scenario (50% - 100% utilisation) => price * 1.1
In this setup the first 5 vehicles are rented out at 100 * 0.9 = 90 euros. The next 5 vehicles are rented out at 100 * 1 = 100 euros. The next 10 vehicles are rented out at 100 * 1.1 = 110 euros.
If all vehicles within the vehicle class are rented out, this yields an average of ( 450 + 500 + 1100 ) / 20 = 102.5 euros per vehicle (= +2.5 % ).
Although this model is generally profitable too, it does not work optimally. For certain days/periods you already know in advance that it is going to be very busy or very quiet. If you know in advance that your entire fleet will be rented out on a specific day/period, there is no need to apply a lower price on the first part of the rentals.
Forecast-based dynamic pricing
For this reason, rental companies within RentVisie can make use of the forecast-based dynamic pricing model.
Based on historical data and current data, a forecast of the expected demand is made on a continuous basis.
If we expect it to be very busy in a particular period, the cheaper Low and Medium scenarios are skipped. If we expect it to be very quiet, we start in the Low scenario instead so that more is rented out.
Alternative: price scraping
At RentVisie, dynamic pricing and rate management are based on your own data. An alternative is to adjust pricing based on competitors. This can be done using price scraping (widely used by the international rental companies).
In the price scraping model you can, for example, specify that you always want to be x % cheaper than your competitor. We offer this model within RentVisie as well.
Which car rental organisations are rate management and dynamic pricing suitable for?
Although dynamic pricing has been around for a very long time, it is still applied only to a very limited extent by local and regional car rental companies. We regularly hear from rental companies that they think it is not suitable because their customers would not appreciate it.
We do not subscribe to that argument. It is true, however, that rule-based and forecast-based (AI) dynamic pricing is less suitable for long-term leasing. This has less to do with the concept of dynamic pricing itself and more with the way the leasing industry manages ROI per vehicle.
Rate management, on the other hand, is suitable for all rental organisations. As set out above, rate management lets you extract valuable insights from your rental organisation's data. On that basis you can make data-driven decisions instead of going on gut feeling.
Conclusion
With rate management processes you extract valuable insights from your rental organisation's data, and on that basis you adjust prices or take other actions (e.g. hiring in vehicles).
Dynamic pricing is built on rate management and is the concept of adjusting prices on a continuous basis.
For an optimal application of dynamic pricing, forecast-based dynamic pricing should be used. Here a forecast is made on a continuous basis from historical and current data, after which the price is adjusted automatically (machine learning). The big advantage is that you never rent out your vehicle for too low a price during peak periods.
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