That is why hoteliers often come up with a question: It is better (easier) to just indicate a flat rate - the price that will for sure bring your guests, and keep it no matter the season and demand. Or things happen the other way around - the discount rate of 3-5% helps hotels sell a bulk of last-minute offers. Sometimes, the smallest increase in room prices, for example, by 3-5%, completely scares guests away. Dynamic pricing is a part of revenue management.įirstly, dynamic pricing is about changing your rack rate - the published rate for one night’s stay without discounts offered on the hotel website or other direct points of sale. This concept is narrower, but it still consists of several constituents. What is dynamic pricingĭynamic pricing is a part of revenue management. The foundation of revenue management is the analysis of hotels’ revenue and occupancy performances, including the analysis of occupancy dynamics, studying of the demand, and the comparison of actuals and budget. From the chart, it is clear that dynamic pricing is merely a part of the processes making up revenue management. Depending on a hotel, revenue management can consist of a whole variety of business processes, but it never limits itself to dynamic pricing. Revenue management is a more wide-ranging concept than dynamic pricing. In this article, we are sorting them out. Moreover, the subjects themselves cause many questions: what accommodations need them, or when and how they should be applied. Thus, it is key to make sure the raise is in line with what the business needs from a cash flow, and ultimately booking / expenses, perspective.Dynamic pricing and revenue management are two terms that are often confused by hoteliers. EBITDA ultimately ties to cash flow, burn rate and the required investment. Because expenses are incurred in line with bookings (and bookings > revenue), the result is that EBITDA is low (and generally negative for most early / growth stage SaaS companies). This is a result of the fact that the SaaS business is incurring these expenses as a proportion of bookings not the revenue actually being recognized. The underlying cost structure (COGS, sales expense, marketing expense, R&D, etc.) must be looked at as derived from bookings not revenue. One of the largest implications for early stage companies is in the amount of money a SaaS business must raise when going out to the VC market for financing. This haircut will of course decrease over time as growth slows, but it does create an important accounting dynamic that has real business implications There is a lag effect between bookings and revenue and it becomes necessary to take a haircut on bookings to get to revenue. For example, a SaaS business that books $25M in Y1, $50M in Y2 and $100M in Y3, would have the following revenue numbers:Īs seen in the table above, for a growth stage company that is doubling in bookings YoY, revenues do not equal bookings. The challenge that comes into play is when a SaaS business is in growth mode. $33M from 2 years ago, $33M from last year and $33M from this year. For example, if bookings are flat at $100M, the business would recognize $100M of revenue each year. Assume for a moment that a SaaS business is selling software in 3 year contracts and that churn is 0% (for simplicity.) In a flat revenue business, where growth is 0% YoY, there are no major accounting issues or business implications because revenues = bookings. This issue is best understood with an example. The down side, however, is that there is often a discrepancy between bookings and revenue that must be understood and accounted for appropriately. This allows for stable and predictable revenues that are smoothed out over the life cycle of the contract. The software, support and upgrades are all included in the subscription. In the SaaS world, software is provided on a recurring (often monthly) basis. The benefit of this model was immediate revenue recognition the downside was lumpy and unpredictable revenue. In this world, bookings = revenue and revenue was generally recognized at the time the contract was signed and the software provided to the customer. Customers would make a one-time payment for perpetual use of software and pay for annual support and upgrades each year. In the traditional software world, software was typically sold as a perpetual license. This difference has implications on both the revenue and cost side of the equation and can also affect important decisions such as how much to raise when speaking with the investor community.īefore we get to growth SaaS businesses, however, let’s first talk about legacy software pricing. There is an important difference between revenue and bookings that comes into play for early stage SaaS businesses that are growing rapidly.
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