The InterContinental Hotels Group (IHG) recently confirmed that it will implement a dynamic pricing model for its rewards programs by the end of this year. This new policy will affect all the brands that IHG owns or manages, ranging from InterContinental Hotels & Resorts, Crowne Plaza Hotels & Resorts, Holiday Inn, Kimpton Hotels & Restaurants, to newer lifestyle brands, such as EVEN Hotels and Hotel Indigo.

In the past, frequent travelers could usually redeem reward points towards a hotel stay according to the category where a hotel is listed (e.g., more points for a luxury hotel than a midscale hotel).

This newly introduced dynamic pricing feature will allow IHG to update the number of points needed to redeem a free room according to changing demand by travelers. Such practices are expected to "increase member engagement with variable point pricing."

Why is dynamic pricing crucial to service operations?

The service capacity of a hotel or a restaurant is usually determined by how many rooms or seats its facility has. It is almost impossible for hotel or restaurant operators to quickly adjust their service capacities according to fluctuating demand by consumers. As a result, it has become a big challenge or even problematic for the service providers to effectively manage supply in accordance with fluctuating demand.

When it is not easy to "control" the perishable inventory with a fixed capacity, many service providers find a different and possibly more effective way to meet the fluctuating demand. They adopt the dynamic pricing strategy as a means to influence the level of demand.

A service provider is considered as using a dynamic pricing strategy when it sells a product at a price that deviates from its "regular" price. That is, to change the sales price for the identical product (e.g., a hotel room, an airline seat, or a restaurant seat) according to fluctuating demand.

Is dynamic pricing good for service firms?

Dynamic pricing has been widely adopted by the service industry. Over time, dynamic pricing has also been proven to be a very effective tactic for hotels, restaurants, and even Airbnb listings to increase their revenue performance.

What are the other companies that also use dynamic pricing in award travels?

The airline industry made the first move. Back in 2015, Delta Airlines and United switched from a distance-based reward program to a fare-based frequent flyer program and later introduced the dynamic pricing model in awards travels.

Hilton adopted a similar strategy in 2017, offering more options for travelers to redeem rewards points. To better engage its loyal customers, Hilton introduced more updates to its rewards program in 2018. It is unclear, however, that its hotels are actively using dynamic pricing in their rewards programs.

How will dynamic pricing affect award travels?

When award travels are tied to fluctuating demand, travelers may have to use more points to redeem for a free ticket or a complimentary room during peak travel seasons, but at the same time, may find bargains if they are flexible in their travel dates. Since the focus of airlines and hotels’ loyalty programs have switched the focus to engaging their loyal customers, it is not a bad idea for travelers to stick to one brand for their travel needs.

Does dynamic pricing promote fairness for both the service providers and the consumers? Why or why not?

From a different perspective, since dynamic pricing can help a service provider increase its revenue performance, is it bad for consumers? What are your opinions?