TOKYO -- Dynamic pricing, a strategy in which prices of services or products are raised or lowered based on demand, has changed the hotel scene in central Tokyo, where the cost of accommodations is hovering at record-high levels.

According to a hotel association joined by 262 accommodation facilities, mainly business hotels, in Japan's capital, the average room rate reached a record 18,649 yen (about $121) in April this year. August saw an average of 16,556 yen (roughly $108) per room, about 1.5 times higher than the same month in 2019 before the COVID-19 pandemic. The average has continued to set year-on-year monthly records for 21 consecutive months, since December 2022.

The hotel association's chairman, Hikoji Takabe, uses the expression, "a world where ramen is priced at 3,000 yen (about $20) a bowl," to describe the recent surge in room rates. What does he mean?

Due to inflation, a single bowl of ramen overseas can now cost around 3,000 yen, leading foreign tourists to bring this sense of pricing with them when visiting Japan. Consequently, "Pricing standards have shifted in the hotel industry to cater to inbound tourists," says Takabe.

However, price hikes are not nationwide, but centered in major cities and popular tourist destinations, with Tokyo being especially prominent.

Raising the upper limits of price fluctuations

Dynamic pricing, which adjusts room rates based on factors such as day of the week, holiday timing and occupancy, is widely adopted in the hotel industry.

While the primary driver of soaring room rates is the recovery of inbound demand boosted by the weak yen and strong dollar, labor shortages and rising utility costs are also contributing factors. Yet, these alone do not explain the entire price surge.

So, what triggered the rapid increase? An industry insider revealed that "the upper limit of the dynamic pricing range has been raised to unprecedented levels."

According to Takabe, the standard range between 2017 and 2019 was around 6,000 to 12,000 yen per night, but this has expanded to about 7,000 to 15,000 yen in 2023 onward, with the upper limit up by 3,000 yen -- three times more than the 1,000-yen boost to the lower limit.

While the range of fluctuations varies by facility, weekday rates of over 10,000 yen are now typical in central Tokyo, with some well-known business hotels charging as much as 25,000 yen on Saturdays.

Since many guests select accommodation by first deciding on an area and comparing prices of nearby hotels, any rise in neighboring facilities' prices offers an opportunity for others to follow suit, spreading the trend of higher room rates.

Still room to raise prices from a dollar-based perspective

Setting rates too high risks driving customers away. Still, dynamic pricing enables businesses to maximize profits by raising prices when demand is high and boosting occupancy during off seasons by lowering rates.

So, will accommodation costs in central Tokyo continue to rise? In September, a double room at the Imperial Hotel Tokyo was 30,875 yen per guest, tax included -- a price considered at the low end for the hotel. Although steep for many, looking at it in dollars offers a different perspective. Assuming an exchange rate of 140 yen to the U.S. dollar, this converts to about $220. In contrast, a night in even a mid-range New York hotel often costs over $300, making this not particularly high in the eyes of foreign visitors.

According to an industry source, "Many hotel owners believe there's still room for rate increases when viewed in dollar terms."

(Japanese original by Akihiro Nakajima, Business News Department)