Revenue Management

Daniela Marketing Manager

Price elasticity in the hotel industry

The model of price elasticity* briefly describes the influence of price on the demand of the products offered. For the hotelier to make optimal use of price capacity, it is essential for him to know how price elasticity behaves for his target group at any given period.

The price is by far the strongest profit lever for each hotel. Accordingly, it is essential to give it the attention it deserves. 

As already mentioned, price elasticity describes the relation between price and demand. It therefore shows how sensitive or insensitive the demand is to a price change. For example, price elasticity may vary between summer and winter and between early and last-minute booking. Similarly, price elasticity does not look the same for every hotel; depending on the target group, strategic orientation and location of the hotel, demand can depend on price. 

 

But what does this have to do with Hotel Revenue Management?

For every hotelier it is crucial to know how high the elasticity of the demand is, in which periods and how the price willingness of the customers behaves depending on it. In simple terms, this means: "How strongly do my potential guests react to price changes?"

Based on that, a well-founded decision can be made about the room price for a specific day/period in order to exploit the sales potential as much as possible. If the price elasticity is ignored, it is possible that the hotel is empty if the price is too high and full if the price is too low, but the rooms will be sold at far too low a price.

Ideally, the hotelier would have to recalculate the price elasticity every day or approx. once a week. Only then would he have the optimal basis to price his rooms correctly daily. Why it doesn't make much sense to do this work yourself using Excel is explained here.

 

The price elasticity can be calculated using this formula:

Elasticity = percentage change in quantity / percentage price change

(for simplification, any math signs are omitted in this example.)

 

Not to get too deeply into the subject, we will only distinguish between elastic and inelastic demand.

 

Elastic demand

If the price elasticity is more than 1, we speak of elastic demand. This means that demand reacts sensitively to price changes. For example, if the price is lowered by a certain amount, demand increases disproportionately to this value.

If the price elasticity in the hotel is currently elastic, price changes cause strong reactions in demand. If the price is reduced by 5%, demand increases by 8%, for example. On the other hand, elasticity also reacts in the same way to price increases. If the price is increased by 5%, demand also drops by 8%. 

 

Inelastic demand

If the price elasticity is below 1, demand is inelastic. This means that demand is very unaffected by a price change and changes relatively less than the price. 

Without a pre-calculation, it could be simply claimed that price elasticity is inelastic for Christmas bookings in ski resorts. The reason for this is that the customer wants to travel and book a stay at Christmas, regardless of the price. He is also aware of the high demand and limited options during this period. As a result, the willingness of the customer to pay is higher than in any other "season".

 

In case of elastic demand, one could therefore assume that "the more the hotel lowers the price, the higher the occupancy rate." Basically, this statement is correct to a certain extent.

 

The hotelier should pay attention to a few things:

  • The hotel should know its own price limit - how low can the price be in the short term so to generate a positive contribution margin?

  • It should be checked in advance whether a necessary additional sale to compensate for the price reduction is possible.

  • The harmony between price and target group must be given.

  • If a price is too low, the consumer often considers it of poor quality.

  • A very high price in turn generates high expectations by the guest, which the hotel must satisfy, if it doesn’t want to have unhappy guests and poor ratings.

     

If from the guest's point of view there is no clear advantage in the hotel and the business is therefore interchangeable, then the price is clearly the most important criteria for the guest. This makes it even more important to know the hotel's USP and the target group, in order to develop the right corporate strategy and establish your own brand. 

Remember

Not the cheapest price wins, but the right price for your own target group!

 

Let's talk about price optimization with RateBoard > Request your appointment now.

 

 

*Price elasticity in this article refers to demand elasticity.

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