Pricing Decisions in the Hospitality Industry

Price sensitivity involves customers’ reaction to a change in price. In the hospitality industry, longstanding and potential guests will also react to changes in room rates.

OTAINSIGHT helps us to better understand the concept of price elasticity on an individualized basis, particularly as it relates to the hospitality industry. Individuality may result in some consumers reacting indifferently to the lowering of a hotel’s room rate. On the other hand, others may rush to make bookings they would not have made otherwise.

There is a difference between individual demand and market demand. In general, lower room rates increase demand. A hotel may raise its rate in the hope of attracting higher demand, but will, in the process, price out some customers and may obtain the opposite effect. The result may be different at an individual level whereby demand falls with the lowering of the rate, and vice versa.

This inverse correlation emphasizes the individuality and irrationality of consumer behavior. This is not baseless, however, as it has to do with whether individual consumers are at the low or middle end of the market versus those at the high end. Those at the low or middle end are more sensitive to changes in the room rate. These groups will demand more at a lower price. However, those at the high end will demand less at a lower price.

Price elasticity differs between the short-term and the long-term. In the short-term, customers are less sensitive to a rate change as they are unlikely to have sufficient time to make alternative bookings or find alternative destinations. In the long run, given that a price change is permanent, they have much reaction time. In order to decrease the impact on demand, revenue managers should adjust rates at a greater distance in time.

Learn more about price sensitivity and pricing decisions by pursuing eCornell’s Advanced Hospitality Revenue Management: Pricing and Demand Strategies program. Find the details here.

eCornell courses are approved by SkillsFuture Singapore for SkillsFuture Credit as well as by HRDF Malaysia under its SBL Scheme.

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