What does Elasticity have to do with hotel bookings?

Elasticity is an important concept in economics - and also for hotel bookings.  Perhaps you are not the analytical or academic type, or maybe you find economics boring, but this is an important concept to keep in mind when you think about raising rates. 

The simplest definition of Price Elasticity is:  A change in demand, based solely on a change in price.

Let's ignore seasonality for a moment and assume that we are looking at one specific date that has a defined level of demand for hotels in your market.  Let's also assume that in a specific channel all the hotels have similar ratings and visibility.  I think we can all agree that if you lower rates, you should get more volume of bookings.  And if you raise rates, you will probably get less booking volume.  So, the key question becomes:  how much will volume change if price goes up (or down)?  These are the two basic choices:  

1. Lower rate per night  X  More room nights  =  Max Revenue?
   • Will the additional volume make up for the lower rate per night?
2. Increase rate per night  X  Less room nights  =  Max Revenue?
   • Will the additional revenue per night make up for the lower volume?

Hotels are not standardized commodities, especially boutique hotels.  But the price of oil is a common example of "inelastic demand" because a change in price will often result in little to change the amount consumed.  There are few substitutes and consumers need to get to work and businesses need to operate. 

On the other hand, products with "elastic demand" can be easily compared, or have substitutes.  Airline prices are often said to be elastic, since service is often considered quite similar and prices can be easily compared.  A small change in price can result in a big change in volume.

This is a key concept used in Yield Management (a.k.a. Revenue Management) and is important for pricing your rooms in a way that maximizes revenue.  Check out the video for a quick, simple, graphical explanation of how to use this concept for your hotel.

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Best regards,

Robert Russell

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