Price elasticity: Difference between revisions
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== | == What is price elasticity? == | ||
It might be more correct to speak of the price elasticity of demand. This elasticity measures the responsiveness of the quantity demanded or supplied of a good or service to a change in its price. | |||
It is calculated as the percentage change in quantity demanded, divided by the percentage change in price. | It is calculated as the percentage change in quantity demanded, divided by the percentage change in price. You'll find more on this by [https://www.investopedia.com/terms/p/priceelasticity.asp clicking here].<br> | ||
In the case of our hotel, this means | In the case of our hotel, this means do (potential) customers react to a change in the price per [[Guest night|hotel night]] or for a booking in [[banqueting]]? <br> | ||
And if so, is the | And if so, is the relationship strong, so that there is (much) more demand when the prices go down, for instance? Generally speaking, higher elasticity would mean that customers will react wildly to a price change. For instance, if the hotel price goes up 10%, you might lose more than 10% of your sales or occupancy rate. And if you go up another 5%, your sales might drop by 50%. Conversely, if you drop the price by 10%, this might bring you more than 15% in additional sales.<br> | ||
From [https://www.rateboard.io/en/blog/details/price-elasticity-in-the-hotel-industry experience in the hospitality industry], we | From [https://www.rateboard.io/en/blog/details/price-elasticity-in-the-hotel-industry experience in the hospitality industry], we know that especially the leisure industry is 'price sensitive'. So, a large portion of (potential) customers do react (positively) to a price change (drop) in sales [[prices]]. On the other hand, if you change the hotel's image and strategy, the (new) prices should also match the new image. You cannot upgrade the hotel without raising the prices; customers will understand this as well. <br> | ||
A low price also has impact on your | A low price also has an impact on your hotel's image, 'cheap' is not associated with 'good', and cheap doesn't always bring you: | ||
* | * More customers | ||
* | * The right type of customers | ||
* | * The right image | ||
== | == Pitfalls == | ||
* Of course, the price is not the only factor in a customer's decision. | |||
* Customers remember last year's prices as well. | |||
* Elasticity is always related to a price range. Breaking the barrier of € 100 or € 200 by raising your price from € 98 to € 102 has more impact (a higher elasticity) than raising the price from € 90 to € 94 ( the same amount of increase). | |||
* A segment of customers (20%-30%?) is insensitive to the prices: Either they are very loyal, or they just do not care. <br> | |||
* Because of all the new types of [[competition]], Airbnb, etc. [https://hoteltechreport.com/news/price-elasticity-in-the-hotel-industry price elasticity is also changing!] | |||
== Buyer's strike == | |||
If in a specific industry or region all the prices of a specific service (like hospitality) go up too much , this might bring about a buyer's strike. This means (most) customers will stop buying this type of service (product) and switch over to alternatives (Airbnb, staying with friends, etc.) <br> | |||
< | |||
So, you can try to calculate the prices, to give you a rough idea and indication. Price elasticity is a way of thinking / predicting how customers could / would react to a price change.<br> | |||
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Latest revision as of 13:29, 12 October 2024
What is price elasticity?
It might be more correct to speak of the price elasticity of demand. This elasticity measures the responsiveness of the quantity demanded or supplied of a good or service to a change in its price.
It is calculated as the percentage change in quantity demanded, divided by the percentage change in price. You'll find more on this by clicking here.
In the case of our hotel, this means do (potential) customers react to a change in the price per hotel night or for a booking in banqueting?
And if so, is the relationship strong, so that there is (much) more demand when the prices go down, for instance? Generally speaking, higher elasticity would mean that customers will react wildly to a price change. For instance, if the hotel price goes up 10%, you might lose more than 10% of your sales or occupancy rate. And if you go up another 5%, your sales might drop by 50%. Conversely, if you drop the price by 10%, this might bring you more than 15% in additional sales.
From experience in the hospitality industry, we know that especially the leisure industry is 'price sensitive'. So, a large portion of (potential) customers do react (positively) to a price change (drop) in sales prices. On the other hand, if you change the hotel's image and strategy, the (new) prices should also match the new image. You cannot upgrade the hotel without raising the prices; customers will understand this as well.
A low price also has an impact on your hotel's image, 'cheap' is not associated with 'good', and cheap doesn't always bring you:
- More customers
- The right type of customers
- The right image
Pitfalls
- Of course, the price is not the only factor in a customer's decision.
- Customers remember last year's prices as well.
- Elasticity is always related to a price range. Breaking the barrier of € 100 or € 200 by raising your price from € 98 to € 102 has more impact (a higher elasticity) than raising the price from € 90 to € 94 ( the same amount of increase).
- A segment of customers (20%-30%?) is insensitive to the prices: Either they are very loyal, or they just do not care.
- Because of all the new types of competition, Airbnb, etc. price elasticity is also changing!
Buyer's strike
If in a specific industry or region all the prices of a specific service (like hospitality) go up too much , this might bring about a buyer's strike. This means (most) customers will stop buying this type of service (product) and switch over to alternatives (Airbnb, staying with friends, etc.)
So, you can try to calculate the prices, to give you a rough idea and indication. Price elasticity is a way of thinking / predicting how customers could / would react to a price change.
