Price elasticity
What is Price elasticity?
Maybe more correct would be 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. More on this you'll find by clicking here
In the case of our hotel, this means; do (potential) customer react on a change in the price (per hotel night or for a booking in the banqueting?
And if so, is the relation strong, so (much) more demand when the prices go down for instance? Generally spoken a higher elasticity would mean that customers will react vividly to a price change. For instance, if the hotel price goes up with 10%, you might lose more than 10% of your sales or occupancy rate. And if you go up another 5%, your sales might drop 50%. If you have the price dropped with 10% this might bring you more than 15% additional sales.
From experience in the hospitality industry, we do know that especially the leisure industry is 'price sensitive'. So, a large part of the (potential) customers does react (positively) on a price change (a drop) in sales prices. On the other hand, if you change the image and strategy of the hotel, the (new) prices should also match the new image. You cannot upgrade the hotel without rising the prices; customers will understand this as well.
A low price also has an impact on your hotels image, so 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 item customers decide on.
- Customers remember the prices of last year 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 much impact (a higher elasticity) than raising the price from € 90 to € 94 (almost the same increase).
- A part of the 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 e.g., price elasticity is also changing!.
Buyers strike
If in a specific industry or region all the prices of a specific service (like hospitality) go too much up, this might bring about a buyers strike. This means (most) customer stop buying this type of service (product) and switch over to alternatives (Airbnb, staying with friends e.g.).
So, you can try to do some calculations on the prices, this might give you a rough idea and indication. Price elasticity is a way of thinking-predicting how customers could-would react on a price change.
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