When price elasticity says enough is enough

Price elasticity has its limits

Price elasticity has its limits, and holiday hotels are reaching a ceiling if we keep following the same model.

I decided to write this after reading a post on the Paraty blog, improving hotel profitability by reducing reliance on OTAs and inbound operators. It discusses the role of direct sales in the distribution mix, recognises the value of other players and encourages hoteliers to support direct sales and use dynamic pricing to optimise sales, including through tour operators. As you know, I support this approach under certain conditions, which you can read about in the taboo of tour-operator guarantees.

The main problem is that holiday hotels have generally failed to factor in fixed room allotments and prices when setting budget increases. This becomes especially clear in peak season, such as July and August, when we hit the ceiling: there is nowhere left to go.

“We have not yet reached the ceiling in peak season.” #RevenueManagement

Here is a visual example of the model that holiday hotels need to update:

As you can see in the charts on price increases and room allotments, price growth has largely been supported by dynamic rates, while room allocation has remained unchanged. In the best case, the dynamic-rate allotment is still smaller than the room allotment given to guaranteed static rates.

Price increases

Room allotments

Imagine a 100-room hotel in July with a 99% occupancy target.

At first, it looks as if the budget targets have been exceeded year after year. But what has happened in recent years? Eventually, the production target in the budget can no longer be supported by the 59 rooms available for dynamic rates. Those are the rooms that have supported the strongest increases in average rates since 2013.

As the chart shows, the way to create more room to increase average rates is to reduce the allotment assigned to guaranteed static rates and move those rooms to dynamic rates. That gives dynamic rates more flexibility. Imagine these two scenarios:

Reducing the guaranteed static allotment by 10 rooms could help us reach the budget target while allowing us to lower dynamic prices.

If your hotel is facing this kind of production ceiling during peak season, it may be time to review your distribution mix. You may be surprised at how much you can increase production and average rate by lowering dynamic prices.

“Price increases in recent years have been supported by dynamic rates.” #RevenueManagement

Another clear sign that your distribution mix needs to change is hearing comments like these across hotel departments:

• “We are selling rooms for next to nothing, and we are squeezing the domestic guest” (dynamic rate).
• “If we do not take a risk now to reduce tour-operator business (static rate), we never will.”
• “We keep increasing prices, but we still offer the same thing year after year.”
• “A guest called and said they stayed on the same dates last year and it was €200 cheaper.”
• “Can we give tour operator X another 15 rooms?”

The market has not failed to warn us; it has been kind over the last few years, absorbing every budget increase. But prices have an elasticity limit, especially when not all rooms can support the increases built into budget targets. I hope this article helps you think about your hotel’s distribution mix.