by Andrew Morgan - QTHB
01st May, 2019
Room rates: supply and demand
The economic forces of supply and demand determine the price levels of most products and services, and it forms the basis of the laissez faire economic system (free from government intervention) under which we live and operate - most of the time. Supply and demand are however, an everchanging dynamic as they fluctuate with human actions.
Accommodation room rates go up and down as a result of all sorts of activities created by people and external factors. A couple of simple demand examples include a big event being held in a locality on any given day, or a large industry increasing or decreasing their activities in a region. Simple supply examples include an abundance of new, short-term accommodation units being built and coming online, or an accommodation site being redeveloped for its highest and best use purposes thereby taking units offline. There are literally hundreds of different actions that change supply and demand. Supply is generally the slower mover however, demand is more dynamic, changing from day to day.
While there are differing opinions on this, it seems to be that most believe that short-term accommodation room rates must go up and down as supply and demand changes. As the old saying goes “make hay while the sun shines”. If there is a busy weekend for an event or an annual event perhaps and the available units in an area can be sold at three times over, will the room rates for that period be the same as when things are quiet? When things are quiet do the room rates stay where they are or do they drop in order to meet the lower demand? Peak and off-peak seasons are another example. Holiday complexes always advertise high season and low season room rates. They are simply going up and down with the relevant supply and demand for that time of the year.
Generally, in situations where it is believed that rates should stay the same no matter what the demand is, it does not end up working long term. Loyalty to guests is obviously a good thing, but it may not be sustainable, particularly in a long-term scenario. If the room rates are not raised during the busy times, then unfortunately come the quiet times, they cannot remain where they are either. Even though the guest may still wish to stay at that motel to repay the loyalty of the lower rates in busy times, their company may move them on to a cheaper property in the quieter time as the company does not have the indebted responsibility of loyalty in return. This is where not moving room rates up and down with supply and demand can end up being a very costly mistake.
Looking after return guests and loyalty is a good thing. It is what builds the strength of any accommodation business. Finding the right balance however, is the difficult part. Being able to increase room rates with higher demand and keep loyal regular guests happy around this, is not an easy thing to do. The juggling act of any business operator is not an easy one to get right. Using room rates as effectively as possible must be the goal though.
Low room rates and under cutting are a major burden on the accommodation industry. The damage caused by this line of thinking is dramatic. The thought process that undercutting the value of one’s product is the best way to sell the product is a very flawed ideology. Consider perhaps, adding value to the product to make it more attractive to the market, instead of giving it away? If there is a low demand for motel accommodation then there is less chance of being able to lift room rates, however there is little benefit in underselling the value of the product. Again, a juggling act.
The secret lies in establishing what the market is willing to pay for the product and service. Finding the fine line in not over pricing the product and not under-pricing it within the confines of the demand available is the trick. What is a guest willing to pay for a neatly presented and clean motel room that offers the expected services such as a good bed, quiet room, air conditioning, high speed internet service, and so on? What is the value of the combination of the product and service being offered that can be achieved at a particular point in time?