Price elasticity in
Revenue Management
Every hotelier can easily influence their profit!
Price elasticity to measure interactions
Based on the price, every hotelier has a big influence on their profits. It is therefore important to study it extensively and regularly.
Price elasticity measures the Interactions between changes in demand and changes in price. That is, it indicates a percentage change in the quantity of supply and demand. The change in demand can therefore be measured when a price changes.
✓ Increasing the room rate provides information about price elasticity
✓ A yardstick for demand responses to price changes
This influences your price elasticity
The price elasticity can seasonal fluctuations and booking behavior are subject to and therefore vary. Not every hotel has the same price elasticity. Factors such as target group, hotel orientation, special features and unique selling points in the hotel can influence elasticity.
What does elasticity have to do with revenue management?
It is important for a hotelier to know how high their price elasticity is in different periods of time. This allows him to calculate and see in advance how willing customers are for the costs of an overnight stay. Before the price change, he must know how potential guests will react to the prices.
Without considering price elasticity, the hotelier either loses out on revenue because too few bookings are made and the rooms are too expensive. Or he could have achieved higher sales because the prices are too low and therefore too few bookings are made.
✓ Bookings and sales are missed without consideration
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Continuous review of price elasticities
It would therefore be ideal if the hotelier looked at his price elasticity on a weekly basis in order to be able to react to changes as quickly as possible. The hotelier can always recalculate the room prices and knows that he is giving the optimal price for his hotel.
happyhotel intervenes here and supports hoteliers in calculating their price elasticities. There are also suggestions such as optimal price should look.
Evaluations: Evaluate guests' reactions before changing prices
analysis: Weekly review to be able to react to changes
Calculations & examples of price elasticities
This is how the calculation of price elasticity works
The direct price elasticity can be calculated as follows: the percentage change in the quantity requested divided by the percentage change in the price. Example: The room rate over a selected period rises by 5%, from 100€ to 105€. The number of nights in demand falls from 10 to 9 inquiries. They are therefore down by 10%. The price elasticity of demand is 2 (10%/5% = 2).
Now we know how we can calculate the price elasticity and can also interpret the result accordingly. Let us now calculate the consequences of an increase in room prices. Instead of 100€ per night in a double room, the price rises to 108€. Before the price increase, there were 250 bookings per month. After the price increase 237 bookings.
How high is the price elasticity and what can be interpreted from this?
(237-250)/(108 — 100) x (100/250)
-13/8 * 0.4 = -2.5 * 0.4 = 0.65
0.65 < 1 demand is rather inelastic. The price increase changes the quantity in demand by 0.65%. If demand continues to fall and there are only 230 requests per month, we substitute the following value into the formula: (230-250)/(108 — 100) x (100/250) -20/8 * 0.4 = -2.5 * 0.4 = 1 Then we get a proportionally elastic value. The consequences then continue to develop and the result is a value > 1. In the long term, there will be elastic demand.
(220-250)/(108 — 100) x (100/250)
-30/8 * 0.4 = -2.5 * 0.4 = 1.5
Based on the price elasticity of demand, a relationship between price and good can be revealed. In the first calculation, demand is inelastic because 0.65 < 1. The price increase from €100 to €108 changes demand by 0.65%. If the room rate is now increased by 1%, demand for overnight stays falls by 0.65%.
This means that despite a price increase, many guests are still booking overnight stays. The price change therefore has only a slight effect on the demand volume.
There are many explanations for this — such as the high hotel standard, a good location or other distinctive features for which the guest is happy to pay more.
Another way to study the price elasticity of demand is to change it using percentage rates.
To help the hotel get more bookings, the hotelier lowers his room rates by 1.5%. He is hoping for a 3% increase in demand.
The elasticity of demand is price elastic: 2 > 1
This means that a price change of 1% on the demand quantity has an effect of 2%. The reduction in the room rate therefore results in a disproportionate subsidy of new bookings.
The distinction between elastic
and inelastic demand
However, it doesn't help just to calculate the value of price elasticity.
The value must also be interprets can be.
Characteristics of elastic demand
Demand is said to be elastic when the value of price elasticity is more than 1. This means that, as in our example, the change in demand is greater (10%) than the change in price (5%). If the price elasticity in the hotel is rated as elastic, price changes cause a very strong response in demand. This can be positive as well as negative: price reduction of 5%, demand increases by 8% = negative price increase of 5%, demand falls by 8% = positive
Inelastic demand and responses
Inelastic demand exists when the value of price elasticity is below 1. Therefore, the change in demand quantity is smaller than the change in price. Such a weak response to demand is often seen despite price changes for essential goods such as potatoes and flour. In practice, inelastic demand is often seen in the winter season. Especially on Christmas and New Year's Eve, guests are usually willing to pay more for a hotel stay. If the price rises, it only causes a weak response from potential guests. They expect high prices to be paid for overnight stays at this time of the year.Price cut by 5%, demand rises 3% = negative price increase 5%, demand falls by 3% = positive
Completely inelastic
However, demand can also completely inelastic be. The value of price elasticity is then zero. In this case, demand is completely unchanged and does not react at all to the price change. Despite a change, the same quantity of goods continues to be purchased. This can be observed, for example, with necessary medications.
Why should I change prices?
A change in the price, such as the room rate, can be a lever function to get more out of my sales.
Increasing demand
A price increase may be a response to shrinking demand. The reduction in price therefore triggers an increase in demand. As a result, sales increase.
Decreasing demand
The price elasticity shows approximately by what percentage the demand for a good, such as a room, falls when the price rises.
Start by calculating your elasticity
Calculating the price elasticity of demand has an extremely large lever that you shouldn't ignore. Rather, the Revenue Manager or let the hotelier himself do it on a daily basis.
However, the hotelier should note that he knows his lower price limit. He needs to know how low he can go with his room rate to cover his expenses. Since every hotel has its own target group, potential guests' willingness to pay should be kept in mind.
With happyhotel, you improve your prices and no longer have to calculate for yourself! You can flexibly submit the price suggestions to your PMS.
and convince yourself
Forget manual price adjustments. With happyhotel, you can maximize your income without constantly checking prices.
