The concept of supply and demand dates back to the 1690s when John Locke wrote “The price of any commodity rises or falls by the proportion of the number of buyers and sellers”. The key word here is “commodity”. John Locke was certainly not referring to a luxury boutique hotel in a seasonal market.
NB: This is an article from Rate Yield
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As revenue management has taken on an important role in the hospitality industry, the law of supply and demand has necessarily played an important role. But determining demand is very difficult to do. There are many revenue management softwares that look at factors like weather data, flight data, search demand, and historical trends to attempt to predict what “demand” looks like on any given day. With that prediction in the toolbox, rates are determined to maximize occupancy based on the current demand level.
Unfortunately, when focusing pricing strategy on demand alone, we end up with erratic pricing that promotes an inconsistent brand image. Additionally, when things are bad, they get worse. Because low demand and occupancy being met with lower rates ultimately means lower revenue all around.
In french, supply and demand is called “l’offre et la demande”. So I suggest, instead of looking only at demand, let’s look at what we have to offer. And what we have to offer is not coal or wheat and it isn’t a seat on a plane.
Pricing for current market dynamics includes demand as a factor but more importantly looks at competition and your hotel’s market positioning and strategy. It requires us to accept that lower pricing does not increase demand and that higher pricing does not reduce demand. The price is not the defining variable to predict demand.
If we can accept this, then we can reject the idea that with lower demand we must reduce price. Instead we can set our strategies based on our market positioning and what our hotel has to offer when compared with other options a traveller has to choose from.
This idea doesn’t completely reject the idea of demand based pricing because an increase in demand should be met with an increase in price. It is simply a way to reflect on our pricing as we enter the low season for many destinations. A lower price will not drive demand to your destination. It may drive demand to your hotel rather than your competitor, but if you fill up first with lower rates, supply will decrease and your competitors will be able to sell at a higher rate later on. You may believe you are winning, but ultimately you will lose out.
