Talk to any hotel operator about empty rooms, and you’ll likely hear about price sensitivity.
NB: This is an article from Demand Calendar
It’s the go-to explanation, the default setting, and the universal scapegoat for low occupancy rates. But what if the industry’s collective understanding of this term is superficial at best and downright misleading at worst? What if the relentless focus on price is causing more harm than good?
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We aim to challenge the conventional wisdom surrounding price sensitivity, reveal its complexities, and propose alternative strategies that could be game-changers for the hospitality industry. If you think you know all there is to know about price sensitivity, prepare to think again.
In the hotel industry, price sensitivity refers to the degree to which the demand for overnight stays changes in response to room rate changes. In simpler terms, it measures how sensitive guests are to price fluctuations. If a small increase in price leads to a significant drop in bookings, we can say that guests are highly price-sensitive. On the other hand, if the number of bookings remains relatively stable despite rate changes, the guests are considered less price-sensitive.
The Complexity of Price Sensitivity for a Complementary Good
Before diving into individual factors like income levels or the economic climate, it’s essential to understand that an overnight stay at a hotel is often not the primary reason for a trip; it’s a complementary good. In other words, the hotel stay usually accompanies the main attraction or purpose of the visit — a beach getaway, a business conference, or a special event like a concert.
The Total Cost of the Trip
When considering a trip to a destination, travelers evaluate the total cost, which includes not just the hotel stay but also airfare, local transportation, meals, activities, and shopping. So even if the hotel prices are higher, guests might still choose a particular destination if other aspects, like meals and local transportation, are cheaper or offer better value.
Competition Among Destinations
Different destinations compete for the same pool of travelers, and they do so through a range of offerings: events, sights, restaurants, family-friendly activities, and even the general price level of the locale. A family may choose a slightly more expensive hotel in a destination that offers numerous free or low-cost attractions, seeing it as better overall value for their money.
The Hotel as Part of the Experience
Sometimes, the hotel could offer unique experiences or amenities that contribute to the destination’s appeal. For example, a hotel with a renowned spa, or one located on the beach, can turn the stay into an attraction, making guests less price-sensitive.
Decisions in Context
Travelers’ decision-making is influenced by their evaluation of the entire travel package: destination, hotel, activities, and overall affordability. Hence, while hotel operators should be mindful of their pricing strategies, they should also consider the broader context in which potential guests make their decisions.
By acknowledging that hotel stays often complement the overall travel experience, hotel operators can better grasp the complexities of price sensitivity. They can also work with local businesses and tourism boards to create bundled offers or market the destination more effectively, influencing individual spending choices and the larger flow of travelers to their location.