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Don't Use 'Price Sensitivity' as an Excuse: You Can't Back It Up

12 September 2023
Talk to any hotel operator about empty rooms, and you'll likely hear about price sensitivity. 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? This blog post aims 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.
In this blog post, we will look into the complexities of price sensitivity in the hotel industry, debunk some common misconceptions, and explore strategies beyond mere price adjustments to attract and retain guests.

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.

Digging Deeper: Additional Factors Impacting Price Sensitivity

With the understanding that hotel stays often serve as complementary goods to the primary reason for a trip, it's crucial to explore other facets of price sensitivity that impact a traveler's choice of accommodation. Here are some other key variables:

Economic Considerations: Income Levels

While the primary attraction may be the destination, income levels significantly influence price sensitivity. Those on a tighter budget may be more inclined to opt for budget-friendly hotels, often foregoing extra amenities for affordability.

Value Perception: It's More than Just Money

Price sensitivity also closely ties into the perceived value that a guest expects from their stay. Guests may be willing to pay a premium if they believe the hotel’s amenities, service quality, and brand reputation add value.

Choices, Choices: The Availability of Alternatives

In today's digitally connected world, alternatives to traditional hotel stays, like Airbnb and budget motels, have surged. The sheer variety of options at a traveler’s disposal heightens price sensitivity, pushing hotels to offer something exceptional for their rates.

The Macro Picture: Economic Climate

Global or local economic conditions can shape price sensitivity en masse. In a booming economy, guests are often willing to splurge on their accommodations, while economic downturns can make even the less price-sensitive guests think twice before booking a high-end room.

Event-Driven Choices: Special Cases of Sensitivity

Certain events can temporarily minimize or exaggerate price sensitivity. For instance, during a must-see concert featuring a once-in-a-lifetime performance, the desire to secure accommodation close to the event could outweigh any concerns about the room rate.

Seasonal Variations: Time Matters

Seasonality further complicates price sensitivity. During high-demand periods, people may be more willing to accept elevated prices, while the off-season sees travelers becoming meticulous bargain hunters.
Understanding these variables provides hoteliers with the tools to strategize more effectively. By recognizing the nuanced ways different factors affect price sensitivity, they can develop targeted pricing strategies that cater to varied customer needs and circumstances.

Common Misconceptions

In navigating the labyrinthine world of hotel pricing, it's easy to fall prey to oversimplified notions or half-truths. Here, we address two common misconceptions that could mislead hotel operators and lead to less-than-optimal decision-making.

The "Lower Rates, More Guests" Fallacy

One of the most prevalent misconceptions is that lowering room rates will automatically lead to increased bookings, filling up those empty rooms. While it's true that a drop in prices can attract some budget-conscious travelers, it's far from a silver bullet.
Lowering rates can also have unintended consequences, such as:
  • Eroding the hotel's perceived value, making it seem 'cheap' rather than 'affordable' or 'value-for-money.'
  • Reducing profitability could affect the quality of services and amenities, thereby hurting the hotel’s reputation in the long run.
  • Attracting a clientele misaligned with the hotel's brand identity potentially alienates the existing customer base.

The "It’s All About Price Sensitivity" Misconception

Another common misconception is attributing a decline in bookings solely to increased guest price sensitivity. While pricing is undoubtedly essential, it is far from the only variable in play:
  • Destination Attractiveness: Sometimes, the issue is not with the hotel but the destination itself. Changes in local attractions, rising crime rates, or even shifts in popular travel trends can make a destination less appealing, impacting hotel bookings as a byproduct.
  • External Factors: Economic downturns, changes in flight schedules, or travel restrictions can impact demand.
  • Seasonal Fluctuations: Seasons shift between years, impacting demand independent of room rates.
  • Service and Reviews: A drop in service quality or negative online reviews can deter potential guests.
By understanding that price sensitivity is one factor among many, hotel operators can develop a more nuanced approach to pricing and overall strategy, achieving better profitability and guest satisfaction.

Price Elasticity for Hotel Stays Too Complex to Calculate

While price elasticity offers valuable insights for many industries, its application in the hotel sector—where accommodations often serve as complementary goods—is challenging. Here's why:

Variable Factors Impacting Demand

Hotels aren't just competing against each other; they're also affected by fluctuations in the attractiveness of the primary goods or events they complement. A decline in tourism, poor reviews for a festival, or a canceled conference can affect hotel demand, making it hard to isolate the impact of price changes on demand.

Incomplete Data

Hotels rarely have access to comprehensive data on all the variables affecting demand, including the pricing strategies of the attractions, events, or activities that drive guests to their location. This makes it difficult to create an accurate price elasticity model.

Different Customer Segments

The variety of customer segments, from business travelers to tourists, budget-conscious students to luxury seekers, further complicates elasticity calculations. Each segment has its own set of priorities and price sensitivities, making a one-size-fits-all calculation unreliable.

Time-Sensitive Nature

The price sensitivity of hotel stays can be highly time-sensitive, influenced by factors like seasonal demand, day of the week, and proximity to the booking date. This variability complicates long-term price elasticity calculations.

Cross-Price Elasticity Complexities

Even if you wanted to factor in cross-price elasticity—how the price of the primary good affects the demand for the hotel stay—the lack of consistent data and the sheer number of primary goods to consider (flights, events, attractions, etc.) make this a Herculean task.

Beyond Price: More Useful Strategies for Hotel Operators

Given these complexities, it may be more pragmatic for hotel operators to focus on other avenues for understanding and influencing guest behavior. Dynamic pricing models, customer surveys, and historical data can provide actionable insights without the pitfalls of calculating price elasticity in such a variable market.
While price elasticity is academically appealing, its real-world application in the hotel industry may offer more confusion than clarity. Hotels are better off focusing on tangible strategies they can control rather than chasing an elusive, highly variable metric.
While price sensitivity is essential, price is only one part of the marketing mix. In addition to pricing, hotels have several other levers to attract more guests and enhance revenue. Here are a few ideas.

Differentiation (Concept/Facilities)

Differentiation can make a hotel more resilient against fluctuations in room bookings. For example, offering conference spaces, hosting events, or even establishing high-quality restaurants and spas can attract different customer segments, including local guests, and create additional revenue streams.
  • Unique Themes: A unique theme can make your hotel stand out, whether it's a literary concept or a vintage look.
  • Facility Upgrades: Offering a state-of-the-art gym, a rooftop bar, or a luxurious spa can make a difference.
  • Local Art and Culture: Incorporating local art and cultural elements into the hotel's design can create a unique selling proposition.

Community Engagement

Community engagement goes beyond mere hospitality; it creates a symbiotic relationship between the hotel and the local community. By actively participating in local events, forming partnerships with local businesses, and implementing sustainable practices, hotels can enhance their reputation and become a cornerstone of community life.
  • Local Partnerships: Collaborate with local businesses to offer exclusive deals or experiences to guests.
  • Community Events: Host local events or fairs to build a relationship with the community and attract local tourism.
  • Sustainability Practices: Implement eco-friendly practices to attract a segment of travelers who prioritize sustainability.

Customer Experience Enhancement (Service and Technology)

Providing an exceptional customer experience can be a real game-changer. Guests are more likely to return and less sensitive to price changes if they've had an unforgettable stay. This involves top-notch services and amenities, personalized touches, responsive staff, and a unique atmosphere that can't be replicated elsewhere.
  • Personalized Services: Utilize customer data to tailor room settings, amenities, or welcome messages to individual guests.
  • Tech Amenities: Offer smart rooms controlled via apps, or provide in-room tablets with access to services and information.
  • Fast and Free Wi-Fi: High-speed internet access remains a must-have for many travelers.

Marketing and Branding

In the age of digital media, a strong marketing and branding strategy can significantly influence consumer choices. Well-executed campaigns can elevate the hotel's image, appealing to various demographics. Targeted advertising, partnerships with influencers, and compelling storytelling can drive interest and reduce overall price sensitivity.
  • Targeted Advertising: Use social media and search engine marketing to target specific demographics or interests.
  • Online Reputation: Actively manage and respond to online reviews to build a trusted brand image.
  • Geo-targeted Promotions: Use location-based marketing to offer promotions to potential guests in specific regions or countries and local guests.

Loyalty Programs

Rewards or loyalty programs can incentivize guests to return or stay with the brand in other locations, offering points, perks, or discounts that can be redeemed in future stays. For many travelers, the benefits accrued through these programs can offset higher room rates, making them more loyal to a specific brand or property.
  • Tiered Rewards: Offer different levels of rewards based on the frequency of stays or the amount spent to encourage return visits.
  • Exclusive Offers: Provide loyalty program members with exclusive offers or early access to new amenities or services.
  • Cross-promotion: Collaborate with airlines or other services to offer bundled loyalty rewards, amplifying the value proposition for guests.
By focusing on these multiple dimensions, hotel operators can create a more robust strategy that attracts a diverse clientele and maximizes the revenue potential of each guest.

Conclusion: Calculating Price Sensitivity too Difficult for Hotels

Throughout this blog post, we've pointed out the complexities surrounding the concept of price sensitivity, especially in the context of hotels. Given that accommodations often act as complementary goods to other attractions or events and the myriad of other variables like economic climate and individual guest characteristics, it becomes practically impossible to accurately calculate price sensitivity for hotel guests.
Hotel operators should diversify their strategies rather than fixating on an elusive and overly simplified metric like price sensitivity. By focusing on differentiation, community engagement, customer experience enhancement, marketing, and loyalty programs, hotels can attract a broader array of guests and create multiple avenues for revenue generation.
In a market as complex and variable as the hospitality industry, chasing after the impractical goal of pinpointing price sensitivity could be useless. The key to long-term success lies in understanding the multifaceted nature of guest behavior and implementing a diversified strategy beyond mere price adjustments.