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Room Rates - Supply and Demand

Andrew Morgan - Monday, June 24, 2019

The economic forces of supply and demand determine the price levels of most products and services.  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 an everchanging dynamic as each go up and down 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, just to mention a couple.  A couple of simple supply examples include, 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 or more different actions that change supply and demand.  Supply is generally the slower mover however demand is more dynamic, changing from day to day.

There are differing opinions on this however in the main it seems to be that most believe short term accommodation room rates must go up and down with supply and demand changes.  As the old saying goes “make hay while the sun shines”.  You can consider scenarios in the short term such as a busy weekend or week and long term such as a booming industry over a ten-year period as examples.  If there is a busy weekend for an event or an annual event perhaps and the available units in an area can be sold 3 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.

Having seen situations where it is believed that rates should stay the same no matter what the demand is, those situations did not end up working out well.  Loyalty to guests is something that gets mentioned in these discussions.  Of course, this is a good thing, however it can only be sustained up to a point though, especially considering long term scenarios.  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 fantastic thing.  It is what builds the strength of any accommodation business.  Finding the right balance here 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, or even close to.  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 big.  The thought process that undercutting the value of one’s product is the best way to sell the product is a very flawed ideology.  Why not go the other way and add 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, the juggling act.  What is the market 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, etc, etc?  Therefore, what does one believe is the value of the combination of the product and service they are offering that can be achieved at a particular point in time?

Written by Andrew Morgan, Specialist Motel and Accommodation Broker