The Value of a Quality Product - Economics 101
- Posted By Andrew Morgan
Price determination is the interaction between the availability of a product (supply) and the desire for it (demand). Laissez-faire economics is a market with minimal government intervention, supply and demand naturally regulate the prices. Australia operates under this system most of the time, although government interference does occur, however the basic mechanics still apply. Supply and demand are constantly shifting due to human actions and external factors. Demand is the more rapidly changing element within the accommodation market.
Factors affecting demand
Demand for accommodation is driven by events and activities that bring people to a location. An increase in demand with stable supply will drive prices up. Increased or decreased activity in a region's key industry (e.g. a new construction project or a plant closure) can impact demand from business travellers. Seasonal travel patterns, such as a destination's "high season," cause predictable spikes in demand and prices. A strong economy with high disposable income generally leads to more travel and higher demand.
Factors affecting supply
Supply, the number of available rooms, changes more slowly than demand. New hotels or short-term rental units coming online increases the supply of rooms. An existing accommodation site being converted to another use (e.g. apartments or commercial space) permanently reduces the available supply of rooms. In the long run, persistently high rates can motivate investors to build new hotels, which will eventually increase supply and put downward pressure on prices.
Maximizing revenue during peak demand
When an event or a busy period creates a surge in demand, accommodation providers can raise rates and maximize profits. “Make hay while the sun shines”. If rates are kept artificially low when demand is high, properties will sell out quickly but at a significant loss of potential revenue. Selling out at a lower rate during peak season can lower a property's net profit due to the increased operational costs of servicing more guests, such as cleaning and laundry, without the corresponding revenue boost.
Maintaining occupancy during low demand
During quiet periods, properties that refuse to lower their rates are likely to see their occupancy rates plummet. In a competitive market, where many properties are vying for fewer guests, offering an attractive price is a primary way to secure bookings. Keeping rates the same when demand drops will lead to unsold rooms and lost revenue. A dynamic pricing strategy allows a business to adjust rates to fill empty rooms and avoid these losses.
The limitations of loyalty in a commercial context
Loyalty, while valuable, can only be sustained "up to a point." In a quiet period, a business client will likely choose a cheaper alternative, even if they have previously stayed at a property that didn't raise it’s rates for them during a busy period. Rather than fixed prices, a more modern approach is to reward loyal guests through targeted programs. These might include exclusive offers or perks rather than blanket low rates, which can devalue the property's brand during high season.
The potential for financial consequences
Failing to adjust rates with supply and demand can be a "very costly mistake." A property that undercharges during high season will not accumulate the necessary revenue to weather the quiet periods. Relying on a fixed-price list in a volatile market makes a business vulnerable to a competitor with a more agile, dynamic pricing model.
The challenge of balancing dynamic pricing and loyalty
While dynamic pricing is common in many industries, it can still risk alienating loyal guests who may feel penalised by higher prices during peak times. Achieving this balance is difficult, requiring operators to use room rates as effectively as possible to meet financial goals without jeopardising customer relationships. Some businesses successfully navigate this by using guest data to offer personalised discounts or perks to repeat customers, even while prices fluctuate for new customers.
The flawed strategy of undercutting
Aggressively lowering rates suggests the product is not worth its full price, eroding its perceived value in the long term. Undercutting can lead to financial burdens for the business, especially during periods of low demand, as it leaves little room for profit and makes it difficult to justify higher rates during peak times. Instead of lowering prices, enhance the overall value of the offering to justify a strong price point, which strengthens the brand rather than cheapening it.
How to increase perceived value
Guests value well maintained, quiet, and clean rooms with essential services like quality bedding, air conditioning, and high-speed internet. Consistently delivering these basics builds trust. Personalisation, memorable experiences, and excellent customer service create a sense of value that justifies premium pricing. Managing online reviews and social media presence is crucial. Positive feedback and good reputation increase the perceived value of the offering.
Ultimately, finding the sweet spot between over- and under-pricing is about understanding the market and knowing the business' own value proposition. Success comes from a nuanced understanding of what guests are truly willing to pay for a high quality product and exceptional service, rather than simply reacting to competitors with lower prices.