Pricing - The Heart of Revenue Generation and Profitability
Are You Leveraging Pricing Power?
By S. Lakshmi Narasimhan Founder, Ignite Insight LLC | June 15, 2014
One of the most powerful principles of economics is that of price elasticity of demand. Simply stated, demand is sensitive to price changes. Given that, demand can be stoked only by reducing prices. This is ironical since revenue growth owes a great deal to how prices are strategically managed. However, there is really no conflict here. While demand may be sensitive to price changes, it does not mean that demand gets killed when price changes - here we are talking about price increases. Price has another critical relationship - with value. Price is as elastic as its relationship with value allows. What does that mean? It means that if the value perceived for a product is higher than its price, elasticity comes down. Take the example of Apple products. They consistently defy the demand elasticity principle and have a growth path irrespective of price increases.
As far as the hospitality industry is concerned, demand is indeed elastic. Price increases in rooms will be accompanied by demand reduction in general. Of course if the product is unique and unlike anything that competition can match, elasticity comes down significantly.
Pricing vs Quantity
One of the constant dilemmas facing the hotel business and the marketing department is related to the balance to be struck between price and quantity in the achievement of revenues. Ideally, price must be the highest possible (not just for revenue considerations but most importantly profit considerations too), but in reality, this is a luxury few hotel marketers have. They must gravitate to a healthy balance between price and quantity.
One of the truths about key resources or assets is that quantity available is constrained. For instance, there are only a limited number of hotel rooms available and even within different room types too, only a specific quantity is on offer. Given this fact, there is pressure on the hotel marketer to compensate with price to achieve budget revenues. But that is easier said than done. While from the hotel point of view, price is a great contributor to both revenues and profits, as pointed earlier in this article, demand is quite elastic related to price. In short, demand is sensitive to price changes, particularly upward.