Supply-Demand Imbalance
Unlike manufacturing companies, service firms like airlines and hotels are unable to change the supply of rooms or seats on a short-term basis to match with demand. Airlines and rental car firms have a little more flexibility than hotels, as a rental car company may order new cars or not renew leases on a fairly regular basis, and an airline may take a plane out of service or change the route it flies. For hotels, it is very difficult to dramatically change room supply on a short-term basis. Hotel demand and supply are almost always imbalanced – lots of days without rooms available and many days with empty rooms.
In North America, the average hotel occupancy on an annual basis is around 60-65%, varying by market. A well performing hotel may be ‘sold-out’ ~100 days per year and have unoccupied rooms for the other 250+ days. To maximize revenue, hotels increase prices during the 100 sold-out days, and implement marketing strategies to boost demand during the other periods.
Airlines and hotels have the advantage that consumers make reservations in advance of service use, which provide insights into total demand. Firms use this information to set prices and plan marketing actions. It’s important to note that not all consumers behave the same way – some are price-sensitive planners, while others are less concerned about prices and might book last-minute deals.
Predicting Airline and Hotel Prices
These factors typically result in a U-shaped price curve over the time during which you might book a flight or reserve a hotel room. Early on (about 4-8 months before departure or check-in), prices may be slightly higher as the firm is waiting for more information from reservations and other signals about demand. Prices might then drop slightly but usually start to rise quickly towards the departure or check-in date, depending on the supply-demand imbalances and customer mix (i.e. relative number of price sensitive versus price insensitive customers). The curve’s steepness is influenced by the extent of supply-demand imbalances – there’s a small dip for the
100 sold-out days, with steeper increases toward the end. On low-demand days, there might be extended dips with attractive last-minute deals.
During the 100 sold-out days, there are typically certain extremely high demand days that are predictable, such as college graduation weekends. Prices remain high throughout the booking period for these dates. However, other high-demand days might be less predictable, leading to sharp price increases as some firms initially price too low and quickly sell out, resulting in limited last-minute availability.
How to Profit on Hotel Pricing Trends
There is a way to capitalize on the fluctuating price changes and the supply and demand imbalances for hotels: Hoken. Discover an innovative hotel marketplace offering hotel room reservations for buying and selling. Hoken meticulously selects its collection of hotel rooms to be in association with highly sought-after events, ensuring the utmost price optimization and maximizing the potential for profit gains for its valued users. Take advantage of appreciating hotel rooms by purchasing rooms in advance when prices are low, holding them, and then reselling them later when demand and price naturally increases closer to the check-in date.
Author Profile
Chris K. Anderson is an advisor for Hoken and a distinguished Professor at Cornell School of Hotel Administration since 2006. His profound impact on the hospitality industry stems from his expertise in revenue management and service pricing, honed during his tenure at the prestigious Ivey School of Business in London, Ontario, Canada. Actively engaged in cutting-edge research, Chris collaborates with various industries, offering invaluable insights to hotels, airlines, rental car and tour companies, consumer goods, and financial services firms. His reputation as an authority in the field is solidified by funding from governmental agencies and industrial partners.
Beyond academia, Chris’s influence extends through editorial roles in the Journal of Revenue and Pricing Management and the International Journal of Revenue Management. Universally recognized as an expert in revenue management, distribution, and social media in the travel industry, he is a sought-after speaker at international meetings and conferences. Countless firms in the travel space benefit from his consulting expertise, including hotels, airlines, rental car providers, OTAs, search engines, social media platforms, software vendors, and solution providers.
