The Relationship Between Supply and Demand: A Look Back to Understand the Future
I’d like to share a thought I often discuss in my classes—perhaps a bit generalized, but accurate.
About 40 years ago, the relationship between Demand (the tourism market) and Supply (Italian hotels) was decidedly in favor of the latter; hotels consistently had high occupancy and often high rates because the supply was limited in both quantity and quality compared to demand. Demand, in turn, was highly influenced by international media of the time, particularly film. But with the advent of the internet, everything changes.
Over time, the Supply in the region grew exponentially, while Demand slowed down, becoming fragmented, specialized, and segmented. Consumers knew what they wanted, where to find it, and how to search for it. Then came the strong influence of Brand Reputation, which we need to learn to accept and understand for its “democratic” nature.
Habits are constantly evolving, especially right now.
Why Should They Choose Our Hotel?
This is a question we should ask ourselves often, as it’s crucial to our property’s success.
Many different factors influence the visibility of a hotel, and they vary widely. Geographic location, for instance, plays a key role in influencing the customer’s choice, but its importance is relative, depending on where the guest is coming from.
The farther the guest travels, the less important the specific location may become. But the hotel has no control over geographic location, weather, or other such variables.
So, what can we act on to attract customers? To be chosen?
Let’s talk about price, the one lever we can adjust quickly to see immediate results—but not always satisfying ones.
It’s important to remember, as I often stress, that Revenue Management isn’t simply about raising or lowering prices.
Price is just a tool that, unlike others, yields faster results. But we must be very careful in using this tool; otherwise, we risk making gross mistakes that are misinterpreted as Revenue Management.
A good price-quality ratio doesn’t mean “low” rates but rather is one of the main factors leisure customers base their choice on.
But price is not an absolute value and could range from €69 to €269.
This brings us to other key considerations:
- A low or high rate is entirely based on customer perception.
- The good price-quality ratio ties a perceived benefit to a customer’s needs, spending power, and habits.
- The quality of the product, in terms of “welcome” and Brand Reputation, is essential.
- A hotel’s star rating doesn’t define the quality of service or hospitality.
This, too, is Revenue Management—understanding when and how much the market is willing to pay for the quality of our product and our hospitality service.
The market is our focus; understanding its needs and demands is key to achieving good results in both occupancy and reputation.
Adapting price to market needs and demands is the solution.
An empty room is, in effect, a room sold at zero revenue, meaning it’s a cost.
Therefore, selling at a “low” rate is a more effective choice than not selling it. But “lower” compared to what?
Compared to a competitor with very low occupancy during that period? Or better “higher” to generate more revenue? But “higher” compared to what? Higher than last year, when the market, weather, or other variables were different, or when occupancy was lower?
These questions don’t require a mystic to answer but rather need to be carefully analyzed one by one.
A first answer to these questions lies in a flexible, dynamic pricing system that segments the offer. Meeting all market segments’ needs increases the conversion rate and thus revenue.
This is where the value of an “initial rate” comes into play, set well in advance and lower than last year’s average rate when occupancy wasn’t satisfactory. Remember: price sensitivity is very high far from the booking date.
Imagine selling some of your rooms—maybe those left unsold last year—at this rate.
This would bring several important benefits, including increased visibility, increased LOS (Length of Stay), and increased Booking Window (the time between booking and stay).
Let’s look at these in detail:
Strong Online and Offline Visibility
Tourists often filter by price on OTAs (Online Travel Agencies). They may be intrigued by a favorable rate, searching for your phone number and giving you the invaluable opportunity to secure a direct booking.
Increase in Length of Stay (LOS)
Increasing the LOS (Length of Stay) means customers may be inclined to book more nights thanks to the favorable rate. This reduces your variable booking costs, allowing you to earn a higher margin on each reservation.
Increase in Booking Window
With an appealing rate published online well in advance, bookings will likely come in earlier, especially for the leisure segment, which is highly sensitive to price. Compared to a higher rate, this approach can, in some cases, double your average Booking Window, helping you “better plan activities” and manage certain costs (on-call staff, laundry, etc.), thereby optimizing results.
Vito D’Amico