Pricing practices sometimes seem peculiar. When first-class hotel rooms in London, Tokyo, or Paris go for $300 to $500 per night, Holiday Inns offers Weekend WebSaversSM rates at Chicago's O'Hare International Airport from as low as $62.48 per night—more than 50 percent off regular prices. Not to be outdone, Howard Johnson's says vacations are more fun with family package rates up to 70 percent off regular prices. Meanwhile, Marriott offers advance purchase rates on the Internet for as low as $59 per night at the Courtyard Marriott Village at Lake Buena Vista, Florida. At the Hilton Durham, in North Carolina, weekday rates are $109.95 and $89.95 on the weekend. What is going on here?
Rather than a mad scramble to build market share at any cost, hotel-chain rates represent a shrewd use of information technology. Any night that hotel rooms stand empty represents lost revenue, and because hotel costs are largely fixed, revenue losses translate directly into lost profits. A room rate of $59 per night does not begin to cover fixed construction, maintenance, and interest costs, but it makes a nice profit contribution when the alternative is weekend vacancy. By segmenting their markets, hotels are able to charge the maximum amount the market will bear on weekdays and on weekends. Similarly, hotel marketing gets fierce for convention business, especially when conventions meet at traditionally slack periods. Is it any wonder that the American Economic Association holds annual meetings around New Year's Day in cold-weather cities?1
This chapter examines common pricing practices and illustrates their value as a practical means for achieving profit-maximizing prices under a wide variety of demand and cost conditions.
1 See Motoko Rich, "Holiday Inn Owner Will Build Hotels Even as Industry Slows," The Wall Street Journal Online, January 16, 2002 (http://online.wsj.com).
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