Inflation in the hotel industry
Inflation is one of those things that can creep up on you. Can you really notice a one or two percent average rise in the cost of things you buy? Some things go up, some things go down. But it all adds up.
Looking at the US, for example, the cost of an average basket of goods (eg food, heating, entertainment) has gone up by 22% in the last 10 years. Before Corona, the hotel industry was keeping ahead of inflation, with prices going up more than the general basket of goods, as you can see in the graph below. Although it is recovering, the cost of hotel rooms is now slightly behind inflation with just a 19% rise in the last 10 years (source St Louis Fed).
But, on average, you should expect your hotel room price should go up with inflation. And this makes sense, as your costs go up with inflation, as, generally, do the wages of your customers.
Why is inflation a big deal for hoteliers at the moment?
To put it simply, inflation is currently historically high. If you look at the orange line in the graph above from mid-2020 onwards you will see fast-rising prices. Heating and electricity prices have risen a lot in much of the world and you can see the effect of supply chain issues brought on by Corona everywhere. Staffing costs have gone up particularly as people have left the industry and pay has risen in the service industry.
As a property manager, you will very likely have noticed basic costs rising in the last year. You should be considering raising your prices to account for this. But can you?
How should it affect your pricing?
What does this mean for you? Well, in the end the final arbiter of how much you can charge is how much people will pay. The laws of supply and demand will interact to find you the right price. This is how RoomPriceGenie settles on your price. It looks at demand, both by monitoring hotels around you, and by looking at how you are performing yourself. We then look at supply – how many rooms do you need to sell. And we put your hotel in the position to make the most revenue.
Where you can change something is your starting prices. If you start off charging too little, then you will have sold some rooms for too little before we move prices up. We want to make sure that the starting prices are correct.
For this, you will need to adjust your ‘Base Price’ in RoomPriceGenie.
- As a simple rule, you could move this ‘Base Price’ up each year by the amount of inflation. For example if you had a $100 base price last year, and inflation is at 5% you would increase your base price to (1+0.05)*$100 = $105.
- But you also need to take account of market conditions. If you are in a place with a lot of demand, for example a domestic tourism resort in a richer country, you could increase your base price by more.
- Conversely, if you are in a place of low demand, you may not be able to increase the base price even though your costs are rising.
It is part art, part science and I don’t want to confuse people too much with this. If you can take a simple action-point away from this it would be this:
Check your prices for the next year and see if you feel they adequately reflect the increase in costs you have had since before the pandemic, and the change in popularity of your hotel. If not, change your base price. And to do this again every year!
If you are a client already, we are happy to help you with this – please reach out. And if you would like to see how automated pricing can help negotiate the tricky waters of pricing in these times, why not book a call with one of our friendly team.