Economics project on hotel industry

8/16/2019 Economics project on hotel industry

1/23

Microeconomics Project

Study of Pricing Strategy in Hospitality

Industry

September1 2015

Submitted by:

Section B | Group 10

Somyata Rastogi 15P070

Deval Nigam 15P080

Lipika Agarwal 15P090

Pallav Singhal 15P097

Pshkar Singh 15P100

Shrey !hat 15P110

"ikas #pta 15P1$0

Faculty: Dr Rupamanjari Sinha Ray

Page | 1


2/23

EXECUTIVE SUMMARY

%n this report& we have e'amine( the pri)ing o* hotel in(stry *rom three perspe)tives+ )ost&

spply,(eman( an( )ompetition strategies- .irst e**e)t on pri)ing (e to e'ternal *a)tors s)h

as /)onomi) s)enario& P% in(e'& seasonality o* (eman( an( other *a)tors- %nternal *a)tors

s)h as o))pan)y rate an( lo)ation a(vantages were also (is)sse(-

%n(ian hotel in(stry was st(ie( y )onsi(ering spply (eman( )hara)teristi)s )onsi(ering

*oreign torist arrivals& )apa)ity a((ition an( spply (eman( imalan)e- Shi*t o* *o)s o*

hospitality se)tor towar(s *oo( an( everage segment was n(erline(-

Di**erent pri)ing strategies relate( to )ompetitors s)h as skimming& mat)hing& an(

n(er)tting an( penetrating was also to)he( pon-

Page | 2


3/23

Table of Content

Executive summary..................................................................................................................2

efining t!e economic contribution of "ravel # "ourism...................................................................4"ravel and "ourism Industry in India............................................................................................4

$actors affecting pricing in Hospitality Industry..............................................................................7

External factors..............................................................................................................7

Internal factors...............................................................................................................8

Market structure - segmentation.......................................................................................9

Sul! "eman" im#alance in Premium $otels categor!..................................................11

Economic exlanation of "eman" sul! mismatc$........................................................1%

&! "ecrease in "eman" of $otels "ue to oor economic con"itions'............................1%

Increase is num#er of rooms o(ere" or increase in sul!..........................................14

Pricing Strategies.................................................................................................................1)

"arget of Pricing ...................................................................................................................1*

%ibliograp!y........................................................................................................................ 19

Page | %


4/23


5/23

annally etween $01 an( $0$-%n(ia


6/23

Pric

e

Cost

Demand

Competition

otels are )omple' organiFations& )reating vale *or )onsmers an( investors y )omining ri)ks

an( mortar with people an( te)hnology- 2heir per*orman)e is not only a**e)te( y ma)roe)onomi) )y)les

an( )onsmer tren(s& t is also linke( to that o* parallel se)tors s)h as airlines an( travel )ompaniesC

seasonality o* (eman(& an( pro()t innovation a**e)t per*orman)e-

Page | *


7/23

)actor affectin" pricin" in *opitalit( In'utr(

External factors

1- Econo$ic Scenario+ the e)onomi) s)enario o* the worl( has (ire)t impa)t on hospitality

in(stry- @hen e)onomi) is growing )onsmers< earning is growing an( this lea( to in)rease

in spen(ing power o* )stomers- 2his lea( to positive (eman( in hospitality in(stry- 2his

(eman( )an e )orrelate( to the (eman( o* rooms o* *ive,star hostel a)ross )ontry- 2his

in)rease in (eman( psh the pri)es p in a positive e)onomi) environment an( to )ater

)stomer (eman( in *tre ma:or player in the market plans *or e'pansion- 2his way

hospitality in(stry )ontrites not only (ire)t #DP )ontrition t also in(ire)tly

)ontrite y in)reasing the (eman( o* in*rastr)tres- 2he positive e)onomi) s)enario le( to

in)rease in (eman( o* rooms an( in short rn le( to in)rease in room tari**-

$- C+I in'e,+ %n*lation e**e)t the growth o* hospitality in(stry in two ways- .irst this lea( to

(e)rease in spen(ing power o* )onsmers an( on the other way this lea( to in)rease in

e'pen(itre in)rre( y the hotels on tilities s)h as ele)tri)ity& *el an( *oo( items-2his

lea( to in)rease in )ost o* rnning a hotel an( a(versely a**e)t the *tre growth plan-

- Seaonal 'e$an'+ ospitality se)tor6s siness has )y)li)al tren( with ma:or earning

o))rring in seasons- oli(ay (estinations s)h as #oa& P()herry& An(aman have a spe)i*i)

season where torists pre*er to arrive- 2his sees a spike in (eman( an( hen)e the pri)es o* the

room- Also in %n(ian s)enario all torist (estination see in)rease in (eman( o* smmer time

(e to ki(s< va)ation-

- Gro-t# of IT.ITES profeional er%ice+ /a)h year thosan(s o* st(ents *in(

employment in %2 se)tor whi)h is growing at a *ast pa)e- As %2 )ompanies )ontine to grow

so (oes their nee( *or hotel rooms *or varios siness engagements- orporate )lients are

the most important )lients *or hospitality se)tor as they o**er long term )ontra)ts an( ths

Page | 7


8/23

provi(e staility o* earnings to the hotel )ompany- #rowth is hotel in(stries o* !engalr

an( Pne is largely (e to growth o* %2 se)tor in these )ities-

5- Tra%el an' Touri$+ As per the 2ravel an( 2orism ompetitiveness Report $015 y the

@orl( /)onomi) .orm& %n(ia is ranke( 5$n( in the worl( *or its attra)tive torist

(estinations- %t is ranke( the 17th est torist (estination *or its natral resor)es an( 10th *or

its )ltral resor)es& with many @orl( eritage sites& oth natral an( )ltral an( ri)h

*ana- %n(ia also agge( 5th rank *or its air transport network- %n(ia is also ranke( 8th

overall *or its pri)e )ompetitiveness- @ith s)h strong *n(amentals& it is not srprising to

sggest large (eman( *or hotel in(stry in the *tre-

- Tec#nical Inno%ation+ Penetration o* new te)hnology is in)reasing in siness worl(-

People are looking *or )ost e**e)tive way to )on()t their siness- So in)rease in se o*

vi(eo )on*eren)ing may lea( to low growth o* hospitality in(stry in *tre-

Internal factors1- /ccupanc( rate+ Deman( *or rooms is highly seasonal in natre with o))pan)y varying

sstantially over the year- %n or(er to ma'imise its revene& hotel )ompanies nee( to have

knowle(ge o* pri)e elasti)ity o* the room tari**- Dring the time o* peak season pri)e

elasti)ity o* (eman( is very low an( hotels )harges more tari** *rom )stomers t in the )ase

o* lean season to ma'imiFe their revene an( pro*it hotels a(opt low pri)ing mo(el as pri)e

elasti)ity o* )onsmers is high (ring that time- Average o))pan)y rate o* *ive,star %n(ian

hotels stoo( aron( 0- per )ent in $01,1 as per "S %n(ian otel Se)tor Btlook-

$- E,panion plan+ @ith torism an( e)onomy showing a positive otlook& many players in

the in(stry are investing in )apa)ity e'pansion- Bver me(im to long term this will help

re()e Average 2otal ost o* the hotels an( in)rease the earnings *or the se)tor in general-

owever& in)rease in spply o* rooms mst e in tan(em with the (eman( otlook- As per

Page | 8


9/23

"S %n(ian otel se)tor otlook& inventory o* ran(e( rooms was pegge( at 1&08&059 in

$01,1 an( e'pe)te( to grow at 17 per)ent per annm- Bverspply o* rooms (e to new

hotels )an pt a((itional r(en on e'isting properties-

- *i"# Co$petition+ ompetition *or)es the players to go *or re()tion in pri)es to attra)t

)stomers- .or /'ample& Lemon 2rees o**ere( hge (is)onts in De)emer $01 to )lear

nsol( inventory =no))pie( rooms>- As hotel in(stry is not per*e)t sstitte with ea)h

other o**ering so there is monopolisti) )ompetition e'ists in the market-

- Geo"rap#( factor+

Leisre (estinations s)h as Shimla& #oa& Dehra(n an( others )omman( a premim over

other lo)ations as (eman( is high *rom torists (ring season-

5- Cot ele$ent+ osts are (i**erent in (i**erent )ities- .or /'ample& metro )ities s)h as

Emai an( Delhi are more e'pensive as )ompare( to tier 1 )ities like Gaipr& Agra an( other

tier $ an( smaller )ities (e to variation in in*lationary pressres- As a reslt& power& *el an(

*oo( 3 everages )osts vary- 2hs pri)es o* rooms vary a)ross )ities-

Market structure - segmentation

The market of hotel industry can be divided into these segments:

Premium 5 star hotels

Located in business district of metro cities

Cater to business travelers and foreign tourists

Considered to be the most expensive

Mid player and ! star:

Cater to: "verage foreign and domestic leisure travelers#

$ "lso caters to middle level business travelers

Page | 9


10/23

$ %&ers most of the essential services of luxury hotels 'ithout the

high costs since the tax component of this segment is lo'er

compared 'ith the premium segment

(udget hotels

Do not o&er as many facilities as the other segments but provide

inexpensive accommodation to the highly price$conscious segment

of the domestic and foreign leisure travelers

(ut these days %)% rooms kind of startup are changing the scenario

in this segment# *here they are providing above avg# service 'hile

charging only in range of +,,, - .,,, rupees

/eritage

Certain architecturally distinctive properties such as palaces and

0orts1 built prior to +25,1 have been converted into hotels# The

Ministry of Tourism has classi3ed these hotels as heritage hotels

4nclassi3ed

Cheap motels spread out across the country

ery cheap and price is the only selling point

T#e Bu'"et Concept

" ne' concept emerged as number of tourists 'illing to pay a high

price for luxurious hotels has decreased 'hile number of inbound

tourist 'ho travel has dramatically increased# Comfortable

accommodation is not luxury anymore

The "mericans innovated the 6Motel7 concept in the 8,th 'hich 'asadopted by 9uropean in the ,;s 'ith the creation of brands such as


11/23

Page | 11


12/23

Supply demand imbalance in Premium hotels category

A))or(ing to the %RA Lt(-& there has een (eman( spply mismat)h in premier hotel

segment- A))or(ing to the statista-)om& (ring last year o))pan)y rate was aron( 55,0;-

Also growth a((ition in spply o* premim rooms is more than 10; e')ept this year it is

only ;- Bn the opposite si(e o))pan)y growth was s 5;- 2his will lea( to *rther

(eman( spply mismat)h an( hotels have to wait *or rather long time e*ore they )an ale to

generate pro*its-

Page | 12


13/23

YEARS

00.02 T/

013.145

00.02 002.10 010.11 011.1 01.13 013.14 CAGR

In%entor( 8&75 1&795 71&51 8&1 9&79 108&059

17-;; #rowth -0 $7-5 15-8 17-9 10-9 15-

/ccupanc(

6

59-5 59-5 0- 59- 58- 57-1 ,0-8;

; hange ,1-0 ,0-1 1-8 ,$-$ ,1-5 ,$-$

R+! $8&8$ &78 &8 9&9 5&58 1&78 1-;

; hange ,11-0 $7- 17-9 15- 9-$ 1$-0

ARR 7&7$$ &89 &51 &0$ 5&80 5&87 ,5-9;

; hange ,-0 ,1-0 0- ,7- ,-8 ,$-0

Re%+AR &598 &81 &97 &575 &88 &$ ,-7;; hange ,1-0 ,1-0 $-$ ,9- ,5-$ ,-$

&P'demand for room nig!ts( )&&')verage &evenue per room

&evP)&*' &evenue per )vailable &oom

B))asional sprts in room o))pan)y rates an( room tari**s o**er a glimmer o* hope on

improving pro*its- !t a re)overy has een el(ing the se)tor *or many years- Shares o*

l'ry hotel )hains there*ore have *allen signi*i)antly )ompare( to roa(er en)hmark

in(i)es-

2he sitation is nlikely to improve soon& going y the spply a((ition *ore)ast an( )rrent

ma)roe)onomi) s)enario- Analysts say that the slight pti)k in room tari**s in some l'ry

(estinations (ring the latter part o* *is)al year $015 was (e to some improvement in

inon( torism an( (omesti) torist movement- Also& the )apa)ity a((ition (ring the year

was (own to ;-

Page | 1%


14/23

Eoreover& the gap etween spply o* rooms an( (eman( growth is likely to wi(en in the

)oming arters- A))or(ing to %RA& in the months ahea( till Ear)h $01& spply o*

premim hotel rooms is likely to go p y 1$; an( then 1; the year a*ter-

Bn the (eman( *ront& etter siness )on*i(en)e is yet to translate into more travel- @eak

)orporate reslts an( s(e( wage an( salary hikes are a threat to (is)retionary spen(ing-

.oreign torist arrivals =.2As> grew in the *irst si' months o* the )alen(ar year& thogh the

growth rate was less impressive than the year,ago perio(- Some analysts say the %nternet an(

the te)hnology revoltion has also impa)te( a(versely the nee( *or siness travel- %n times

o* weak pro*itaility& in(stry )hose to )t (own (is)retionary e'penses like travel-

en)e& o))pan)y rates may improve only marginally- !t the higher room )apa)ity may

keep the revene per average room at )rrent levels- ertainly& with rising )osts an( )apital

e'pen(itre& low revene will hrt pro*its- 2he only silver lining is that in the last two years&

premim hotels have )t (own (et- Lower revene an( pro*itaility notwithstan(ing&

interest )ost as a per)entage to sales has )ome (own- Some are even strategi)ally in)reasing

the share o* *oo( an( everages in the siness as it is less )apital,intensive when )ompare(

to the a((ition o* rooms- !t& with o))pan)y levels stagnating at an average o* 5,0; *or

the last three to *or years& one )annot e'pe)t a (rasti) trnaron( in the se)tor


15/23

Q

PS

D’

Q’e

P’e

D

Qe

Pe

Q

P

SD

Q’e

Pe

Qe

P’e

S’’D’

Increase is number of rooms oered or increase in supply

,ue to $ig$er "eman" forecast in reious !ear man! #ig la!ers a""e" more no. of

rooms in t$eir ortfolio. &ut su""en "ecrease in "eman" coule" it$ $ig$ sul! of

rooms ill furt$er re"uce t$e e/uili#rium ricing.

Page | 1)


16/23

+ricin" Strate"ie

2he pri)ing strategy *ollowe( y the torism in(stry is a mi' o* *ollowing pri)e strategies+

1- Secon' 'e"ree price 'icri$ination+ All the

ma:ority o* *ive,star hotel provi(e variale

room tari** (epen(s on the nmer o* (ays a

person stays or nmer o* rooms a person is

willing to ook- 2his kin( o* ehavior )an e

e'plaine( y se)on( (egree pri)e

(is)rimination where pri)e o* pro()t is

(epen(ing on antity (eman(e(- %n this type

o* strategy )ompany )annot (i**erentiate etween (i**erent types o* )stomers an(

hen)e& (epen(ing on their (eman( o* the pro()t the pri)ing is set *or ea)h )stomer-

2hs& lk or(ers attra)t more e)onomi)al pri)es& this is evi(ent in event planning

se)tor& where more is the a(ien)e& less is the per person )ost *or the whole event-

De to lk or(er& e)onomies o* s)ale are ene*itte( to the pro()er& who then passes

a proportion o* this ene*it to the *inal )stomer in *orm o* (is)onte( rates-

ere& in the s)reenshot elow se)on( (egree pri)e (is)rimination is provi(e( y an

online event planning mer)hant ase( on the grop (is)onts-

Page | 1*


17/23

$- T#ir' 'e"ree price 'icri$ination5 %n this sort o* pri)ing strategy& )ostmers are

(ivi(e( into varios segments ase( on the *reen)y o* their visitsH sage o* servi)es

or ase( on (emographi)s- /a)h )stomer segment is provi(e( with (i**erent kin( o*

ene*its in *orm o* (is)onts or spe)ial ratesH servi)es- 2his )an e n(erstoo( *rom

the (epi)tion aove& where the (is)rimination is (one *or senior )itiFens an( military

an(Hor government employees- At many pla)es& like amsement parks an( even

transportation servi)es st(ent (is)onts& )ompany (is)onts& )orporate (is)onts are

given y the servi)e provi(ers-

!ase( on the history an( *reen)y o* availing the servi)es *rom the servi)e provi(er&

(is)rimination )ol( e (one as premim )stomer an( reglar )stomer or also&

spe)ial pri)ing )ol( e (one *or the 1 st time sers so as to )onvert them into

permanent ones-Bn a roa(er perspe)tive the strategy *or a )stomer segment is (one ase( on the

repone to price elaticit( of 'e$an'7 en)e& i* we see& tu'ent an' enior citi8en

'icount are given as these )stomer segments are $ore elatic to price elaticit(

of 'e$an'7

- T(in" an' Bun'lin"+ 2o in)rease the revene o* hotels& sometimes we see that a

hotels are o**ering pri)e whi)h in)l(e )omplimentary reak*ast an( sometimes a

Page | 17


18/23


19/23

Bn the home page o* Eake my trip& one o* the %n(ia


20/23

/ighprice

Lo'=uality

/ighprice

/igh=uality

Lo' price

Lo'=uality

Lo' price

/igh=uality

2he same tren( is evi(ent in the travel in(stry also& where airlines an( now& even

%R2 =n(er premim tatkal s)heme> *ollow (ynami) pri)ing strategy ase( on the

(eman(-

2o over)ome the week (eman(s (ring o** seasons o* o** timings& servi)e provi(ers

)an *ollow Special 9 E%ent pricin" trate"(& to attra)t more (eman( o* )stomers-

2his strategy is evi(ent in restarants (ring ln)h time on week(ays& when the

(eman( is sally low& many restarants provi(es **et system an( spe)ial mens&

wow @e(nes(ays at this time to attra)t )stomers-

Tar"et of pricin"

2he %nternet has (ramati)ally )hange( hospitality pri)ing- %ts spee( an( transparen)y have

remove( most arriers etween )stomers an( sppliers& one nee( not e an in(stry insi(er

to *in( the est pri)ing to sit yor nee(s- Sites like BIB Rooms& makemytrip-)om o**er

varios options to the yer to )hoose *rom- Iet& hotels an( restarants still nee( to make

pri)ing (e)isions-

Page | 2+

Pric

0uali


21/23

Eany *a)tors in*len)e the pri)es& in)l(ing yor )ompetitors< rates an( pro()ts- Br goal is

to (evelop a pri)ing strategy that pla)es one6s ran( an( its pro()ts in a )ertain position

relative to yor )ompetition- Bne way to visaliFe this is the pri)e,vale matri'-

2he position o* hotel rooms within this matri' is a *n)tion o* one6s ran( proposition&

)ompetitors& an( pri)ing o:e)tives-

• Are yo looking to ma'imiFe short,term revenes or pro*itJ

• Are yo seeking higher pro*it margins in a l'ry market with spora(i) salesJ

• Do yo nee( to (i**erentiate more to penetrate the marketJ

Bn)e pri)ing o:e)tives are i(enti*ie(& pri)es o* the )ompany an( those o* )ompetitors are

plotte( on the pri)e,vale matri'- Rates nee( tweaking i* )rrent pri)es (o not )onvey the

ran( positioning relative to )ompetitors or is not syn)hronos with the pri)ing o:e)tives o*

the )ompany-

.ollowing strategies )an e employe( to )orre)t pri)es relative to )ompetitors+

S:i$

2his strategy )learly positions the )ompany aove the restC it tells )onsmers something is

spe)ial =i-e-& worth paying more *or> aot yor pro()ts- 2o skim& set yor pri)es higher than

the )ompetition (oes in or(er to Kskim o** )stomers who are willing to pay more- 2his

strategy )an e highly pro*itale- 2hogh high pri)es imply high ality *or many )stomers&

it


22/23

2his allows one to stay )ompetitive *or a larger pool o* )stomers& yet (oesn


23/23

Biblio"rap#(

• http+HHwww-wtt)-orgH,Hme(iaH*ilesHreportsHe)onomi);$0impa)t;$0resear)hH)ontries

;$0$015H

• http+HHwww-livemint-)omHPoliti)sHhe:s!FNG0!B@8ar1"LH2ravel,an(,torism,in(stry,

to,grow,75,in,$015,report

• http+HHwww-statista-)omHstatisti)sH1$Hmonthly,o))pan)y,rate,o*,hotels,in,in(iaH

• http+HHwww-statista-)omHtopi)sH$07Htravel,an(,torism,in(stry,in,in(iaH• http+HHwww-'otels-)omHenHrevene,managementHrevene,management,ookHhotel,pri)ing

• "S %n(ian otel se)tor Btlook
http://www.wttc.org/-/media/files/reports/economic%20impact%20research/countries%202015/http://www.wttc.org/-/media/files/reports/economic%20impact%20research/countries%202015/http://www.livemint.com/Politics/h3ejs6Bz6NJ0BOW86ar1VL/Travel-and-tourism-industry-to-grow-75-in-2015-reporthttp://www.livemint.com/Politics/h3ejs6Bz6NJ0BOW86ar1VL/Travel-and-tourism-industry-to-grow-75-in-2015-reporthttp://www.statista.com/statistics/314326/monthly-occupancy-rate-of-hotels-in-india/http://www.statista.com/topics/2076/travel-and-tourism-industry-in-india/http://www.xotels.com/en/revenue-management/revenue-management-book/hotel-pricinghttp://www.wttc.org/-/media/files/reports/economic%20impact%20research/countries%202015/http://www.wttc.org/-/media/files/reports/economic%20impact%20research/countries%202015/http://www.livemint.com/Politics/h3ejs6Bz6NJ0BOW86ar1VL/Travel-and-tourism-industry-to-grow-75-in-2015-reporthttp://www.livemint.com/Politics/h3ejs6Bz6NJ0BOW86ar1VL/Travel-and-tourism-industry-to-grow-75-in-2015-reporthttp://www.statista.com/statistics/314326/monthly-occupancy-rate-of-hotels-in-india/http://www.statista.com/topics/2076/travel-and-tourism-industry-in-india/http://www.xotels.com/en/revenue-management/revenue-management-book/hotel-pricing

Economics project on hotel industry

Documents

Transcript of Economics project on hotel industry