MANAGING SUPPLY AND DEMAND

CHAPTER 4

DEMAND AND SUPPLY

• Nature of the Problem• A hotel guest room is a perishable product• If a room goes unsold on any one night, the

room revenue is lost forever.• The challenge of selling out each night is made

difficult by the fact that the supply of hotel rooms is fixed (in the short run) while demand for these rooms is variable.

DEMAND AND SUPPLY

• When the supply of rooms is greater than the demand for them, rooms are left empty and the revenue is lost forever

• When the demand for rooms is greater than the supply of available rooms, the hotel is 100 percent occupied.

• But, if more rooms had been available, the hotel would have achieved more revenue.

THE NATURE OF DEMAND• Weekly Variations in Demand• The demand for hotel rooms for any

given property is extremely variable.• Devide demand for hotel rooms into

the ‘four-day market’ and the ‘three-day market’.

THE NATURE OF DEMAND• Four-day market– Refers to hotels that concentrate on

business travelers who tend to frequent the hotel on Mondays through Thursday and prefer to get home for the weekend.

• Three-day market– Leisure travelers tend to stay in hotels on

Friday through Sunday nights over the course of a three-day weekend.

– Business-oriented hotels will have strong occupancy during the weeks but tend to have problems in filling rooms on the weekend.

THE NATURE OF DEMAND• Seasonal Variations in Demand– Demand can be classified as off-season, high-

season@on-season and shoulder periods– Off-season• is when demand is weak and occupancy is

low• In some cases, a hotel may choose to close

down rather than absorb the costs of remaining open when demand is weak.

– On-season• When demand is strong and occupancy is

high– Shoulder season• Time between the off- and the on-season.

BUSINESS DEMAND• The business-related travel market

segments can be broadly categorized as follows:– Regular business travel– Business travel related to meetings,

conventions and congresses– Incentive travel

BUSINESS DEMAND• Regular Business Travel– Business travelers are more important

to travel suppliers than their hotel total numbers would indicate.

– They use airlines, rental cars, hotels and travel agents to a greater extent than do pleasure travelers.

– The business traveler is more time sensitive;service quality is more important than price; and he or she is more experienced and demanding.

BUSINESS DEMAND– Business travel is a nondiscretionary

expenditure. The business traveler must travel to specific places to do business.

– As a result, business travel is more stable and less price resistant.

– There is movement away from upscale accommodations toward more moderate or economy-class accommodations.

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BUSINESS DEMAND• Meetings, Conventions and Congresses– The services considered importanat are, in

order of importance:1. No-smoking rooms2. Concierge3. 24-hour room service4. Gift shop

– The second most important factor is the presence of adequate meeting facilities

– Convention locations usually change from year to yaer as attendees do not want to return to the same spot each year

BUSINESS DEMAND• Incentive Travel– Define as ‘a global management tool that

uses an exceptional travel experience to motivate and/or recognize participants for increased levels of performance in support of organizational goals’

– Travel is touted as doing a better job of satisfying people’s needs for achievement, recognition and rewards than cash or merchandise

THE PLEASURE AND PERSONAL TRAVEL MARKET

• The market can be subdivided into those traveling as individuals (or as a family unit) and those traveling as part of a group.

• Individualsi. Getaway/family travelers. They tend to visit places that

are a good place for children, where friends and family live, scenic etc

ii. Adventurous/Educational Travelers. They tend to engage in cultural activities such as visiting museums, galleries, opera and theater, visit places that someone else they knew had been to, offer a number of things to see and do etc

THE PLEASURE AND PERSONAL TRAVEL MARKET

iii. Gamblers/fun travelers. They want a highly popular place where they can gamble, participate in recreation or sport and enjoy a good night lifeand fine dining. They are also concerned about price, the availability of good beaches, sun bathing and good weather. On the other hand, they are less concerned about cultural activities, being close to friends and relatives and the presence of amusement parks.

THE NATURE OF SUPPLY

In the short run, the number of rooms that a hotel has for sale on any given night is fixed. More rooms, floors and additions can be built, but it may take several years before the necessary feasibility, financing and construction is completed.

THE NATURE OF SUPPLY

Problem When the demand for hotel rooms is greater

than the supply provided, guests have to be turned away.

This is particularly difficult as a hotel room is a very perishable product.

If it is not sold tonight, the sale is lost forever.

THE NATURE OF SUPPLY

Problem When supply is greater than demand, there are

empty hotel rooms. Yet the costs (particularly fixed) of running the hotel go on. The interest must still be paid, lights must be kept on, and the heat still runs. It may be possible to reduce some of these costs (turn off the heat on unoccupied floors) but the fact remains that the hotel industry bears the burden of having high fixed costs that do not vary as demand varies.

THE NATURE OF SUPPLY

The extremes for management are to build for peak demand and have excess capacity (underutilization of resources) during off-peak, or to build at a level that will ensure high occupancy at all times but will result in demand being turned away.

The task of balancing supply and demand falls to the marketing department.

MARKETING• Definition

Marketing can be thought of as a total systemdesigned to plan, price, promote and make availableto selected markets hospitality products andservices in the form of benefits and experiences thatcreate satisfied guests and achieve organizationalobjectives.

• This definition encompasses several ideas.

MARKETING• Objectives

satisfy the guests while producing profit for the company

« if you satisfy the customers but fail to get the profit, you’ll soon be out of business; if you get the profit but fail to satisfy the customers, you’ll soon be out of customers »

the idea is to generate profits by producing satisfied customers

MARKETING• Objectives

managers focus on producing satisfied and motivated employees who will perform the employees focus on producing satisfied

guests guests will return and tell their friends. the result will be increased revenue, profits and satisfied shareholders and/or owners.

MARKETING• Total System

indicates that marketing is much more than advertising, much more than sales promotion.

marketing encompasses everything from the development of the concept, product, and/or service to how it should be priced, promoted and made available to people.

It works only if an exchange is made between buyer and seller that benefits both.

the buyer receives something of value and the organization receives revenue.

MARKETING• Selected Markets

encompasses the idea of market segmentationmarket segmentation is the process of taking a

heterogeneous market and dividing it into smaller, homogeneous segments.

Each segment is made up of individuals who have similar profiles.

The profiles of one segment, however, are different from profiles of another segment.

MARKETING• Hospitality Products and Services

While hotels provide various products and services, guests buy benefits and experiences.

For example: the mini refrigerator in the room is a combination of products (the various items in the refrigerator) and service (actually self-service).

MARKETING• Marketing Mix

Marketing mix include the 4 P’s:1) Product/Service2) Price3) Promotion/Communication4) Place/Distribution

A separate marketing mix needs to be developed for each and every segment of the market.

DEVELOPING A MARKETING PLAN• There are 6 steps involved in the development

of a marketing plan:1) Conduct a marketing audit2) Select target markets3) Position the property 4) Determine marketing objectives5) Develop and implement action plans6) Monitor and evaluate the marketing plan

DEVELOPING A MARKETING PLAN1. Conduct a Marketing Audit

an analysis of the guests, the property and the competition

Guests- to develop a profile of the hotel guests and to evaluate in an unbiased way how the operation stacks up relative to the competition in providing what they want.

Property- an unbiased evaluation of the strengths and weaknesses of the operation.

Competition- a competing facility is any operation that seeks to attract the business being sought by the resort under consideration

DEVELOPING A MARKETING PLANThe purpose of competitive analysis are:I. Profitable market segments being served by

competitors that are not being served at the operation under study

II. Some competitive benefit or advantage the property has that cannot be matched by the competition

III. Weaknesses in the marketing strategy of the competition that can be capitalized on.

DEVELOPING A MARKETING PLAN2. Select Target Markets

market segments should be selected on the basis of size, likelihood of growth, competitive position, the cost of reaching the segment and how compatible the segment is with the company’s objectives and resources.Revenue grid- identifies how much revenue is brought in from the various segments of the market presently being served.

DEVELOPING A MARKETING PLAN3. Position the Property

Positioning statement the image that customers have of an operation is its

position in the marketplace. A good positioning statement will accomplish several

things:a) It will create an image in the minds of the customers as to what

it stands for.b) It will describe the benefits the hotel offers to the guests.c) It will differentiates the property from the competition.

DEVELOPING A MARKETING PLAN4. Determine Marketing Objectives

Criteria- the very act of setting objectives increases the likelihood that they will be achieved.

Objectives should be set for each segment of the market to which the resort is appealing.

Objectives should be results oriented.

DEVELOPING A MARKETING PLAN5. Develop and Implement Action Plans

o involves the development and execution of a specific marketing mix for each segment of the market being sought.

Product-Service Mixo consists of the various products and services offered by

the operation in an attempt to satisfy guest needs.

Priceo The importance of price comes from the fact that it is

one-half of the price-value relationship that customers seeks.

o In the hotel business much of the pricing that goes on is product-driven pricing.

DEVELOPING A MARKETING PLANPromotion-Communication Mixconsists of all of the communications between the hotel and its guests, media advertising, word of mouth, merchandising, promotion, public relations, publicity and personal selling. Page 102Place-Distribution Mixthe channels that connect the company and its various customersDirect channel of distribution means that the resort communicates directly with its guestsIndirect channel of distribution means when there are one or more intermediaries between hotel and its customers.

DEVELOPING A MARKETING PLANAction Plans to Manage Supply and Demand The room revenue generated in a hotel is a product

of 2 things – average room rate and percentage occupancy.

Room revenue = average room rate x no. of rooms sold

Percentage occupancy = no of rooms soldtotal rooms

To increase revenue, management needs to sell more rooms at a higher price.

As the price increases, demand is reduced.

DEVELOPING A MARKETING PLAN Management is faced with dilemma of what to

emphasize – increase price or focus on selling more rooms.

So the management create this rules:Supply greater than demand: Improve Occupancy (SELLING MORE ROOMS)Demand greater than Supply: Improve average room rate (INCREASE PRICE OF ROOM)

DEVELOPING A MARKETING PLANSUPPLY EXCEEDS DEMANDThe 3 strategies that can be use when demand isforecast to be weak are:

I. Increase demand by seeking out additional market segments by reducing price or through increased promotion.

II. Reduce supply means reduce costs such as a few rooms are taken out of inventory each day to go through a process of deep cleaning. Another strategy is to close off entire floors . The most drastic scenario is one where the entire hotel is closed for off season.

III. Redistribute supply by change the type and mix of hotel rooms to appeal to the tasteof the changing market.

DEVELOPING A MARKETING PLANDEMAND EXCEEDS SUPPLYThe 3 strategies that can be use when demand isforecast to be strong are:

I. Reduce demand by increase room rate or eliminate discount.

II. Increase supply. In the long run, more rooms can be built. In the short run, a hotel can increase its bed capacity.

III. Redistribute demand by move bookings from periods of high demand to periods of low demand.

DEVELOPING A MARKETING PLANBUDGET a common way of developing a budget is to base it

on a percentage of sales. Another option is to spend in line with what the

competition is spending To spend what the business can afford Actions plans are develope that will be successful

and an amount budgeted to ensure their completion.

DEVELOPING A MARKETING PLAN6. Monitor and Evaluate the Marketing Plan

When marketing plan is successful – there are more guests coming in more often and paying higher prices.

When marketing plan is not worked – fewer guests coming in less often and spending less.

The marketing plan must be monitored at each step of the way to ensure that it is on track and corrective action must be taken at each step of the way if it is off track.