Monday, September 19, 2016

Seasonality in hotel demand

Over a typical year, hotel demand spikes in the summer, and then sharply collapses as school starts.  It picks up in the fall, and then then trails off in the winter months.  If you build capacity, you have to figure out not only how to accommodate peak occupancy (78%), but also how to make money when demand falls.  One obvious solution is to turn fixed costs (like permanent employees) into variable costs (temporary ones).

Another issue is whether seasonal demand becomes more elastic (probably), which means lower margins during seasonal peaks.

2 comments:

  1. While moving permanent workers to temporary workers, and using a more flexible staffing helps with that portion of the costs, there is still the variable cost issues of such things as heating/cooling. The hotel still needs to maintain set temperatures within the building to prevent breakdown, water issues, or even to meet codes. As such, isn’t it more viable not to just look at the costs that can be controlled and varied, but also to seek out opportunities that would offset the falloffs of the peak times?
    Many hotels use off-season discounts as ways to help stabilize their business operations throughout the slower seasons. If they work with local communities and organizations, there is the opportunity to bring in large groups through seminars, trainings, corporate events. This would also allow them to offset, but then the question becomes do they utilize the off-season discounts with the other events, or do they keep them separate.
    An example I’ve seen is a Shoreline convention center holds a large sporting event. It is a three-day event three weeks before a big holiday, and brings in a huge increase of visitors to the area. Those that are associated with the event do not receive off-season discounts, and rates are “negotiated” between the event sponsor and the area hotels to set the price at a slightly higher than normal level. The difference will be a commission base to the event sponsor, for bringing the event to the area.
    If such an event is only significant for a short period of time, the costs will increase for this event; they incur additional variable costs; and need to ensure enough seasonal employees are available to help with the work. There may not be any opportunity costs lost because there isn’t necessarily any other option available to them during this time of year, so there is likely minimal opportunity cost. However, I am sure there are sunk-cost fallacies throughout the scenario?

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