2018-11-30
Dr Mirosław Nalazek Demand side and supply side of
Compendium of Tourism Basics
Lecture 1
Tourism demand characteristics and
determinants.
Conceptual Demand-side
Definitions
 UNWTO definition (The activities of persons
travelling to and staying in places outside their usual
environment for not more than one consecutive year
for leisure, business and other purposes).
 While this is not a strict technical definition, it does
convey the essential nature of tourism, i.e.:
 Tourism arises out of a movement of people to, and their
stay in, various places, or destinations.
 There are two elements in tourism – the journey to the
destination and the stay (including activities) at the
destination.
Technical Demand-side Definitions
From a ‘technical’ point of view, attempts to define tourism have been
led by the need to isolate tourism trips from other forms of travel for
statistical purposes. These ‘technical’ definitions stipulate certain criteria
for trips to be considered as tourism. They include the following:
• Minimum length of stay – one night (visitors who do not stay
overnight are termed same day visitors or excursionists).
• Maximum length of stay – one year.
• Strict purpose of visit categories.
• A distance consideration is sometimes included in relation to the term
‘usual environment’ – the UNWTO recommendation is 160
kilometres.
tourism
Most commonly two approaches are taken:
 Demand side
 Supply side
Conceptual Demand-side
Definitions (cont’d)
 The journey and stay take place outside the usual
environment or normal place of residence and work
so that tourism gives rise to activities that are distinct
from the resident and working populations of the
places through which they travel and stay.
 The movement to destinations is temporary and short
term in character – the intention is to return within a
few days, weeks or months.
 Destinations are visited for purposes other than
taking up permanent residence or employment in the
places visited.
Key Terms – visitor, tourist, same-
day visitor
 A visitor is a traveller who is included in
tourism statistics, based on his or her
purpose of visit, which includes holidays,
visiting friends and relatives, and business.
 A tourist is a visitor who spends at least one
night in the country visited.
 A same-day visitor is a visitor who does not
spend the night in a collective or private
accommodation in the country visited.
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Leiper’s Tourism System

A Tourism System - Leiper’s Model
The System consists of the following elements:
 Tourists

 Geographical elements

 Traveller generating region

 Transit region
 Tourist destination region
 The tourism sector

Source: Leiper, 1990

Types of Tourism
Purpose of Visit

United Nation ‘94 (UNWTO)

• Residents travelling only within
Domestic tourism their country of residence

• Involving non-residents travelling

3 categories (according to UNWTO): Inbound tourism of the given country
 Leisure/recreation
• Involving residents travelling to
 Business/professional
Outbound tourism another country

 Other purposes

World Tourism Organization

• Domestic tourism and inbound
Internal tourism tourism

• Domestic tourism and

National tourism outbound tourism

International • Inbound tourism and outbound

tourism tourism

Key Terms - Definition of a resident

 For the purpose of international/domestic tourism
statistics, a person is considered to be a resident in a
country/place where he/she has lived for most of the International tourists
past 12 months.
 As regards international tourism, place of residence
usually refers to the country of residence.
 As regards domestic tourism, place of residence is
often defined as an administrative unit, like
municipality or region.

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Classification of international visitors
Source: WTO, 2000
Characteristics of tourist services
Intangibility
 The attributes of tourist services cannot be
grasped by any of the five senses
 Tourist service product cannot be easily
evaluated or demonstrated in advance of its
purchase, the benefits of products cannot be
demonstrated,
 Therefore purchase is based on consumer
expectations
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5 main sectors in travel and tourism
Services versus goods – special
characteristics of services
Services are fundamentally different from goods
for the following reasons:
 Intangibility
 Lack of ownership
 Perishability,
 Inseparability
 Heterogeneity
Intangibility (continued)
 In considering pricing and services marketing, it is
often difficult for the consumer to measure service
value and quality.
 Intangibility can cause lack of confidence on the part
of the consumer .
 To overcome this, consumers tend to look for
evidence of quality and other attributes, for example
in the decor and surroundings of the restaurant, or
from the qualifications and professional standing of
the receptionist at the hotel
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Goods/Services Continuum
Intangibility (continued)

 Attributes showing level of services are called by

some authors „physical evidence”, which
according to them is part of marketing-mix (7P
model).
 Therefore it is particularly important to present
the product through printed brochures, videos,
Web sites etc.
 Branding (hotel chains) make offerings more
tangible.

Lack of ownership Perishablility

 It is impossible to own and store a service like it is
the case with a product.
Services are used or hired for a period of time.

For example when staying in the hotel the guest buys

„The right of temporary usage” of the room – the
right to use the room for agreed period of time.
 If not sold by a particular time, the
opportunity to sell it again is gone,
Therefore an empty seat on a plane or

hotel room, for example, are a lost
opportunity forever.
 It cannot be stored for future occassions,
 The problem is complicated by seasonality
of demand and fixed capacity

Perishablility (continued) Inseparability

 Therefore complex pricing and promotion
policies are required to smooth out
demand curves caused by the tourism’
seasonality,
 That is why reservations and bookings are
so important in tourism business. They
have direct impact on economics of tourist
 Services are produced and consumed at the
same time, unlike goods which may be
manufactured, then stored for later distribution.
 The waitress in the restaurant, or receptionist in
the hotel are inseparable part of the service
offering.
Thus marketing management is especially


important in the hospitality industry

businesses.
 Each trip is always the possibility of a new
experience

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Inseparability (continued) Heterogeneity

 This means that the service provider becomes
an integral part of the service itself.
 The client also participates to some extent in
the service, and can affect the way it is
delivered.
 Delivery of services is inconsistent due to
employee variance and varying needs of
customers
 Customers are also varied and have different
wants and needs
 The use of self-service technologies in an
attempt to standardize service

Heterogeneity & Invariability A definition of tourism demand

 Because a service is produced and consumed
simultaneously, and because individual people make
up part of the service offering, it can be argued that Tourism demand are tourism
a service is always unique; products that people (tourists) are
 It only exists once, and is never exactly repeated. willing and able to buy at each
specific price in a set of possible
 This makes the issues of service quality and
prices during a specified period of
uniformity very important.
time.
 Very important is personnel training and careful
monitoring of customer satisfaction and feedback –
this can be amongs others achivement by
maintaining of high standards.

Total tourism demand – 3

components/situations Effective demand
There are 3 basic components of total demand for  Actual number of participants in tourism or
tourism:
those who are traveling, i.e. de facto tourists
 Effective or actual demand - actual number of
participants in tourism or those who are travelling,  Commonly and easily measured
i.e. de facto tourists.  Almost all of tourism statistics refers to
 Suppressed demand – is made up of that section
of population who do not want to travel for some
effective demand
reason (presented at later slide).
 No demand – represented by those who simply do
not wish to travel or are unable to travel.

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Determinants of suppressed demand

Determinants of suppressed demand
 Travel is expensive and requires a certain
threshold of income before people can
undertake tourism. It competes with other
products for available funds.
(cont’d)
 Family circumstances such as commitments, those
who are single parents, or have to care for elderly
relatives may prevent travel.
Government restrictions such as currency controls


and visas (both inbound and outbound) in some

 There may be different reasons for countries.
suppressed demand for example:  Fear to travel (because for example of possibility
 Lack of time may be a problem for some of terrorist attacs) is real barriers for some
individuals-cannot afford to be away from home individuals.
 Physical limitations (such as ill-health) are a
significant reason for many people not traveling.

Suppressed Demand Types

Two elements of supressed demand can be distinguished:
 First, potential demand refers to those who will travel at some
future date if they experience change in their circumstances (for Elasticity of tourism demand
example, their pruchasing power may increse, or they may
receive more paid holiday entitlement.
 Second, deferred demand is the demand postponed because of
a problem in supply environment, such as lack of capacity in
accommodation, weather conditions or, perhaps, terrorist
activity. This, too implies that when the supply conditions are
more favorable, those in the deferred demand category will
convert to effective demand at some future date.

Elasticity of Tourism Demand Four elasticity measures

 Elasticity describes the sensitivity of one  Income elasticity
variable to changes in another variable.  Price elasticity
 Elasticity measures how much one  Cross price elasticity
variable changes in direct response to
 Marketing elasticity
changes in another variable.
 Tourism demand exhibits four main types
of elasticity relevant for policy.

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Income elasticity of demand

 Income elasticity of demand measures the
responsiveness of demand to a change in income.
Income elasticity of tourism demand This relationship can be expressed as a formula:
 % change in demand
 Ei = -----------------------------
 % change in income

 E < 1 inelastic
 E = 1 unitary (proportional) elasticity
 E > 1 elastic

The relationship is usually positive

Maslow’s Hierarchy (Pyramid) of

Engel’s Law Needs
 An economic theory introduced in 1857 by Ernst Self
Engel, a German statistician, stating that the Actualization
Esteem Needs
percentage of income allocated for food purchases (self-esteem)
decreases as income rises.
 As a household's income increases, the percentage of Social Needs
(sense of belonging, love)
income spent on food decreases while the proportion
spent on other goods (such as luxury goods, tourism Safety Needs
etc.) increases. (security, protection)

Physiological Needs
(hunger, thirst, rest)

Structure of individual consumption

Maslow’s Hierarchy of Needs (cont’d.) expenditure of household sector in Poland
and EU in 2012

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Price elasticity Tourism demand and price

 Price elasticity: the extent to which  This negative relationship is commonly called the law of
demand for a tourism product changes demand.
because of a change in the price of that % change in demand
product itself. Ec = -----------------------
 Like in case of other products and services % change in price

price and tourism demand have an inverse

 E < -1 inelastic
relationship.  E = -1 unitary (proportional) elasticity
 As its price falls, the quantity demanded for a  E > -1 elastic
tourism product should rise, and as its price
rises, the quantity demanded should fall.

Price Elasticity Price elasticity in tourism

 If the %age change in demand is greater than
the %age change in price which caused it, then
demand is elastic.
 If the change in demand is less than the %age
change in price which caused it, then demand is
inelastic.
 If responsiveness of demand is exactly
proportional to the change in price, then
elasticity is unitary.
 Price elasticity in tourism may differ
depending on the type of tourism especially
on whether the product is a necessity or a
luxury.
 Generally demand for business travel
(necessity) is less price elastic than for
holiday travel (luxury).

Difference in price elasticity between

Examples: Hotel Sofitel – Warsaw & demand for holiday and business
Hotel Mercure Zakopane travel
 Suppose Sofitel Hotel in Warsaw increased the prices by 10%,  Question: How the difference between price
as consequence the occupancy dropped 6%.
 - 6 % decrease in demand elasticity for holiday travel and business
 Ec = --------------------------------- = - 0,6 travel can be explained?
 10 % increase of price
In this case the demad is inelastic.
 Suppose Mercure Hotel in Zakopane decreased the prices by

10%, as consequence the occupancy increased by 15%. :

- 15 % decrease in demand


 Ec = ----------------------------------- = - 1,5
10 % increase of price


This case represent the elastic demand

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Difference between price elasticity
for holiday travel and business travel
▪ For holiday travellers they have freedom of choice
regarding where/when/how long and even whether
to go on holiday at all. Leisure travellers can shop
competitively, checking prices, value for money,
special offers etc. So income and price elasticities are
higher than for business travellers.
▪ For business travellers the decision of when/where or
even whether to go is often beyond their control.
(attending conferences, meetings, product launches
etc) So business travel is price (and income) inelastic.
Relative prices
 In their destination choice decision, tourists will consider the
price (cost of living) at the destination relative to the costs of
living at the origin and substitute destinations.
 Thus, two types of prices must be considered in the demand
function of tourism:
 relative price between the destination and the source country;
 relative price between different competing destinations which generates
the substitution price effect.
Substitute products
 Substitute products (goods or services)
are those that can be used in place of one
another but have different attributes .
 The products exhibit positive cross price
elasticity - a rise in the price of one product
will lead to a rise in the quantity demanded of
the other product and vice versa.
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Exchange rate elasticity
▪ Exchange rate affects the cost of international travel
travel, both incoming and outgoing thus influencing
the demand.
▪ A strong PLN increases the cost of an stay in Poland
and reduces the spending power of visitors.
▪ It does however increase the purchasing power of
Polish tourist (and outgoing tour operators) going
abroad and as result reducing the costs of outgoing
trips.
▪ A drop in the value of the PLN (versus USD and/or
EUR) is positive for Poland incoming tourism as it
lowers the cost of visiting the country. Visitor
numbers and spending will increase.
Cross-price elasticity of demand
Substitute products and
complementary products
Substitution for inferior products
 The income elasticity of demand for inferior
products is less than zero (E <0). eg. holidays
at a domestic caravan park (inferior product)
as opposed to a hotel or motel (normal
product), or five star resort (luxury product).
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Cross-price elasticity of demand

Complementary products
Cross price elasticity: the extent to which demand for a tourism product
 Tourism products are often consumed together, such changes because of changes in the price of substitute goods and
as an air flight and a hotel room along with a complementary goods.
sightseeing tour.
 So increase in demand for one product may cause
increase in demand of complementary product. Cross Elasticity of Demand between goods A
(complementary) and B (substitute)
 The products exhibit negative cross price elasticity - a
rise in the price of one product will lead to a fall in  % change of demand for produkt A
the quantity demanded of the other product, and vice  EAB = -------------------------------------------
versa.  % change in the price of product B

Cross price elasticity: examples

 Example 1: the demand for air travel for
leisure purposes from London to Paris will be
affected by changes in the price of Eurotrain Marketing elasticity of demand
or ferry travel (substitute product).
 Example 2: changes in the price of skipasses
in Austrian ski resorts will affect the demand
for accommodation in those resorts
(complementary product)

Marketing elasticity of demand Marketing elasticity

 Marketing elasticity (Em) measures the
responsiveness of sales to changes in
advertising/marketing expenditures.
 It is measured by the ratio of the percentage
change in sales to a percentage change in
adverting expenditures.
 % change of demand
 Em=-----------------------------------
 % change of advertising expenditures
 Knowledge of marketing/advertising elasticity can assist
tourism managers to determine appropriate levels of
advertising outlays.
 Thus a tour operator may advertise on radio or TV, or a
destination may promote itself in newspapers and magazines,
and the internet generating increased sales revenues.
 At the destination level, estimates of marketing elasticities
can inform the allocation of marketing expenditure between
different tourism products or different market segments.

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Elasticity of supply
 Supply of some tourism facilities (eg.
accommodation) is ‘inelastic’ ie limited or restricted.
 When supply is limited competing forces may bid the Seasonality of tourism demand
price up.
 In response to higher offers suppliers may be willing
to increase production (extend the hotel, release
additional rooms).
 However increase of the supply is often impossible in
the short run as it requires new investments.

Tourism seasonality Tourism seasonality (continued)

 Tourism demand is highly seasonal almost in all
countries,
 Critical factor in choosing a destination is weather
 Other factors affecting seasonality:
 School holidays,
 traditional ‘factory shut-downs’,
 Key holidays such as Christmas, Thanksgiving in USA etc.
 Fluctuations of the demand may also be between
days of the week or on daily basis.
 Examplease are: ???
 Seasonality of demand also refers to events (such as
Olympics, World championships etc)…the tourism
demand is only present for the periods of the event.
 The seasonality of tourism flows has obvious
implications for all the firms that deal with tourists:
tour operators, travel agencies, hotels, carriers,
attractions etc.,
 Marketing strategies are designed to shift demand
from peak to off-peak in order to extend the tourism
season,
 Main instrument in this is pricing policy (revenue
management)

Overnights in collective accommodation

establishments in Poland in 2013 (000’s) Bandwagon, snob and Veblen effects

 Consumption decisions of individual consumers are

not always independent.
 This is not the case if there is a bandwagon, snob
or Veblen effect present.
 The bandwagon effect refers to a situation
where people demand a commodity because
others are purchasing it and it is regarded as
‘fashionable’ to keep up with the Joneses’.

Source: GUS

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Bandwagon, snob and Veblen effects
 The snob effect is the opposite of the bandwagon
effect as some consumers seek to be different and
exclusive by demanding less of a product as more
people consume it.
 The Veblen effect refers to a situation where
some individuals seek to impress others by
demanding more of certain ‘high status’ products
or services as their price rises.
End of lecture 1
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Demonstration Effect
 The theory is that by simply observing tourists will
lead to behavioral changes in the resident population
 Local people will note the superior material
possession of the visitors and aspire for them.
 Positive: may encourage residents to adopt more
productive patterns of behavior
 Negative: locals may become resentful because they
are unable to obtain the goods and lifestyle
demonstrated by the visitors
 Demonstration effect may also take place within the
group of tourists travelling together influencing their
purchase behaviour.
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