Price Elasticity of Demand in the Hotel Industry

There are few industries where the concept of elasticity is not relevant but it is just one
factor in business decision making. The hotel industry is not a perfectly competitive
market but hotels do face considerable competition from rivals. Hotel owners have
some influence over the price they charge for the service they provide and a
consideration of the concept of elasticity is important in decision making. This article
refers to some of these other factors as well as emphasizing the importance of factors
affecting price elasticity of demand.
In this assignment, you are required to provide answers and explanations to the
questions posed at the end of the following article, relying on the concepts that were
covered in this course module.

The Making of Mafraq

The National Investor’s (TNI) purchase of the 15-year-old Mafraq Hotel in Abu Dhabi in
April 2007 was the company’s first direct hospitality acquisition. But, with the firm’s
founding  principle being to incubate UAE-based businesses aligned to the Abu Dhabi
2030 vision – in which tourism plays a pivotal role – it was a ‘natural choice’, recalls TNI
vice president, real estate agent, Robert Rowell.
Fast forward four and half years and the company has since invested US $50 million in
extending and upgrading the hotel. Far more than a face lift, the full renovation has
resulted in a sleek, modern hotel with 250 rooms instead of 120, its dated former self a
mere shadow. All achieved while the hotel remained open, not quite on time but most
definitely on budget, reveals Rowell. Many owners are forced to invest such sums to
bring their properties up to the brand standards of their appointed operators, but this is
where Mafraq has a point of difference – TNI decided to manage it in-house and keep
the original name.
The general manager, Ghassan Fares, previously a GM at Habtoor Hotels, joined
Mafraq in  November 2007 to deliver TNI’s vision. And for Fares, the freedom bestowed
on  him by the company has played a  major role in the hotel’s ongoing success. Rowell
and Fares appear to work side by side, finishing each other’s sentences and radiating a
distinct sense of pride in what they have achieved at Mafraq.
The project marks TNI out as a bold new hospitality investor, avoiding the brand
bandwagon and going it alone – controversial perhaps at a time when Abu Dhabi is
welcoming numerous global names. It highlights the issue of whether brands are always
best and demonstrates that there are indeed other options, so Hotelier paid Mafraq a
visit… and was pleasantly impressed with this secluded Abu Dhabi hotel. Here, Rowell
and Fares explain the philosophy behind their owner-operator partnership and their
‘bullish’ approach to 2012.
What was the Mafraq Hotel like when you acquired it?
Rowell: In 2007 we had a four-star hotel that was around 15 years old. It was in need of
a refurbishment. The hotel had 120 rooms with one all-day-dining facility. We saw the
occupancy levels in the existing hotel and the local demand and realized there was a
clear investment case to expand it from 120 rooms to 250 rooms and to fortify the
product offering by including a speciality restaurant and a ballroom, within the four-star
target.
When will you see return on investment on your acquisition?
Rowell: I think a rule of thumb for model- ling investment returns on a hotel would be
approximately, or under, 10 years in terms of being able to return the initial amount
invested, and I think we’ll comfortably be within that return time frame. The hotel has
already exceeded our expectations in terms of the room rates which increased rapidly;
certainly for the first couple of years after 2007 the room rates were increasing but the
occupancy wasn’t decreasing so for us there was a low price elasticity of demand, a low
correlation of prices going up and occupancy going down, so that gave us even more
encouragement that the asset was a good one and would be good for a long time.
Now the property has its new-look, what will be your approach to driving rates
and occupancy?
Fares: We’re in line with the market for a four-star property, in the AED 500s. During the
Abu Dhabi Grand Prix we did very well.
We are regaining all of our corporate clients because during construction some of them
moved out. But we never lost touch with them, we kept visiting them, making sales calls
at least weekly, we invited them to different areas, sometimes took them to a different
hotel because we didn’t have facilities to serve clients here.  We stayed proactive on
that part of it. They don’t believe this is really the property they were staying in before!
I’m not worried at all in keeping this property running and getting profit out of it. We did it
in the tough days and when the property was really deteriorated; it wasn’t that great in
terms of standing, now it’s brand new with a lot of facilities. It’s a product that can
compete with other properties, whereas earlier it was challenging for me to compete
with other properties.
We can talk with more confidence now and we can convince clients look- ing for
meetings, incentives, conferences and exhibitions (MICE) business that we are the
place for them. The Abu Dhabi Tourism Authority (ADTA) has done well on promoting
Abu Dhabi as a MICE sector; earlier we had 3–5 per cent of business in MICE, now
we’re expecting to have 10 per cent.
What and where is your competition?
Fares: The Yas Island hotels are competing because they are dropping their rates
tremendously. There are furnished hotel apartments coming up and that’s also a
challenge because looking at the business around us it’s long-term, when you have a
guest that stays with you for a minimum stay of 10 nights, many look for cooking
facilities; that’s a challenge there for us.
Rowell: It’s those other segments that we’re not catering for, trying to compete with our
segment, possibly a serviced apartment coming in to the area and competing for the
long staying guest; or it’s the five stars trying to compete on rate, which hurts them in
the long run, just to take those clients. Generally it’s the closer hotels to us but it’s a
pretty captive market as there’s a limited number around us.
You’ve now celebrated the official relaunch on November 18, what next?
Rowell: We’re very much focused on pushing forward into 2012, we’re very bullish on
the short, medium and long term of the hotel and the area around it here so we’re
focusing on operations now. We’ve just come out of development, so now it’s 100 per
cent focus on getting the operating efficiency back to where it was and employing staff,
retaining the right staff and eventually making profit. We’re bullish over the next 12
months despite the upcoming supply.
 

Questions
1. Why might TNI have wanted to keep the Mafraq Hotel open during renovation and
refurbishment?
To retain the previous corporate clients, strengthen the client base, keep up, and maintain excellent
customer support and service as well as a source of income during renovation and refurbishment.
They stayed proactive on this strategy. If the hotel was closed during this time, there will be no
source of revenue as well as won’t allow the hotel access to the customers and keeps the hotel in the
market for four and half years. They put a huge effort into regaining all of their corporate clients
during construction through visiting them, making sales calls at least weekly, invited them to
different areas, and due to lack of facilities at their hotel to serve the clients; they shifted them to
different hotels. Their proactive strategy thrived them to keep in touch with old customers and
provided service continuously in the period of renovation and refurbishment of Mafraq hotel. Equally
important, their sales calls to their customers for corporate clients in the period of renovation and
refurbishment facilitate them to serve the clients and always be part of their service.

2. Why might hotel chains establish brands? Use examples to illustrate your answer.
Hotel chains might establish brands such as Hilton, Marriott, and Hyatt because customers trust the brand
name and are assured that they will receive quality service based on just the brand name. The brand name
not only creates a positive and lasting reputation, but also a long-term commitment aiming to ensure a
successful market image, and business growth. Creating a brand allows the hotel to earn and develop
brand loyalty from the customers. This means that despite the existence of competitors, the customer is
likely to stay in a particular hotel due to the loyalty towards the brand. The brand name provides quality
assurance to global customers thereby increasing the demand for such hotels. The hotel chains such as
Marriott, Hyatt, or Hilton have hotels across the globe with hotel chains established. Any customer
traveling to a different country where he/she is not aware of the hotels is likely to choose a hotel from an
established brand as he/she will be assured of the service provided by them. In this case, TNI decided to
keep the original name Mafraq and not go after an established brand name, as they already have previous
corporate clients. While other options always exist, a hotel with a new name will have to work towards
establishing its name and reputation and gaining the trust of the customers, something a known brand will
not have to do. Once Mafraq has established a reputation in Abu Dhabi, it can open other branches in
different cities and continue to exploit the reputation it has developed by operating in Abu Dhabi.
3. What do you think is meant by the phrase ‘return on investment’?
Return on Investment (ROI) is a performance tool used to gauge the performance and efficiency of an
investment or to measure the efficiency of a number of different investments. ROI calculation allows the
business to determine if the investment made was favorable or unfavorable. A high return on investment
means that the investment was efficient. On the other hand, a low return on investment means that the
investment was inefficient. In this case, TNI vice president, Robert Rowell uses the term return of
investment to depict when they might be able to recover the cost of investment and start earning a profit.
As per that, in 10 years period, Mafraq should be making a profit, and ROI should be positive.
ROI Formula = Net profit/Total investment*100.

4. What factors might influence the price elasticity of supply and demand for hotel
accommodation such as that at Mafraq?
As we studied in Chapter 3 of the managerial economics book, price elasticity measures how changes in
supply and demand impact an item or service’s price. Various factors influence the price elasticity of
demand and supply. These factors vary depending on the nature of the industry. In regards to the hotel
industry these factors may influence the price elasticity of supply and demand:

Price elasticity of demand: Price elasticity of demand will vary based on facilities provided such as gym
or spa, foods, location of the hotel whether the hotel is located in the center of the city or in the other parts
of the city, and season as the tourists will visit during a certain time period; thereby increasing demand
during that time.

Price elasticity of supply: When price changes, there will be not only a change in the quantity demanded
but also a change in the quantity supplied. First, supply elasticity will depend on the number of hotels
such as the existing competition of how many sellers are willing to provide the service in the market.
Second, price of other goods and services: If the average price of a good such as food items or toiletries
increases, this will lead to an increase in the cost of service for the hotel thereby decreasing the profit
margin. Similarly, a decrease in such goods will increase the profit margin for the hotel. Third,
government regulations. If the government heavily regulates a particular industry, fewer sellers will be
willing and able to operate whereas if an industry is lightly regulated, more sellers will operate in that
market.

5. How might a knowledge of the price elasticity of demand for Mafraq being ‘low’ be
useful to its owners in making pricing decisions?
Price elasticity of demand depicts the change in demand in relation to the change in price with other factors
remaining consistent. If the price elasticity of demand is low, an increase or decrease in price will not have a
big impact on the price. This is the case for essential goods such as food or water for which demand will not
decrease substantially despite an increase in price. However, if the price elasticity of demand is high, any
increase or decrease in price will have a high impact on demand. This is the case for luxury goods such as
cosmetics for which the demand will decrease more with an increase in price. Since price is only one factor
that influences the demand, the price elasticity of demand being low means that other factors are influencing
the demand in the market. Knowing the price elasticity allows a business entity to determine the efficiency of
an increase in price. In this case, if Mafraq knows that price elasticity for demand is low, it can also ascertain
that the demand is being influenced by other factors, such as luxuries provided by the hotel, etc. In such a case,
Mafraq can set higher prices without decreasing the demand and risk operating at a loss. Such a pricing
decision would not be possible without the knowledge of price elasticity.

A1. Renovation done by TNI took four and a half years. A simple reason for keeping the hotel open
to keep a source of income while the renovation is being done. If the hotel was closed during this
time, there will be no source of revenue for four and half years. Further, keeping the hotel open
allows access to the customers and keeps the hotel in the market thereby ensuring that customers
know about it. Since the customers had seen the hotel prior to renovation, Marfaq was able to depict
the magintude of renovation to the customers quite easily.

A2. Creating a brand allows the hotel to earn and develop brand loyality by the customers. This
means that despite the existence of competitors, the customer is likley to stay in the particular hotel
due to her loyality towards the brand. Brand name provides a quality assurance to the customer
thereby increasing the demand for such hotels. This is par Hotel chains such as Marriott, Hyatt or
Hilton have hotels across the globe. Any customer traveling to a different country where she is not
aware of the hotels, is likely to choose a hotel from an established brand as she will be assured of
the service provided by them. In this case, TNI decides to keep the original name Mafraq and not go
after an established brand name. While other options always exist, a hotel will a new name will have
to work towards establishing its name and reputation and gaining trust of the customers, something
a known brand will not have to do. Once Mafraq has established a reputation in Abu Dhabi, it can
open other branches in different cities and continue to exploit the reputation it has developed by
operating in Abu Dhabi.

A3. Return on Investment (ROI) is a performance measure used to evaluate the efficiency of an

investment or compare the efficiency of a number of different investments. ROI calculation allows the
business to determine if an investment made was favorable or unfavorable. A high return on investment
means that the investment was efficient. On the other hand, a low return on investment means that the
investment was inefficient. In this case, TNI vice president, real estate agent, Robert Rowell uses the term
return of investment to depict when they might be able to recover the cost of investment and start earning
a profit. As per that, in 10 years period, Mafraq should be making a profit and ROI should be positive.
Formula of ROI= Net profit/Total investment*100

A4. Various factors influence the price elasticity of demand and supply. These factors vary
depending on the nature of the industry.
Price elasticity of demand:
a. Facilities provided: demand will vary based on weather hotel provides facilities such as
gym or spa which a tourist looking for luxury will desire.

b. Location of the hotel: demand will vary based of weather the hotel is located in the centre
of the city or is it in a secluded region.

c. Season: demand will vary based on the season. Tourists will visit during a certain time
period thereby increasing demand during that time.
Price elasticity of supply:
a. Number of hotels: supply elasticity will depend on the existing competition how many
sellers are willing to provide the service in the market

b. Price of other goods and services: if the average price of a good such as food items or
toiletries increase, this will lead to an increase in cost of service for the hotel thereby
decreasing the profit margin. Similarly, a decrease in such goods will increase the profit
margin for the hotel.

c. Government regulations: if the government heavily regulates a particular industry, less

sellers will be willing and able to operate whereas if an industry is lightly regulated, more
sellers will operate in that market

A5. Price elasticity of demand depicts the change in demand in relation to the change in price with
other factors remaining consistent. If the price elasticity of demand is low, an increase or decrease in
price will not have a big impact on the price. This is the case for essential goods such as food or
water for which demand will not decrease substantially despite an increase in price. However, if the
price elasticity of demand is high, any increase or decrease in price will have a high impact on
demand. This is the case for luxury goods such as cosmetics for which the demand will decrease
more with an increase in price. Since price is only one factor which influences the demand, price
elasticity of demand being low means that other factors are influencing the demand in the market.

Knowing the price elasticity allows a business entity to determine the efficiency of increase in price.
In this case, if Mafraq knows that price elasticity for demand is low, it can also ascertain that the
demand is being influenced by other factors, such as luxuries provided by the hotel, etc. In such as
case, Mafraq can set higher prices without decreasing the demand and risk operating at a loss. Such
a pricing decision would not be possible without the knowledge of price elasticity.

The major reason behind the kept open aspect of mufraq hotel at time of rennovation is the
possibility of loosing the existing business clients.

The clients that moved out at tine of rennovation, the hotel kept on calling them and providing
services atleast to the existing clients as because they hotel at that time was not in the condition to
give facility to new clients but the least they can do is to retain the previous clients. Because if the
company didnt kept open the facility then after the reopening of the hotel the hotel have to start from
phase 1 only where it is all new and just started to set up. Even when they are not able to provide
facility to the existing clients, they even took them to other hotels but didnt lose the touch from them.

The major advantage the hotel will be getting is the presence of earlier clients with adding new
clients as well. Which will induce the hotel to earn more and more profits.

So the hotsel also gets the some amount that are charged fron the clients which can also increase
the budget of rennovation and can guve the hotel a better prespective into the moderm and sleek
hotel.
Hotel chains might establish brands such as Marriott and Hyatt because customers trust the brand
name and are assured that they will receive quality service based on just the brand name, the hotels
are often managed by different owners but ultimately the brand name assures global customers from
all over the world. In order to bring a hotel under a brand name, it is necessary for hotel chains to
meet the necessary regulations which ultimately provides surety to the customers that they will be
under safe hands. This increases customer retention and loyalty.

There are more corporate contacts who require 5 star facilities and hotel chains with brand names
assure that sort of quality and service. Corporate partners often hold large conferences which gives
rise to large scale need for catering services which these brand names assure for their customers.
Corporates also gain from this as they are able to acquire more clients which leads to constant build
up over the years. As brand names are global, corporates also have the ability to hold global
conferences and avail discounts, giving such brand names an advantage.

It ultimately gives hotel chains the economies of scale due to which they are able to charge rates
which the customers aren't reluctant to pay. Because of this there are several global brands who
gain an advantage in terms of brand name as it is already established and just for that brand name,
there is enough goodwill attached to the name which leads to more hotels resorting to be under the
brand name as it provides them long term stability in terms of customer flow.

1. Why might TNI have wanted to keep the Mafraq Hotel open during renovation and refurbishment?
“Mafraq” open hotel during “renovation and refurbishment” because with the help of this strategy it's
a “customer base” of “Mafraq” hotel they always be contact with corporate clients customers those
customers, who were book rooms in their hotel but because of renovation and construction this
customer can't book rooms in “Mafraq” hotel but
“Mafraq” always do “Sales calls with this customers” and provide rooms theme as a third party to
save this customer base continue for future.
For Example –
After they do “sales calls their old customers” book a room then “Mafraq” hotel ship this customers
to another hotel, with this strategy they always keep in touch with their old customers and provide
service continuously in the period of “renovation and refurbishment” of “Mafraq” hotels, they always
do sales calls to their customers for corporate clients in the period of renovation and refurbishment
and provide them facilities to serve clients and always be a part of their service if “Mafraq” hotel is in
renovation therefore their team always provide service to their corporate clients or old customers
because these things help to them for future, after completion of “Mafraq” hotel renovation this
customer our customer base is useful for them and they booked their rooms because of this
continued touch.

2. Why might hotel chains establish brands? Use examples to illustrate your answer?
Brand is very powerful word in any industry if any organisation become in a brand, then customers
and World blindly go for this brand, if we considered this sentence in hotel industry, if any hotel
become off brand then this hotel easily get customers because of their brand name in market, any
hotel become a good brand it means it is in customer mind, customer know very well three brands,
because of service infrastructure foods another service, if anyone ask in a new country someone
then they do free advertising of these brands and suggest someone about Brand and popular hotel,
In short when any hotel become a popular because of their service it become or create brand image
in market, After that this hotels establish hotel chains of their bands in worldwide because of their
good image in market and this good image help to attract customers towards their hotel that's why
mini hotels change established brands,
For example –
“Oyo” is a famous brand in hotel industry that's why they establish chains of their hotels worldwide
with your brand name, also they do franchise other hotels with their brand name Oyo, so customer
attract because of OYO names, that's why they increase there is chain of hotel industry in worldwide
to get new customers or consumers.
3. What do you think is meant by the phrase ‘return on investment’?
Discuss about ROI (return of investment), then it is the ratio of profit or loss created in a fiscal year in
terms of investment and percentage of increase or decrease in the value of investment during the
year,
Formula of ROI= Net profit/Total investment*100
So if we consider hotel industry, investment return period is about 10 years, in “Mafraq” investment
about dollar 50 million will be take time to recover about 10 years or minimum after that profit will
generate but as Rowell said after by hospital within two years generate good profit, and their
expectations in terms of room rate which increases rapidly because of innovation. This is concept of
return of investment.
5. What factors might influence the price elasticity of supply and demand for hotel accommodation such
as that at Mafraq?

After 2007 hotel fare increased date today but demand of consumers about rooms or hotel is not
decrease about out “Mafraq” hotel, so here price elasticity of demand and supply not effect
on “Mafraq” hotel, basically this did not effect on hotel industry, decision making of consumers
is depend on service of hotels not depend on price for Fares of hotel rooms,
So this is also influence factor about Iraq and other factors such as, service quality
of “Mafraq” to consumers, available foods, well furnished hotel apartments, available menu,
meetings hall conference Hall precision tubes availability, brand name is also influence
factor on “Price of elasticity demand and supply”, so this factors influence the price elasticity of
supply and demand for hotel accommodation about “Mafraq”.
6. How might a knowledge of the price elasticity of demand for Mafraq being ‘low’ be useful to its owners
in making pricing decisions?

Definitely as I said price elasticity did not effect on hotel industry mostly, same thing
about “Mafraq” hotel low price elasticity of demand definitely beneficial for owner of metric to
increase customer base or demand of customer about rooms, their brand name good service, for
example after 2007 next 2 years price of rooms increased a today but demand of supply did not
decrease about “Mafraq” hotel so sweet shown that elasticity did not affect on matric hotel industry
because of their brand name or other things may be their service.

A. existing business clients for a source of income, while the renovation is being done. If the hotel
was closed during this time, there will be no source of revenue for four and half years. Further,
keeping the hotel open allows access to the customers and keeps the hotel in the market
thereby ensuring that customers know about it. Since the customers had seen the hotel prior to
renovation, Marfaq was able to depict the magnitude of renovation to the customers quite easily.
After they do “sales calls their old customers” book a room then “Mafraq” hotel ship this customers
to another hotel, with this strategy they always keep in touch with their old customers and provide
service continuously in the period of “renovation and refurbishment” of “Mafraq” hotels, they always
do sales calls to their customers for corporate clients in the period of renovation and refurbishment
and provide them facilities to serve clients and always be a part of their service if “Mafraq” hotel is in
renovation therefore their team always provide service to their corporate clients or old customers
because these things help to them for future, after completion of “Mafraq” hotel renovation this
customer our customer base is useful for them and they booked their rooms because of this
continued touch.

So the hotsel also gets the some amount that are charged fron the clients which can also increase
the budget of rennovation and can guve the hotel a better prespective into the moderm and sleek
hotel.

A2. . Nowadays, branding is regarded not only as a process of creating clues such as names, symbols,
signs, and/or designs, through which organizations facilitate customers in identifying their services
(Keller, Aperia & Georgson, 2008), but also as a long-term commitment aiming to ensure a successful
market image, and business growth. As strong brands are the outcome of thoughtful market
segmentation, and product differentiation, they are designed to communicate the organization’s vision
to the target group, while aiming to ensure loyalty among customers.

generate market share, increase loyalty among consumers, and might lead to higher profit margins.

Branding also contributes to organizations’ reputation, and reinforces brand awareness.

International hotel chains often use synchronized marketing strategies, similar tangible and intangible
services, and standardized environment and servicescape for all of their locations