November 25, 2017
Price sensitivity - Part 1
Prices are a fact of life. Every time we sell or buy anything the transaction ends with a certain amount of money changing hands. But how do prices actually get decided?
To make a long story short, a price is a seller’s view of what they can get away with. There are other considerations as well: fairness, brand value and trust, to name a few. But at its commercial core, pricing is a seller’s expression of value.
Where it gets interesting is when a buyer agrees to that price and completes a transaction. Any seller can imagine a price they’d like to receive. What matters are the prices goods are sold for.
For Pace, this has always been the fundamental problem of revenue and yield management. In fact, the fundamental challenge of business in general. Which is why our company mission is: To find the right price.
Let’s go and dive deeper to understand why Pace invests so much effort in the area of pricing.
First, a bit of theory: according to the theory, buyers approach any transaction with an alternative value to price in mind. This is called their willingness-to-pay. If the price is lower than our willingness-to-pay, we buy. If it is not, we think it’s too expensive.
Economists call the difference between price and willingness-to-pay consumer surplus. Basically it is the value we, as buyers, get for free above the price we pay. A taxi home from work at the end of the day for £5 doesn’t give me much consumer surplus. On the other hand, a taxi home at 3am at the same price would give me a very high consumer surplus.
Why is this important?
Let’s look at a concrete example. If buyers have a high consumer surplus and few alternatives they have low price sensitivity. The short way of describing them is they would continue to buy even if you increase the price.
Translating this back to Pace and revenue management: our platform is unique in modelling consumer surplus and price sensitivity. What this means for our customers is the ability to understand, in real-time, whether to focus on ADR or occupancy. When price sensitivity is high in a booking-curve you should capture bookings. When price sensitivity is low you can grow your ADR.
Pace shows you the relationship between the two so you can always make the best decisions. From what we’ve seen and heard, we’re the only solution out there that can generate these conclusions.
Speak to us to understand how our platform can benefit your property!