Price Elasticity

Price Elasticity measures how sensitive consumer demand is to a change in price. In hotel revenue management, it quantifies how much booking volume changes when a room rate increases or decreases. A property with elastic demand sees bookings fall sharply when rates rise; one with inelastic demand retains occupancy even at higher prices.

Formula

Price Elasticity of Demand (PED) = % Change in Quantity Demanded ÷ % Change in Price

A PED of −1.5 means a 10% rate increase leads to a 15% drop in bookings. Values between 0 and −1 are "inelastic" (demand is relatively insensitive to price); values below −1 are "elastic" (demand is highly sensitive).

Example

A hotel raises its standard rate from €100 to €110 — a 10% increase. Bookings fall from 80 to 68 room-nights — a 15% decrease.

PED = −15% ÷ 10% = −1.5  (elastic)

The same hotel during a city-wide conference sees bookings drop only 3% when rates rise 10%, giving a PED of −0.3 (inelastic). The revenue manager can push rates more aggressively during the event.

Why it matters

Understanding price elasticity allows revenue managers to set rates that maximise total revenue, not just occupancy. Inelastic segments — business travelers, guests at unique or remote destinations — can absorb rate increases without proportional demand loss. Leisure and budget-sensitive segments are typically more elastic and require greater pricing discipline.

Elasticity is not static: it varies by day of week, booking window, season, and competitive context. Modern Revenue Management Systems (RMS) incorporate elasticity curves when generating pricing recommendations, helping properties find the rate that maximises revenue rather than simply matching the market.

Related

• BAR (Best Available Rate) — the publicly available rate being adjusted in response to demand signals
• Unconstrained Demand — total market demand before pricing decisions constrain it
• Dynamic Pricing — the practice of continuously adjusting rates based on demand, elasticity, and competitor behaviour
• Revenue Management — the broader discipline in which elasticity analysis sits