Pearson New International Edition International pcl tp indd 1

REVENUE MANAGEMENT
270

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several days of the convention, the number of hotel rooms available to be sold (sup-
ply) will remain constant. New hotels cannot be conceived, financed, designed, and
constructed in 12 months. Hoteliers cannot add more rooms to their existing inven-
tory, nor would it be advisable to do so if they could, because demand for these extra
rooms will disappear when the convention ends. Contrast this situation to the taxi-
cab business in the same city. Taxicab managers will likely increase the number of
cabs available during the convention. They may extend the hours drivers are on duty,
add more vehicles, secure additional drivers, or use a combination of these strategies.
The impact of the law of demand on hotel inventory is immense and twofold. In
addition to recognizing that the short-term supply of rooms cannot be increased, out-
standing revenue managers understand that their own inventory of rooms is highly
perishable. In contrast, consider, the situation of a shoe store manager in the conven-
tion city. If on the Monday the convention begins, a specific pair of shoes does not sell,
the manager can try to sell that pair of shoes on Tuesday. If the hotel does not sell
room 101 on Monday night, it will never be able to sell that room on that night, and
the potential revenue that would be generated from the sale is lost forever.
Now assume that at one minute before closing, a specific pair of shoes has not
sold. Also assume that the store manager knows that at one minute after closing,
these shoes will disappear forever. How should the store manager price those shoes
if a customer walks into the store at one minute before closing? Understanding the
shoe store manager’s dilemma in this situation is the key to understanding the chal-
lenges of a hotel’s revenue manager. In a hotel, unsold inventory vanishes forever!
All hoteliers must also understand the law of supply because of its long-term
impact. The price a hotel charges for its rooms is influenced by many factors. One of the
most important is the number of rooms (supply) available relative to the extent of
demand for these rooms. Consider, for example, a city in which the average demand (all
sources) for rooms during an entire week consists of 600 room nights. Assume also that
the total number of rooms available to house these travelers is 1,000; five hotels each
offer 200 rooms for sale. The citywide occupancy rate is 60 percent (600 rooms 
1,000
rooms 
60 percent). If one of the hotels closed and the demand for rooms remained
unchanged, the occupancy rate would increase to 75 percent (600 rooms 
[1,000
rooms 
200 rooms] 
75 percent). If this happened, the laws of supply and demand
would likely affect the pricing strategy implemented by each hotel’s revenue manager.