It is about this time of year that I normally focus on some vacation-related issue. In the past, I have examined all inclusive holidays and virtual tour guides. In this post, I would like to consider the concept of hotel minibars and their relationship to the business management programme and, in particular, accounting, finance and marketing.
The major objective for most commercial businesses is to meet various targets related to revenue, market share or profit. Ultimately, the bottom line is the most important measure of business success; in other words the maximisation of net profit distributable to shareholders. This may be a long-term target rather than a short-term aspiration as new businesses will have to invest in developing brand recognition and loyalty and gaining market share before focusing on net profit. There are countless ways of achieving business success involving key aspects such as branding, product development, corporate responsibility, promotion and human resources, but ultimately everything rests on the combination of revenue and cost.
Some firms will seek to maximise profit by charging a premium price. Manufacturers of products, such as planes, ships and custom produced goods, have to charge a high price to generate a high profit margin. Although major plane producers such as Boeing and Airbus manufacture relatively few planes, they generate huge revenues from the ones they do sell. Although repeat business may be an objective, they cannot rely on this and so charge a high gross profit margin on every plane sold. However, the manufacturers of fast moving consumer goods (FMCGs), such as cereals, soda drinks and confectionary, charge a relatively low price with low profit margins to generate demand and to gain future repeat business. Indeed, they are even prepared to loss lead to encourage high future sales and repeat purchase behaviour. In both cases, maximising net profit is the main aim, but this is achieved in different ways. Profit is the result of multiplying unit sales by profit margin. In the case of low volume, bespoke manufacturers, profit is generated by high prices, whereas for FMCGs, margins are tight, but sales can be huge.
However, the ability to charge a high price is subject to a number of factors, including quality, competition, customer value perceptions and price sensitivity (elasticity). If customers believe they are being ‘ripped off’, they will vote with their feet, by not purchasing and/or buying a competitor’s product or substitute item. In your business course you will have used a perception map, where products are placed in a quadrant determined by factors such as quality and price. If customers perceive a product to be high price, but low quality, the firm is destined to fail.
So, to return to hotel minibars, the logic of this commercial activity has long eluded me. Hotels appear to work on the basis of a captive and, therefore, lazy target market, which they believe to have low price sensitivity as a result. It may be true that those who stay in luxury hotel chains regard their expenditure on relatively low-cost items to be inconsequential. However, for most of us who are less willing to pay luxury rates the cost of incidentals is very important. If the objective of the hotel is to maximise revenues from peripheral items, charging a high mark-up may not be the way to operate. After all, a bar of chocolate (priced in my hotel at four times the price of the shop five minutes away) is not a luxury item despite it being sold in a luxury environment and it also has many substitutes. Simple economic theory suggests that price elasticity will be relatively high.
We all know of hotel residents who are prepared to secrete away breakfast items in bags and napkins for later consumption. The idea of these customers then paying four times the price for a chocolate bar in the room is fanciful. Consequently, those who buy minibar items are likely to be rich, careless, drunk or particularly lazy (or a combination of these), but are almost certainly in the minority (which is possibly why it appears common practice for hotel chains to add minibar charges to the final bill anyway and hope the customer does not notice on checkout). Common sense says this; charge a slightly higher price, but not noticeably so. Will a customer’s brand perception of a hotel chain be adversely affected by lower minibar prices? It seems highly unlikely. If hotel residents perceive minibar products as acceptable value for money they are likely to consume more rather than venture out to find a cheaper substitute. As a result, profit margins may fall, but sales will increase by a higher proportion and overall profits will rise (as well as satisfaction and brand loyalty). Hotel residents may also consume other services, such as films and meals, if economic common sense prevails. The same reasoning applies to making phone calls from the hotel room, which we all know are extortionate. Have hotels not heard of mobile phones or Skype? This leads to an important question – are hotels really that ignorant of economic theory?
IB Style questions
1. Distinguish between Gross Profit and Net Profit.
2. Compare and contrast competition-based and market-based pricing.
3. Analyse the relationship between price-elasticity and sales revenue.
4. Discuss the importance and role of branding in the commercial success of hotels.