Revenue Management
Price Elasticity of Demand
How sensitive room demand is to a change in price — the responsiveness behind every pricing decision.
Academic definition
Price elasticity of demand measures the responsiveness of quantity demanded to a change in price, calculated as the percentage change in demand divided by the percentage change in price. Because demand typically falls as price rises, the value is usually negative; demand is described as elastic when the magnitude exceeds one, meaning demand changes more than proportionally to price, and inelastic when below one. In hotels, elasticity varies by segment, season, lead time, and competitive context: leisure demand is often more elastic than corporate demand, and demand for a sold-out city during a major event can be highly inelastic. Estimating elasticity guides pricing decisions, indicating whether a rate increase will raise or lower total revenue. Elasticity is an empirical, contextual quantity rather than a fixed constant, and it describes the effect of price on demand volume, not the effect of a pricing decision on profit.
% Change in Demand = percentage change in rooms demanded · % Change in Price = percentage change in rate
Worked example
A 10% price rise that cuts demand 15% gives elasticity = −15 ÷ 10 = −1.5 (elastic); revenue falls, but if the lost bookings were low-margin OTA rooms, profit may actually improve.
The ProfitPAR™ lens
Elasticity tells you how demand moves when price moves — and the classic reflex is to use it to maximise revenue. But the same elasticity figure points to a different decision once profit enters the picture. If demand is inelastic, raising rate lifts revenue and profit together, easy. If demand is elastic, the revenue-maximising cut may still be a profit-losing move once you remember that each extra booking drags CPOR and commission behind it. ProfitPAR™ reads elasticity through the margin: the question is not whether a price change grows revenue, but whether the demand it gains or sheds grows retained profit. Sometimes the most profitable move is to lose the elastic, low-margin demand on purpose.
Elastic demand you win by discounting can cost more in margin than it adds in revenue.
Measure what each room actually keeps.
ProfitPAR is offered as a private revenue practice, by invitation. Tell us about your hotel to begin.
Request an InvitationWorked examples use illustrative figures in Indian Rupee (₹) with lakh/crore conventions. They are composite and representative, not drawn from any single property. ProfitPAR™ is a trademark of Sibasish Misra.