Hotels and airline companies often sell their rooms and seats at deep discounts
ID: 2719043 • Letter: H
Question
Hotels and airline companies often sell their rooms and seats at deep discounts on sites like www.priceline.com andwww.hotwire.com. The prices for these hotel rooms and airline seats are often way below what the company needs to make to cover its costs.
1. Discuss why airline and hotel companies are willing to do this? (Think about the different types of costs as they apply to hotels and airlines when you present your reasoning.)
2. Airlines as well as hotel companies have their own websites where customers can buy seats or rooms. Why do you think they prefer to use priceline or hotwire for the 'deeply discounted' product rather than their own website?
Explanation / Answer
1)The hotel has a lot of fixed costs which needs to be covered like admin&general,property maintenance and Marketing,staff therefore by selling the rooms at way below what the company needs to make to cover its costs(fixed +variable costs,variable costs are cost of food,beverages) they increase their revenues which can be used to cover their fixed costs ,by selling more quantity they earn more and more revenue which can be ultimately used to cover entire fixed costs and profit finally,their goal is make the vacancy cost to minimum and profit ultimately in doing so.Similarly Airlines have highest proportion of cost in form of fixed cost as fuel ,the airline by increasing the quantity they reach the break even point faster and thereafter start making profits.They often do not get enough revenues to make profits therefore they resort to low price tactics to attracts customers and boost quantity which boosts revenues and thus profit finally.
2)The airlines use priceline or hotwire for the 'deeply discounted' product rather than their own website because they are offering the prices alongside other competitors and the lower price is the best filter that customers often make on this websites therefore to get attention of customers and get selected by them they offer deep discounts on these sites.
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