The Upside of Procrastination

The free newspaper on the London tube has this front-page advertisement: “From 10 a.m. tomorrow, £10 ($15) hotel rooms, on the web site
lastminute.com.”

For an economist this is a heartwarming advertisement. Clearly these are hotel rooms that would otherwise go unfilled.

While $15 is not much, I would imagine that it is a bit more than the marginal cost of a hotel room, since the only marginal costs of the rooms must be the electricity, water, laundry, and cleaning.

So long as these deals are rare — so that the customers don’t stop reserving early in the hope of obtaining a great last-minute deal — the hotels win, as do the customers.

London theaters have a similar deal, but tickets are only half-price on the day of the performance. Since the marginal cost of providing the seat is essentially zero, I wonder why those last-minute deals aren’t better. Perhaps there’s more of a chance that people will wait for the last minute, thus making this uneconomic for the theaters.


Matt

Marginal costs for hotel rooms generally include not just what you mentioned, but credit card fees, commissions (travel agent or web), and heating/cooling costs. Most hotels that I have worked with in the states have a marginal occupied room cost around 15-20$. It is possible to be lower, of course, and for those hotels willing to sell rooms at $15, their cost must be lower - otherwise, what's the point? Better to let the rooms sit empty...

Marc

Depends on the property. Some may consider occasionally selling rooms at cost, or even a small loss, to be a marketing tool to get people into the property with the hopes they will return later, tell their friends, etc.

It's also possible they are hoping they will still make money from these people as they celebrate their bargain by ordering room service, dining in the hotel restaurant, eating a $12 Snickers bar from the mini-bar, and so on.

Emmanuel M

"Since the marginal cost of providing the seat is essentially zero, I wonder why those last-minute deals aren't better. Perhaps there's more of a chance that people will wait for the last minute, thus making this uneconomic for the theaters."

Well, since you make questions and answers together ...

Another point to consider. If you offer hard discounted thetre seats, for say 20% of the price, the perceived value of the seat might become 20% of the price.

Another problem is that knowing you paid 5 times the sum you neighbour paid might cause a felling of being ripped-off for customers who full price, further degrading their willingness to pay 100%

Walter Wimberly

It could be also, that they lose/break even money on the hotel room, hoping to make it back either in incidentals (mini-bar, pay-per-view, etc.), external additional business (restaurant on premise, etc.) or in repeat business as they get the name out.

VK

My guess is that hotels aren't worried to do so because most people, when planning a trip to a different city, won't take the chance to bank on a hotel having a last minute deal. After all, if there isn't one, they have no place to stay.

Theater seats, on the other hand, are an easy good to just get up and take advantage of last minute, so if people believed they could just wait until last minute and pay significantly less, they would never buy full price.

KarenS

Well, yes, I'm much likely to take a risk when it comes to theater tickets. If I can't find a hotel room, I'm sleeping on the street. If I can't get theater tickets, I can find something else to entertain me that evening.

Dan

I've been wondering for a while why the airline industry doesn't appear to operate in this fashion. I haven't traveled since the economic downturn, but prior to that, I rarely saw last minute travel deals that were marked down significantly enough to make them enticing. And yet, it seemed to be a frequent occurrence that I would find myself on a half-empty plane. Shouldn't airlines offer incredibly deep discounts on last minute travel?

LarryDan

10 years ago I worked as a manager at an extended stay hotel. Our cost to clean a room at that time was $7.00. The regular price of our rooms was $99 to $119 a night. On the weekends I would drop prices to sell out the rooms (weekdays we were usually full). Basically if someone came in off the street asking about prices, I would not let them leave until they had a price they liked. Normally the lowest I'd go was $29. Advice to travelers w/o reservations:
Do not place your card on the counter and say you want a room, you will get full price. Do ask what the occupency is. If they have plenty of rooms available, they will go lower than their stated price. After they tell you the normal price, ask what the best available price is. If it's late, remind them of the time and that they'll never sell them all out. Then state a price $20-$30 lower then their best available.

FC

Dan,

I think there are two parts of the story. First, last minute travelers are more likely to be business travelers. These travelers are willing to pay more than leisure travelers. It's a way for airlines to price discriminate.

This can't be the full story, though, because it seems that filling a seat (even if the airline only gets just more than enough to cover the cost of a Coke and peanuts) is better than letting it go empty. But this makes sense only in a one-off scenario. In the long run, everyone would adjust their ticket buying behavior and would wait until the last minute to buy their ticket, and airlines would do worse than they are doing now. (I can't remember a single time where I couldn't find at least one airline ticket on a route last minute, so I don't think many people would be concerned about not getting a ticket...but who knows?)

Why are airlines different from hotels? I think it's much more likely that the typical last minute airline ticket buyer is a business traveler than the last minute hotel room renter. After all, many people who need a last minute hotel room are driving.

Anyone else have a better idea?

FC

Read more...

Michael

The profit on the hotel room is one thing.

The profit on dinner, on the bar and of course the free word-of-mouth advertising can add considerable value to the exercise.

econobiker

FC in post #9:
There would seem to be some sort of negative correlation explanation between last minute pricing for flushing excess capacity (ticket discounting) and last minute pricing for limited quanity items very in demand (ie: ticket scalping- obviously laws limit the theaters from actually doing this.).

pelayo@cms

What the hotel is doing is excellent price discrimination. They know they will get some money to cover the costs of rooms. Probably those who will get the rooms so late will be tired to go out, so they will probably eat and drink at the hotel were they will make the real money.

to LarryDan: thanks for the tip on getting hotel rooms it can really come in handy.

Stephen

You'll love this idea then.

Passengers on partly full Air New Zealand flights to the United States can guarantee an empty seat next to them - if they're prepared to pay $75.

The airline's novel way of making money out of empty seats during the long-haul travel slump has proved popular during a month-long trial.

Full article can be read here:
http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10544471

JoseAngelCMS

Even though people (hotels and movie theaters) are not making the most they can for providing a good or service, it is better for them to get some money, rather than zero.
The money they charge should be equal or higher than the cost of providing the good is. This way, the company is making some money, rather than zero profit, which makes it better off.
Even though it is better to get some money out of the good or service, rather than no money, making these cheaper by the last minute can create incentives for consumers to wait and buy these at the last minute. If this ends up happening, the company will be loosing the money of the people who were willing to pay at the high price because they will now wait until the price is cheaper. This is a good decision in the short run, but in the long run, it will bring negative effects to the company.

Hilda CMS

This ad was definitely very eye-catching because people do not normally find a hotel at such a cheap price. It is great because people that do need a cheap room and do not care much about the quality of the hotel would definitely decide to sleep there, thus creating some sort of price discrimination.

Concerning the theater tickets, though, I think one must take into account the hours you have to wait for those last minute cheap tickets. I once went to a show and bought the last-minute tickets at about $70 dollars less but I had to wait about three hours and there were a very limited amount of tickets. I could of been doing something else with those hours so they become implicit costs in a way.

Joe D

It may well be that there is very little money to be made by offering a £10 hotel room, but the advert states only that there are "£10 hotel rooms" on the website: there could be as little as two hotel rooms at £10, with the rest going for higher amounts. Remember, this is not an advert for the hotels, but for the website. They need only to find a few (low quality? third world?) hotels to go to the low of £10 in order to make the advert technically correct, and meanwhile the ad will draw in a lot of customers who will be going for the higher price rooms in more desirable hotels or countries.

maxicms

Im sure the theatres tried a cheaper price, but most likely this resulted in having all their seats sold out with a bunch of customers left wanting to buy tickets. Thus, they realized that they could sell these last minute movie tickets more expensively because the demand was higher. It seems likely that people would buy the tickets "last minute" which is when they walk into the theatre then a few days before, because then one would have to make the extra effort of walking to the movie theatre or paying extra on a cite like fandango.com to reserve their seat. Hence, selling the tickets at half-price must be their most convenient price inw hich they get all the seats sold out or at least most, and take out the most money they can from each consumer's pockets.

PekeCMS

Hahaha wow, I had never figured this out. Procrastination isnt HORRIBLE all times... The thing is, procrastination really doesn't get paid of well in school these days.. unfortunately. Procrastinating in the school world only leads to stress, white hair, and hopefully not a bad grade... Economically, would the procrastination help companies by selling their old version for really cheap prices (to eliminate inventory) before the next new ones come? (in the area of technology specifically) I don't remember seeing Apple sell generation 3 ipods for a cheaper price if tomorrow they will bring out gen 4... what do they do with left over ipods?

ShUn-CmS

Anyone's incentive is to get the most profit out of whatever they do. In this case, for both the hotel and theater example, they are trying to increase profit, even just a little, it's better than nothing! Now, there's a concern that people will wait till the last minute to get this great deal, which will cause the producer to do get a negative profit. Well, life is full of risks; we have to take chances. This is what makes life soo adventurous. Even if they don't succeed, well it's sunk cost. Think of something else and become a billionaire!

Tkwon CMS

Okay. Call me a cynic, but there are a few issues to consider with this "Upside of procastrination"

First, is this seemingly wonderful price discrimination really that good? Once enough customers become aware of this, many will purposefully wait till the last minute to buy tickets, resulting in loss of profit, since these customers would've otherwise bought the regular tickets.

Second, if this was truly a benefitial practice, profit-hungry businesses would've already implemented this 'last-minute-sale program' ages ago. Seeing that we don't often see such last minute deals (it's hard to get last-minute airplane tickets for a bargain price, even when the plan is only half full) I say that this upside of procastrination is either minimal, or is applicable only to certain industries.