Every market in the world is ruled by the law of supply and demand. Prices are set based on the inverse ratio between the two. When supply is low or demand is high, prices are high. When supply is high or demand is low, prices are low. Greater demand leads to growth, and meeting that growth is a matter of balancing supply.
But what about the hotel industry, where demand is regional, and supply is architectural? Hotel demand is determined by the draw of a city and nearby attractions. Hotel demand is measured in buildings and real estate development, so the market is hardly liquid in nature. Unlike other industries, competitors can’t flood the market to increase supply, and demand requires a long-game strategy to influence.
So, just what is the role of supply and demand in the hotel industry, and how can you use this information to optimize the success of your hotels?
Feasibility Studies and the Status-Quo
Most hotels operate on a status quo balance of supply and demand. Each region has a certain concentration of hotel demand that typically fluctuates predictably with the seasons. The existing hotels make up a static supply of rooms. Hotels in each price range share demand nearly equally. Most hotels in the region will have similar occupancy levels by accepting their portion of the market share.
This is the “set it and forget it” approach to hotel supply and demand. If your hotel finances remain balanced along with the supply-demand status quo As long as the traveler-drawing factors and hotels in operation remain the same, the yearly occupancy and revenue will remain stable, as well.
When looking to open a new hotel, a feasibility study will give you a view of the current supply-demand balance and whether there is a profitable margin to add “supply” in terms of a new hotel and set of rooms to any given market. If so, then you can safely move forward with a profitable, but not particularly competitive, hotel business plan.
What You Need To Know About Hotel Supply and Demand
Moving forward, having a clearly defined strategy based on calculable hotel room supply and guest booking demand is essential. Here are a few key pieces of information that can help you build your strategy.
When demand rises in the form of increased travelers, demand for hotel rooms also rises. This allows you to raise prices and increase your RevPAR (revenue per available room). If demand falls, the reverse is true. Supply and demand for hotels can be relatively static. Hotel demand is determined by local attractions, so region variables play a major role. Hotel supply per region is determined by the number of currently operating hotels in each price point.

However, macroeconomics can also play a role. Macroeconomics influences consumer spending power, ability to travel, and overall ability to book hotel rooms. The strength of the economy is directly related to how much people can travel and spend, represented as hotel demand. This can also influence property values.
Hotel property values are influenced by the local balance of supply and demand in the hotel industry. Hotels are, naturally, more valuable when supply is low (few hotels) while an overage of supply (too many hotels) can decrease overall hotel property value in each region.
Claiming a Bigger Market Share
If you want your hotel to perform better than the regional competition, you’ll need a strategy to claim a larger portion of the market share. This can be done by improving guest experiences and building a reputation that stands out in the local hotel landscape. Hotels that have something special to offer - and an aggressive marketing strategy – can catch the eye of travelers and earn more of the annual demand for rooms compared to other hotels in the region.
This requires a multi-point approach. A modern, comfortable, and attractive hotel are must-haves, of course. But you also need to stand out in ways that make a difference in today’s travel planning. That can mean more vivid and comprehensive room photos, glowing reviews on the popular online booking platforms, and aggressively broadcasting your superior guest experiences.
A high-quality website, a good mobile app, and a loyalty rewards program can all make a difference.
The Room Price Game
In a market of near-static supply and demand, one way that hotels can tip the scales is through room price - and star rating. Lowering your prices can temporarily steal some of the market share (increase demand for your rooms) but it’s important to maintain a balance in terms of both your profitability ratio and your hotel reputation.
If demand goes up temporarily – like for a big local event – you can raise the prices but not so much that you lose business to your competition.
Hotels tend to share demand in tiers indicated by star-rating and price point. Guests sort themselves based on whether they are looking for a clean bed at the lowest price or a more luxurious experience in higher price tires. Know your price tier and the safe range for adapting your prices based on demand.
Many hotels have a minimum room price, even during the off-season, to maintain their reputation and claim on mid-tier or higher guest demand.
Room Price vs Total Spend
Another way to look at the room price dynamic, however, is the total spend of each guest’s stay. Full-service hotels have an advantage when it comes to the total spending strategy. Guests who order room service or visit the restaurant, get a massage, or book tours through the hotel each contribute more to your revenue than the baseline cost of their room.
Many full-service hotels stay competitive with slightly lower room prices and a great up-selling strategy that encourages guests to spend on hotel amenities. This is a way to maximize your earning capacity with your current market share of guest demand. Or, from another perspective, it is a way to generate more demand for your services from your existing guests.
A hotel known for great services can also build a reputation that can draw more guests through glowing reviews and personal recommendations. So, building a full-service guest experience is a win-win strategy.
Generating Demand: Playing the Long Game

Hotels with a long view on supply and demand strategy look for ways to generate new demand. If you can draw more travelers to your city and, more specifically, to your hotel, then you can claim more bookings and keep your prices relatively high. Most hotels accept the default amount of local tourists and business travelers and seek to claim a share of that demand for hotel rooms. However, you can change the playing field by creating reasons for travelers to visit.
Hosting large events, for example, is a great way to boost your bookings. This is why hotels often host conventions, conferences, galas, charities, and exhibitions. Becoming known as a great personal venue for big weddings, family reunions, and other large gatherings can provide a similar boost.
In addition to hosted events, hotels can throw in their support for new community events like festivals, sports tournaments, and other major crowd attractions that bring travelers from far and wide. This increases the overall demand in the hotel’s region and the number of guests who can be booked. Becoming a sponsor or named participant with these events can also send guests directly to your hotel in favor of other brands and locations.
Planning Success in Hotel Supply and Demand
If you are considering investing in a hotel, always start with your feasibility study to determine the balance of supply and demand in the hotel industry within each region. If you are already running hotels, look for strategies to increase local demand and claim a larger market share to inspire growth. For more insights into hotel financial strategy, contact us today.