Price Elasticity: How to Find the Best Price
Intermediate10 min readFor students & players
Raise your price and you sell fewer rooms. Lower it and you sell more — but earn less on each. Somewhere in between is the price that makes the most money. Price elasticity of demand measures how strongly customers react to price, and it tells you which way to move.
What is price elasticity of demand?
Price elasticity = % change in quantity demanded ÷ % change in price.
If a 10% price rise loses only 5% of customers, demand is inelastic (elasticity 0.5): raising the price increases revenue. If the same rise loses 20% of customers, demand is elastic (elasticity 2): raising the price loses revenue.
Why hotels compare prices
Guests rarely judge a price on its own. They compare it with similar hotels nearby. In PlayLobbyboss, guests look at rival hotels in a similar price band, weighted by their rating, and decide whether your room is fair value. A better rating lets you charge more before guests walk away.
In the starting town, the market price for a Standard room is about $55. Because the starting hotel has a decent 3★ rating, guests accept up to about $104 before bookings start to drop sharply. The game’s price guide suggests about $94 — just below that ceiling.
Elastic and inelastic zones
| Price | What happens | Demand |
|---|---|---|
| Well below market ($60) | Every room fills, but each earns little | Inelastic — raise the price |
| Near the guide ($94) | Rooms still fill, each earns much more | Around the best price |
| Above the ceiling ($120+) | Guests book rival hotels instead | Elastic — lower the price |
Four Standard rooms at $80 earn $320 a night. At $94 they earn $376 — $56 more every day for the same rooms. Over a year that is more than $20,000, without building anything.
What changes elasticity?
- Substitutes: more rival hotels nearby make demand more elastic.
- Quality and reputation: a higher rating makes demand less elastic.
- Season (in real hotels): in peak weeks guests are less price-sensitive; in the game, winter simply brings fewer travellers.
- Customer type: business travellers care less about price than families on holiday — in the game too.
Common pricing mistakes
- Competing only on price: rivals cut back and nobody earns money (a price war).
- Never testing: small price changes and watching occupancy is how real revenue managers work.
- Ignoring quality: a cheap, low-quality room loses on both sides.
🏨 Try it in the game
- Start a free hotel. Note your occupancy and nightly revenue at the starting price.
- In the Rooms tab, raise the Standard room price in steps of $5 every few days.
- Record price, occupancy and revenue in a table. Where does revenue peak?
- Compare your peak with the "Best price" button. Then upgrade a room’s quality and test again: does the best price move?
Questions to check your understanding
- A 5% price increase reduces bookings by 2%. Is demand elastic or inelastic? Should the hotel raise its price?
- Why can a hotel with a 4.5★ rating charge more than one with 2.5★ in the same street?
- A rival cuts its prices by 20%. Should you follow? What else could you do?
FAQ
- What is a good elasticity?
- There is no good or bad value. Inelastic demand (below 1) means you can raise prices; elastic demand (above 1) means price cuts can grow revenue.
- Is the cheapest price always the most competitive?
- No. Very low prices fill rooms but can leave a lot of money on the table, and they invite rivals to start a price war.
The game is a simplified model of running a hotel: it shows cause and effect, not real industry benchmarks.