Posts Tagged Supply and Demand

It is possible to have too much business

The recent firestorm around Netflix reminded me of a recent conversation my GM and I had about our hotel occupancy. Last year our annual average occupancy was 89% which is amazingly high especially in this economy, most properties in our competitive set would kill for a 70% average right now.

How did we interpret this number? Our rates were too low, and so in 2011 we raised rates for the first time in 3 years. Not a gigantic amount, between 10-20% depending on the room and time of year. The reasoning for this was that we had been too busy. Our goal is 85% occupancy, which was our average in the 3 years before 2010. Not much less and not much more.

Less occupancy and we see a drop in revenue which we obviously don’t want. Above 85% and we’re literally too busy, it becomes difficult to get into the rooms to do bigger maintenance projects and deep cleaning while the wear and tear on the rooms continues and the quality of our product falls resulting in discounts and lost revnue. 85% is the magic number we’ve picked. So when we hit above that, it was time to raise rates, in the hope that it would actually lower our occupancy closer to 85%. We’d be less busy, but hopefully make the same or greater revenue as a result. July is the first month of the new rates, but so far the change is paying off as planned. We’ll get to do maintenance projects easier without having to sacrifice revenue generation. It’s actually a tactic that we never discussed in school and I found very interesting. We’ve done the same thing with our spa rates over the years. When the spa gets too busy, and we’re sold out every day and slamming with business, it’s time to raise rates so that we can work less hard, provide a better spa environment, and either increase or maintain profits.

Netflix is likely trying to do the same thing to a certain extent. That is to say, they’re trying to encourage their customers to choose one of their new standalone packages, which will decrease the need for infrastructure in one or both of their services. And charge a premium for those that want the option of both. I saw the argument out there that they haven’t added any value to either product, and with the DVDs that might be true, you can’t really add any value to that service already, other than adding additional DVDs rented simultaneously for the same price. But the streaming service, they’ve adding value constantly. I blogged not long ago about the addition of most of the Star Trek catalog to the streaming service. And while they aren’t adding the “newest releases” to the streaming service (yet) they’re constantly expanding that library with the products that the big studios will license to them. The added value just wasn’t tied directly to the new price points. Hell considering I’m planning to save $2/month the added options is added value for me.

I guess I’m saying this. Netflix knew they were going to lose customers over the new prices. How could they not after all? And a lot of them are probably the customers that already weren’t getting their full value out of the service. Essentially dead weight in their membership. Sure those members weren’t costing Netflix in postage or bandwidth, but I’m pretty sure Netflix doesn’t pay for stamps, they’re contract with the post office is probably a lump sum determined by their membership numbers, not their actual use (that’s pure conjecture, but it kind of makes sense). And then they’re asking the members they hold onto (like me) to make a choice, select a more limited plan that reflects your actual demand, or pay a premium for the option of both. Once again, this is deliberate strategy. Netflix is about to go into negotiations with the studios, and I’m hoping they want to show them that DVDs are a dying medium and that digital distribution (preferably through Netflix) is the way to go. The writing is on the walls in this regard, DVD/BlueRay are rapidly going the way of VHS, Betamax, and the Dinosaurs. And though it’s not plainly stated I imagine being able to demonstrate the clear divide between steaming customers, DVD customers, and those with both will factor strategically into Netflix’s negotiations with the studios.

Remember this old gem?

Anyways, I just wanted to put that thought out there. It seems counter intuitive to a lot of people that a business can have too many customers and be too busy. Just think of high school Econ class and those old Supply and Demand graphs and the old invisible hand of the market making them intersect. That’s all we’re looking at here.

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