Why do hotel rooms cost so much?

shutters.jpgNot that long ago, $300 a night used to be considered high end. Then it was $500. Nowadays, you can easily shell out $700 at Shutters in Santa Monica - and for a not-so-wonderful room. Santa Monica, which routinely has one of the highest occupancy rates in Socal, does have cheaper offerings, but expect to pay at least $250 for even modest accommodations. The reason, says Slate's Matthew Yglesias, is that not many travelers are willing to drive a hard bargain.

The business traveler is likely to feel that he "needs" appropriately located accommodations and isn't going to be interested in exhaustive research about the costs and benefits of staying someplace cheaper and more remote. What's more, he's generally not paying out of pocket. A responsible employee will of course try to be reasonably frugal, but even so frugality is benchmarked to local costs. That encourages a market that's biased toward higher price points. The existence of premium business travelers who can fully pass costs on to clients (think fancy lawyers and consultants) further pushes the market up.

Here's another less obvious explanation.

Hotels can market unsold inventory without cutting the price of every room. Say I have 85 out of 100 rooms booked at $100 a night. Cutting the price of every room by $5 will cost me $425 and then I have to hope that I get at least five extra bookings for my trouble. It makes more sense to take my 15 spare rooms and directly market them to price-sensitive customers by using a specialized reseller like Hotwire. Hotwire sells bargain hotel rooms, but "opaquely": You only get to know the hotel's neighborhood and star rating, not its name, when you book. That annoyance screens for price-sensitive customers and offers a better strategy than broad discounts.

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Mark Lacter
Mark Lacter created the LA Biz Observed blog in 2006. He posted until the day before his death on Nov. 13, 2013.
Mark Lacter, business writer and editor was 59
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