Swakopmund Guesthouse: A Price Rise That Filled Fewer Rooms
Swakopmund, Namibia. A 30-room guesthouse has 10,950 room-nights of capacity a year. In 2023 its average room rate was N$1,000 and occupancy was 80%. After a refurbishment, the owner raised the average rate to N$1,200 in 2024 and occupancy fell to 62%. The owner says the rise was a success because each room now earns more. A nearby lodge kept its rate at N$950 and its occupancy rose from 70% to 74%. In the same period, the local mining sector announced 600 job losses and conference bookings fell across the town. The guesthouse's variable cost is N$280 per occupied room-night and fixed costs are N$2.4 million a year. For 2025 the owner is considering a further 15% rise to N$1,380, arguing that overseas tourists are less price-sensitive than regional travellers.
1. Calculate the price elasticity of demand and the change in total room revenue. Interpret the result, including the effect on profit.
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Room-nights sold in 2023: 10,950 × 0.80 = 8,760. In 2024: 10,950 × 0.62 = 6,789. The price rose from N$1,000 to N$1,200, a rise of 20%. Quantity fell from 8,760 to 6,789, a fall of 22.5%.
PED = -22.5 ÷ 20 = -1.125. Demand is elastic in this range. Total revenue fell from N$8.76 million to N$8.1468 million, a fall of about N$613,200, or 7%. Revenue per available room also fell, from N$800 to N$744 (N$1,200 × 0.62), so the owner's claim that each room earns more confuses room rate with yield.
Profit tells a subtler story. Contribution in 2023 was 8,760 × (N$1,000 - N$280) = N$6,307,200. In 2024 it was 6,789 × (N$1,200 - N$280) = N$6,245,880. Fixed costs are unchanged at N$2.4 million, so profit fell by about N$61,320, from N$3.907 million to N$3.846 million. The revenue fall was largely offset by lower variable costs, but the rise still did not increase profit. It was not a success on the owner's own financial test.
2. Evaluate whether the owner should impose the further 15% rise to N$1,380 for 2025.
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If the 2024 elasticity is extrapolated, a 15% rise would reduce quantity by about 16.9%, from 6,789 to roughly 5,640 room-nights. Revenue would be about 5,640 × N$1,380 = N$7.78 million, below the 2024 figure. Contribution would fall to about 5,640 × (N$1,380 - N$280) = N$6.204 million, so profit would fall again. That is the central risk.
But the estimate is not certain. The owner may be right that overseas tourists in peak season are less price-sensitive than regional and conference guests. The market is segmented: a blanket rise raises the price for all guests, including the marginal ones who are most responsive. The nearby lodge's experience matters. It held its rate at N$950 while the guesthouse raised its relative price, and its occupancy rose. The cross elasticity is positive: the guesthouse is losing guests to a cheaper substitute.
The income effect also matters. Mining job losses and fewer conferences reduced local income and demand. Raising the rate into weaker demand is poorly timed. A better policy is yield management: keep a high rack rate for peak overseas bookings, discount in low season, and target conference groups. A small rise of about 5%, monitored for three months, is more defensible than 15%.
3. Distinguish price elasticity from income elasticity and cross elasticity in this case. Explain what each tells the owner.
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Price elasticity measures the responsiveness of quantity demanded to a change in the guesthouse's own rate. Here it is about -1.125, so a price rise reduces revenue. That tells the owner not to raise the rate across the board without checking occupancy.
Income elasticity measures responsiveness to changes in consumers' income. Hotel stays are a normal, income-elastic service for local conference and leisure guests. When mining jobs were lost and incomes fell, local demand fell even if the guesthouse's price had not changed. This is a shift of the demand curve, not a movement along it. It tells the owner that part of the occupancy fall is not caused by the price rise and cannot be reversed by cutting price alone.
Cross elasticity measures responsiveness to a change in a related good's price. The nearby lodge kept its rate at N$950 while the guesthouse moved to N$1,200, so the substitute became relatively cheaper. The positive cross elasticity means some guests switched. This tells the owner to watch competitors' rates, not just its own costs.
The three concepts together show that the occupancy fall has three causes: the own-price rise, weaker local income, and a cheaper substitute. A single price decision cannot fix all three.