To discuss the factors which motel owner Justin McGregor’s should consider when deciding on business proposal from a well respected community resident George Alward for 2 nights full house accommodations. Offer for half room rate, during low occupancy season, for church convention attendees.
Good Night motel is a family owned and operated motel, located near main highways, restaurants and retail shopping in the Canadian town Grand Bend. The town is a summer resort with local businesses exposed to seasonal business patterns. Such is the Good Night motel, which has 30 units and charges $80/nt, rate comparable to the high-end motels in the area.
Due to the global economic recession over the past few years Good Night’s occupancy rates have dropped resulting in lower annual revenues and increased competition for guests. 2012 is the first time in five years with earned profit.
In the “low” period (Oct 16-May 14) the motel is rarely more than a quarter full at any time. During this time the operating and administrative expenses do not vary with the occupancy rate except cleaning supplies ($2.74 rm/nt) and heating ($5 rm/nt).
When making the decision McGregor should consider both macro and microeconomic factors affecting his business.
Global Recession: Currently due to the global economic recession and the appreciation of the Canadian dollar vs US, less people are travelling, their leisure budgets are smaller. Consequentially the revenues are lower and the competition for customers higher. In a competitive environment, customers are not price takers. There are various comparable motels so George Alward can simply take his business to the competition.
Possibility for repeat business: If McGregor accepts the offer he will create an opportunity for possible repeat client next year during slow season. And since Alward is a respected member of the community, his recommendations will have positive impact on the image of the motel.
Opportunity Cost: McGregor should look not only the money he would be bringing in, but also at the lost opportunity costs. Although highly unlikely, there is forgone possibility that other people may wish to rent the 30 rooms at the standard rate of $80 per night.
Qualitative Factors: In the event of full occupancy there is a possibility of lower efficiency. If the staff has to accommodate all 30 rooms at the same time, they may not be able to provide good quality service.
Pricing Strategy: Accepting lower price for the room may set precedent for future clients demanding lower rates.
Accounting Figures: Assuming all other operating and administrative expenses are the same for both cases accept or reject the offer do not vary with occupancy. For low season, accepting the offer results in positive incremental profit.
Based on the fact that the global economy has not yet fully recovered from the recession and the seasonal low occupancy of the motel, despite the possibility of higher opportunity cost and unwanted precedent effect, it would be beneficial for McGregor’s business to take the offer. The motel will benefit from positive incremental surplus, hopefully some repeat
clients and good marketing from serving the local community.