I’ve recently been through our business plan and noticed that our breakeven point has increased several hundred dollars per week since the last time I did the exercise, about three years ago.
This comes at a time when it appears I have unsuccessfully attempted to put prices up. Demand for our motel units, now priced at $110 instead of $99, has slumped to lows I haven’t seen in years.
Price increases
Feeling the stress of recent changes in the market, we put up our wages by around 8%. We did this because we wanted to retain and motivate our very talented staff.
In hindsight, perhaps I did this prematurely, or in the wrong order. I should have put prices up first, seen if the market could wear that level of increase, and then increased the wages. If this business is shut a year from now, that would have been the wrong dance move that did it.
Price elasticity of demand
Motel units have incredibly high price elasticity of demand. The business has profited over the last few years as I’ve gutted the business for costs and improved the eco-sustainability of the business model, which in turn has reduced costs further, and also used online marketing to drive awareness of our service and our price point. But make no mistake – our costs are still going up.
Our recent botched attempt to put up our motel prices, which I’m now likely to reverse, shows just how elastic our market has become. With competition, a new motel opening in Otaki, & AirBNB, our only option is to wage a price war. Perhaps that is our business now – perpetual price war, and do whatever it takes to stay alive.
The main area where the price change took its toll was online bookings. Online bookings give a high level of lookthrough visibility to accommodation properties.
My prediction of what’s coming
Looking at our own business, I can easily see the trend. Reduced profits, failed attempts to put prices up, increases in labour and rates costs – all of this is adding up to a situation where we badly need support but are not going to get any.
So of the Labour $5.5 billion surplus, much of which comprises of GST, and which comes from business, I will say this much – be careful with it, it’s not going to be that large next year.
