Facts about hotel mini-bars (model this)

What’s surprisingly affordable in hotel rooms across the globe is, however, vodka. It’s much cheaper than peanuts and, in some cases, even water.

That is the case for instance in Zurich, Helsinki, and Oslo.  (Where is the profitable cross-subsidy?  Or is this price discrimination?  Is vodka less likely to be claimed for reimbursement from third-party payment?)  In Toronto hotel minibars, a can of nuts costs on average $18.23, at least among the hotels sampled.

That is all from Annalisa Merelli, via David Wessel.

Comments

Loss leader. Vodka makes you more likely to buy $18 peanuts.

The linked study lists NY, NY peanuts as $7.13 per portion and then in a different table (the one referenced in the Quartz article) lists them as $16.76. The vodka numbers are reversed between these two tables in the exact same manner.

Sorry theorists - I think this is simply a case of switched data columns.

http://www.multivu.com/mnr/70425518-tripadvisor-tripindex-reveals-las-vegas-most-expensive-for-room-service?_ga=1.103499138.304337612.1396459724

This sounds like the best explanation. My bet is on data error rather than subtle marketing strategies.

Ah! Pulling off a Reinhart Rogoff.....

Oh my God, you're right. That's brilliant. They should give the booze away for free, but charge $20 for the snacks.

agreed, and they may rely on expensive complementary goods like cranberry juice or sprite or jell-o mix

Exactly. Few (non-Russian) people would drink vodka straight.

Exactly. The vodka is cheap, but they get you on $6 for a tiny can of tomato juice or bloody mary mix.

According to 60 Minutes, those hotel mini-bars are rigged.

A related question I've thought about is the happy hour pricing, going directly against the marginal pricing of consumption of further units. You pay little for the first units and full price for the ones late at night. I think what has to be modified is the assumption of rationality :-)

Happy Hour is more about price discrimination and the fact that restaurants have high fixed costs to be open and very low marginal costs for actually serving any food/drinks.

Three factors: (a) a smidgen of irrationality by the consumer (although if that were really it they'd figure out a way to make everyone's first drink really cheap... in fact, most bars give a free drink ("bartender's buyback") after a few; (b) Trying to get people in early to justify costs of opening (as anon says below); and (c) the first drink has a fixed cost for the customer as well as the highest marginal utility -- the cost of getting to the bar. Happy hour offsets some of the fixed costs for customers willing (in expectation0 to consume more in aggregate.

I've always thought of happy hour in terms of competitive pressures and price discrimination—it's the time of day when demand is highest (everyone looking to grab a drink after work), but probably also most inelastic (there are lots of other demands on people's time to go home and see the kids or whatever), so establishments are competing against both each other and those competing obligations; the demand of late-night/weekend consumers is more inelastic, as those are the people who want to be out late and don't have something else going on.

I don't think demand is highest at happy hour. Most bars get full much later.

I may be unfairly extrapolating from my own experience, but the end of a long day is when I could most use a drink; so at the very least, the potential demand is quite high—it's just also highly inelastic compared to the demand that comes later in the evening.

You mean elastic?

I don't own a bar, but I'd imagine happy hour as more of demand leveling to deal with inventory issues, and can even be modified for specific excess inventory via product specific happy hour drink specials.

The interesting fact is that the vast majority of hotels operate their minibars at a loss, despite the high prices.

Why? Labor or theft?

Labor mostly. And low volume.

If you're talking about a higher end Hilton, Marriott or Hyatt your most frequent guests are going to get club level access to sodas, snacks, and cheap drinks. Your tourist guests aren't going to spend the money. So, you have a lot of labor and low volume.

As for theft, most places have sensors that charge you if something is removed for more than x seconds.

Given the low volume, I'm surprised that the hotels don't try to mix genuinely cheap stuff (a few items that are comparable to what's available at a nearby shop) with more expensive impulse buys. I don't even look at a minibar most times. But surely more tourists would use it if there were half a dozen prominently discounted items. They could then move product while getting the big wins from the same impulse and expense account buyers they do now. I do wonder whether they've done the pricing research on this or just continue with tradition and managerial intuition.

I was staying at the Andaz on 5th in NYC and they have gone with free minibars. I think they did the research and adding $20 to a $500/night room rate ends up with a better customer experience than keeping all the minbars filled and guests not using them due to high prices.

I doubt there are many (if any) expense policies left that cover mini bar charges.

Main reason they have them seems to be that they are required to get the stars.

"I doubt there are many (if any) expense policies left that cover mini bar charges."

Most places I've worked at have gone with either per diem or dollar limts. If you don't get to the hotel till 11pm and all you want is an $8 diet coke and a $8 Snickers - that's fine.

There was a recent article, perhaps linked here, that lamented that mini-bars were being discontinued at many hotels.

"While reliable numbers are hard to come by—in part because of the changing definition of minibar, which may now include trays of gourmet snacks in addition to the iconic refrigerated unit—the upper-tier hotels to which I have often turned for solace seem to be forsaking the minibar, while most of the cheap hotels where I’ve passed out after long days on the road never had them to begin with. Travelers like me, dismayed to find themselves in a room without a minibar, are now expected to order room service or buy a soda from a vending machine or a nearby 7-Eleven. Hotel bean counters prefer the Internet—an in-room amenity that never spoils or requires restocking." Elegy for the Minibar

In my case, I could always claim the per diems regardless. So the 8$ coke was really out of my pocket, still.

Last year I stayed at a hotel where non-alcoholic beverages were free but alcoholic beverages were not. I think they were really hoping I'd open the mini-bar looking for a bottle of ice tea and conclude that I'd be much happier with a $7 bottle of beer.

That sound like bars offering $1 Miller Lites & hoping that's not what reasonable people will drink all night.

I'm shocked to find out that people actually look at the prices for items in a hotel minibar. I thought it was used either out of desperation or recklessness, with a devil may care view of the cost. I would have priced the most popular items highest.

"desperation or recklessness, with a devil may care view of the cost."

Sure sounds like someone who just drank vodka, to me!

The vodka bottle is 1/10th the volume of the water bottle.

This. What a silly discussion without knowing that fact.

Not really. Comparing fluid ounces of water vs vodka is silly, because you're not drinking vodka to quench your thirst, and your not drinking water to get drunk.

Bulk per kg. price of potable water is less than 1/1000th. that of pure ethanol. So I doubt quantity makes things any more rational

the price makes the markup.

for low priced items: 1) low revenue if not expensive. 2) the markup is not high enough to motivate a person to go to the store.

for vodka, additionally one might enoy it more outside. also, there is little urgency for drinking vodka. making the client less forced to buy now

It's price discrimination: The non-alcoholic items are liable to be grabbed by kids whose parents aren't paying enough attention. I.e., they are consumed by little people who are maddeningly insensitive to price.

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