Incremental profits

Profit margins are nice. Finding a way to make sure profits are a certain percentage of expenses is wonderful. The thing to keep in mind is that when all is said and done, profits are more important than profit margins.

I started thinking about this the other day when I unexpectedly had to stay over in another city. I went to the closest hotel and they were full but suggested I go to the hotel across the street. The front desk clerk at the full hotel was extremely nice and told me what she thought the other hotel would charge.

Since I had to go somewhere else anyway I decided to login to hotwire.com and was able to book a room at a comparable hotel that was 3 blocks away for 25% of the price I had expected. I booked the room, walked to the hotel and it was a very nice hotel that certainly looked comparable to the first option.

The question is, did this hotel sell this room too cheaply? If they hadn’t been on hotwire.com I wouldn’t have even known the hotel existed and would have saved elsewhere. As long as the fee I paid was more than the incremental expenses (the expense of the infrastructure and front desk clerks and security etc don’t change for one extra room rental so it really is just the housekeeping expenses plus fees for the reservation etc) than it was a good deal for them. It might reduce their average profit per room sale and reduce their profit margin over selling at their normal prices but isn’t it better to make a small profit and hurt profit ratios than to make no profit and keep ratios high?

Just something to think about.

Have a great day!

Lawrence

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