Right from the beginning of the current economic crisis, consultants, industry experts, hoteliers and revenue managers have been arguing about discounting, citing “the mistakes of 2001”. While the advice to avoid discounting is based both on experience and consumer behavior research, hotels are a business and must generate revenue. What else can you do if your competitors discount and your market share starts dropping?

Experts point to the time it took rates to recover after 9/11 and imply that the danger of price wars during a recession is the difficulty in pulling rates back up to pre-recession levels. While this is certainly a risk, in my opinion, the biggest hidden danger in fighting a price war is not about rate integrity; rather, it’s that we’re teaching customers to make hotel purchase decisions strictly on price. The longer this continues, the more likely hotel rooms will become a commodity, indistinguishable on any other factor but price. This will result in price wars that continue into the recovery and beyond and do irreparable harm to the industry as a whole.

To Discount, or Not?
The arguments about discounting usually come from two perspectives economic and consumer behavior. An economist would argue that the advice to avoid discounting is simply wrong. Supply and demand dynamics set the market price. Scarcity dictates pricing, and there’s no scarcity of rooms right now. They’re not as valuable to consumers as they were two years ago. Lowering prices is merely a necessary response to market conditions. Once demand increases and supply becomes scarcer, rooms will be more valuable to the consumer and hotels can command higher prices. Pricing above what the market will bear means losing market share to competitors.

Consumer behavior research has shown that customers establish a reference price for a good or service based on previous experience and use this reference price to evaluate whether a future price they’re offered is reasonable or fair. The more and longer hotel room rates are discounted, the more likely that the discounted rate will become the reference price, and the more difficult it will be for hotels to recover their value in the minds of the consumer. Maintaining rates reduces the risk that the reference price will be replaced.

The biggest problem with both of these arguments, at a market level, is they assume one hotel room is the same as any other. If an hotelier is unable to convince customers that their product is worth more than their competitors’ through “soft” factors beyond price (assuming that location is equivalent), then they’ve become a commodity. Price then replaces brand, service standards and physical property as the key driver of purchase decisions, and price wars continue.

Commoditization – How It Started and What Can Be Done
The worst thing a hotel can do in this economy is discount and then cut key services that differentiate its property from the competitors. This is the double-edged sword of the down economy. In order to fight commoditization brought about by excessive focus on price, hotels must maintain service levels and brand focus. Every customer that comes through the door needs to understand what makes your property different and special, and what makes your brand unique, whether they are a loyal customer or came in because of a discount.

This commoditization of hotel rooms is not a new issue. Hotels started down the commodity path in the mid 1990s with the advent of Priceline and the OTAs and have been fighting it ever since. Once customers could easily search for the best deal in the market, hotels focused so much energy on keeping up with the competitive set and maintaining rate parity they forgot to remind the customers about the brand. The problem was exacerbated after 9/11 when hotels had to fight for a smaller piece of the pie and did so by dramatically cutting rates.

Differentiating the brand and distinguishing service offerings is 100 percent in the control of the hotel operator. The OTAs merely accelerated a trend that already existed. Only a situation in which there is very little perceived difference among brands (assuming location and star level) encourages blind auctions and rewards the low-cost leader. If brand and service standards had been a salient factor for customers, Priceline and Hotwire would never have gained traction.

This is not to say that the OTAs are not useful, or even essential. These channels increase visibility and drive revenue. Further, they increasingly provide opportunities for hotel companies to differentiate themselves using pictures, text, customer ratings and social media. Smart operators can use packaging and bundling on the OTAs to maintain rate integrity while filling distressed inventory. The branding opportunities, when applied intelligently, can drive bookings, even if your rate is slightly higher than the competitive set.

There is certainly a place for opaque channels in a good pricing and distribution strategy, as well. The ability to “dump” distressed inventory without customers knowing how low you are willing to go not only generates revenue, but also helps to maintain the customers’ reference price. However, these channels should represent the small “brand-insensitive” segment of your market mix, used to fill in gaps once your brand-loyal customers have been served. Filling the property with low-price seeking customers will turn away your brand-loyal guests.

Reflecting on the last economic crisis in 2001-2003, hotels have refocused attention on the brand. The numerous brand launches by major players are testimony to the importance of designing services that best meet the needs of diverse customer bases. When times were good, hotels had money to invest in pilot or experimental projects like new brands or building brand awareness. Now that times are bad, there is an increased focus on cost cutting, and special projects are placed on the back burner. Driving efficiency is important, but not at the expense of what makes your property and your brand unique.


The Opportunities
A recent report from Forrester investigated customers who seek low price versus those who seek service in making their buying decisions. While 65 percent of hotel customers say both low price and good service are a priority, 19 percent favor good service over low price, and just seven percent favor low price over good service. This means nearly three times as many people would choose your hotel only because your service was good than would choose your hotel only because it was the lowest price. Why not send those price seekers to your competitors and focus on attracting and maintaining service seeking-customers (within a reasonable price range for your market)?

Findings from the Cornell Center for Hospitality Research support this argument. The researchers studied the effect of pricing strategies (in terms of price position within the competitive set) on RevPAR and occupancy. They compared hotel performance during the recession in 2001-2003 and then in the upswing from 2004-2007. In both cases, and across market segments, analysis showed that hotels that consistently priced five percent or more above their competitive set had higher RevPAR, even though occupancy was lower than lower-priced competitors. In fact, hotels that price 20-30 percent above the competitive set saw the most significant increases in RevPAR, even with much lower occupancy levels. To a certain extent, this study supports the argument not to discount, but it primarily advocates not being the low-cost leader in the market. Even if average rates in your market drop, you are well served to continue to price above the average.

Such a strategy requires you to provide some incentive for customers to choose your property beyond just price. This means that as revenue managers are carefully monitoring and maintaining price position in the market place, marketing and operations continue to focus on the brand promise and providing excellent service. Close communication, a strong understanding of the market and a deep relationship with the customer base will ensure hotels generate revenue through the downturn and are well poised for recovery.

Revenue management has always been about finding incremental opportunities, and that still holds in a down economy. Small day-to-day adjustments within a larger brand strategy are the only way to weather the storm. Clever packaging and promotions highlighting unique features and amenities remind customers of your brand and deepen their relationship with you, while driving value and encouraging bookings. Keep a close watch on your OTAs, and leverage any opportunities to reach customers through new channels.

A strong analytic strategy, supported by solid data collection, integration and quality is essential, now more than ever when budgets are tight and revenue is down. Every price and promotion strategy should be carefully planned with all stakeholders participating. The team should evaluate why the pricing decision is being made and whether the promotions supports or grows the brand promise. If the decision is strictly made because a competitor lowered its rate, then you need to go back to the drawing board. Once put into place, you must follow up. Analysis of response rates and change in demand patterns will ensure you measure success and can make course corrections when required.

All of this discussion reminds us that pricing is as much an art as it is a science. It is very much subject to and influenced by consumer behavior, preferences and perceptions. There is no silver bullet, no across-the-board strategy that will save you. The reality is demand is down, and even if you are strategic and thoughtful, you may be forced to deep discounts to drive revenue. At these price levels you could entice some customers to experience your brand and become loyal through the recovery. Unfortunately, it is also likely that many customers will trade up while rates are low and won’t stay at your property once rates are back at pre-recession levels. You have a responsibility to your owners and stakeholders to continue to drive revenue, but that goes for now, and also during the upturn. You may be forced to discount rooms, but don’t discount the brand at the same time.

Kelly McGuire, PhD, is product marketing manager for SAS Institute’s gaming and hospitality practice.