Several months ago, a study presented by Cornell University and Smith Travel research, re-affirmed what many of us already believed to be true; Discounting to gain occupancy does more harm than good. The study concedes that discounting within your competition set may sell some rooms, but, overall, it’s a losing proposition.

Data drawn from more than 6,000 hotels from the years 2001 to 2003 shows that hotels, with lower prices relative to their competitive set, captured some market share but did not gain in RevPar. Conversely, those with higher rates relative to their competitive set had lower occupancy and higher RevPar. Now, if you are satisfied with higher occupancy and mediocre RevPar, there is no reason to read-on. You may go back to reading your P&L statement while scratching your head wondering why the added occupancy did not improve your bottom-line.

Are You Still Discounting? You Might Gain Some Occupancy, But Lose RevPar to Your Competition

By: Neil Salerno, CHME, CHA

The primary focus of the study shows that hoteliers need to position their rates higher within their competition set, rather than automatically cut rates to keep occupancy share  numbers up. The entire study “Why Discounting Doesn’t Work: The Dynamics of Rising Occupancy and Falling Revenue among Competitors” can be found at: hotelschool.cornell.edu.

A lot of talk and hand-wringing is devoted to revenue management. There are probably as many methods to achieve good revenue management as there are hoteliers working at it. The fact is that it is an involved process and one that deserves attention regardless if business is heavy or light, year ‘round. One could argue that it’s even more valid during off-season; small changes could produce an even greater impact during slow periods.

A good first step is to create a realistic competition set with which to compare your hotel. I feel that Smith Travel Research, STR report is a great benchmarking tool whether you are running, selling, or buying a hotel. Start with making certain that your competitive set truly reflects the competition for your hotel. It amazes me how many hotels don’t update their comp sets, periodically. Don’t be afraid to change it, STR will run the entire previous year with the new comp set, so you will have a true and accurate picture of your position in the marketplace.

Set realistic benchmark goals for RevPar. I know of at least one hotel owner who uses the percentage of Rev Par share to measure progress, without updating the comp set to reflect current and new competition and day-dreaming of how his hotel used to dominate the marketplace. What he doesn’t realize, or refuses to realize, is that he is now sharing business with additional competition and his hotel’s maintenance has not kept pace with the new competition and new market demand.

Beware of the “downward spiral”. Hoteliers who myopically focus on cutting expenses to produce profit, without a substantial effort to improve top line revenue, are doomed to failure. Deeply cutting expenses will produce a good short-term result, but this alone, usually results in decreased service levels, driving away repeat business and dropping the top line even lower. This, of course, creates a further need to reduce payroll and service levels even further, and the downward spiral continues. To break this spiral, a stronger sales effort is needed, using new methods to create new results. Memories of the good ole days and how we used to do it years ago just don’t cut it today. Living in the past, dooms you to failure in the future. 

Today’s sales program needs to start with good revenue management. Creating an optimum rate structure, rate and inventory yield management, good electronic channel distribution, and strong sales solicitation are all a part of revenue management. Don’t fall prey to the simplistic belief that simply reducing rates will produce long-term profit. 

Beware of micromanagement. Sales people need time to sell; needless detailed reports and unnecessary meetings only serve to defuse their concentration on the sales effort and reduce selling time. Set out clear sales goals, provide support in the form of direction, resources, benchmarks, and let the team sell. This form of “Stewardship Delegation” versus “Gofer” delegation develops people into strong innovative sales people. 

The Cornell University study illustrates that we can, no longer, develop rates and programs in a vacuum.

###