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March 01, 2009
CounterPoint
Tom Walker

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© 2009 Hospitality Upgrade. No reproduction without written permission.

As the hotel industry confronts another perhaps record-breaking downturn, the temptation to discount aggressively is bound to gain momentum.  But what, exactly, does it mean to discount?  Outside of very limited-service products, a hotel’s overall average rate results from a bundle of prices.  Group rates, negotiated corporate rates, rack rates, opaque rates and many others all are ingredients in a hotel’s final average daily rate (ADR).  One discounting tactic might create real value; others may have the opposite effect.  So the how, what and where to discount become questions deserving careful consideration.

The last major downturn for the hotel industry is widely recognized as the aftermath of Sept.11.  A unique panic ensued among hoteliers.  A softening of demand was becoming apparent before that day’s horror, but the catastrophes in New York and Washington, D.C., accelerated decline precipitously.  Hotel room rates plummeted – New York City saw double-digit reductions and, as a leading market, presaged even steeper reductions elsewhere.  The result was a race to the bottom; a race that moves quickly and heralds no winner.  Worse, as hindsight has made starkly clear, significantly eroded room rates tend to recover more slowly as demand rebounds than they slid in the opposite circumstance.  One reason why this is so is the influence of group (meeting) demand.  Associations book conventions years in advance.  A typical contract addresses room rates in terms of current year pricing, with a specific inflator per year as the determinant of actual future pricing.  A contract struck when rates are depressed because of poor demand will carry a legacy effect into the future.  Should demand be robust in the year of consumption, or years leading up to the year of consumption, the hotel will find itself bound to charge less than market rates because of contract parameters.  Unfortunately, the opposite turns out not to be true.  A contract struck during high demand periods may command commensurately high room rates at time of consumption on paper, but if when guests are booking, rooms demand has collapsed and prices are lower, attendees can simply book the lower publicly available rates. 

Spirited conversations about this particular point engaged meeting planners and hotel directors of sales, not to mention attorneys, throughout 2002 and 2003. Coincident with the panic following Sept.11 was the ascendance of online travel agents (OTA).  In their immediate anxiety, hoteliers offered these channels abundant inventory and sharply discounted pricing in hopes of minimizing such a steeply declining demand curve’s impact.

Opportunities to participate in special promotions, conditioned upon sometimes exclusive, often complex, discount offers, will predictably become more numerous as 2009 wears on.  Once again, the promise of an OTA’s broad reach and supporting marketing muscle will be an attractive hook. 

It is abundantly true that OTAs represent an important source of business for hotels.  It is equally true that, for their own viability, hoteliers need to retain control of their product.  Some proposals might make sense, but before agreeing to such a solicitation it would be wise to consider a variety of factors.  Important factors would be:
Will the program put your hotel in violation of agreement terms with other OTAs?  If it does, the benefit from one will be offset by punitive placement and relational damage elsewhere.

Can your own technical infrastructure support the program?  Escalating discounts as length of stay increases, or other appealing but complicated schemes, will create operational problems and customer friction if they cannot be reliably fulfilled. Based on expected incremental lift (which would consider buy-down effects and the marginal cost to occupy a room), is it probable that the discounted business will deliver more profit than would be achieved otherwise?  A greater number of occupied rooms does not automatically translate into improved profitability.

Is the promotion fenced in such a way that it doesn’t create an expectation of ongoing reduction?  Prices that have fallen generally do not recover quickly.  The more closely a property is associated with special promotions the more difficult it will be to rebuild position as demand rebounds.

Most importantly, does the offer place your own channels at a comparative disadvantage?  It takes very little time to train customers.  When OTAs are afforded better pricing than what the hotel offers directly, the long-term benefit accrues to the OTA rather than the hotel.  Not only is demand diverted to much higher cost channels, the customer learns that loyalty to the OTA is more beneficial than loyalty to the hotel.

Discounting may work in some cases and not in others, depending on what is discounted, for what purpose and to what effect.  Discounting is one of many tools a hotel operator might use to improve performance.  Like any tool, it can be misused.  It remains for professional hoteliers to assess the value of targeted discounting within the context of their own competitive circumstances.  The tactic ought to be formulated according to an advantageous strategy–one that needs to be monitored and regularly measured to ensure it is achieving the intended result.



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