RSBA & Associates 
Hospitality Consulting Services
400 Spear Street, Suite 106
San Francisco, CA 94105
Email: [email protected]
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 Pricing To Profit
by Rick Swig, ISHC, September 2009

In December 2008 I walked into a department store to buy some pillows.  I was pleased to see that there was a 40% off sale, although I was going to buy the pillows anyway.  When I went to pay for the items, the sales clerk asked me whether I was a frequent buyers member because there would be another 10% off.  I was not, but she gave me the discount anyway. Then, she asked me whether I brought in a 10% off discount mailer, which I did not, but she gave me the discount anyway.  I was pleased to receive these massive discounts, but I wondered, as I left the store, how the store owners’ profit was faring.

Little did I know that I was experiencing the beginning of a retail trend, which would move from department store activity right into the hospitality sector…..and with a vengeance!  As we are completing the fourth quarter of 2009, the hospitality sector has managed to undermine any pricing strength and/or integrity that it once held.  The sector has managed to follow the airlines and general retailing down the path of failed profitability through unabashed incentives and unprofitable discounting. 

Some hotel asset managers wonder what unprofitable versus profitable pricing is.  Simply stated, the distinction is that which allows owners their fair or anticipated return on investment.  It is not just about winning the market penetration game or comparable competitive yields on Gross Operating Profit.

According to a number of industry observers the modern era of the hotel business began in 1985 with the unveiling of Smith Travel Research (“STR”).  Although the hotel business really started over two thousand years ago for travelers seeking relief from horse and camel trails, STR did allow the most accurate opportunity to measure one’s hotel business productivity within the context of the competitive market.  The focus on measuring market share and market penetration (in general and then by market segment) brought a new awareness to the hotel business sector, along with the potential manipulation of those elements through more sophisticated marketing and pricing techniques.  Twenty-two years later, Randy Smith is pleased that the industry is now globally addicted to his data, while the industry is both the better and the worse for it.

Especially after the early 1990’s recession and the resulting decline of business travel in that period, the airlines and, subsequently, the hotel operators discovered that they could stimulate the so-called Leisure transient segments with pricing incentives and other terms and conditions like length of stay provisions, Saturday night stays, and selected day of week pricing.  It really worked and stimulated both travel, cash flow, and some re-claimed profitability.  At no time during that period was there a decline in national average daily rates in hotels.

In the early 2000’s, especially during and after 2001, hotel operators expanded on what they thought they had learned in the previous recession and then applied those activities to broader business segments and on a seven-day basis.  There were ad hoc pricing incentives, as well as special bonuses paid with double and triple frequent guest points or miles, and once again hotel operators were seemingly able to stimulate demand for their individual hotels…..or was it simply shifting market share without any effect on individual market or segment demand? 

At this point STR data really became the monthly metric source to measure competitive effectiveness, as hotel operators became addicted to their measured revenue per available room (“REVPAR”) market penetration performance. Linkages between pricing incentives and individual hotel REVPAR penetration performance became apparent, so hotel operators just kept on discounting to stimulate business and this time with willing conspirators called the e-commerce channels. 

Although many hotel operators would argue and quantify that they were successful in capturing predominant market share for their individual hotels in 2001 and 2002, that period became the only time since the beginning of time (1987) that industry wide ADR declined, and it was only the effective management of expenses that enabled general profit stability. As a result of the discounting epidemic of the early 2000’s decade, general ADR levels in many geographic markets did not return to year 2000 levels until 2007 or 2008.

The hotel operators went back to the discount trenches in 2008, as demand crashed again.  This time, however, business travel significantly ceased, and meetings became a political and financial scourge.  What was a hotel operator to do?  DISCOUNT!!!!  Why?  To generate demand and builds market share with favorable reports on an operator’s performance via the now weekly STR report.  What about profitability, however, and the protection of a hotel’s product and positioning integrity?  Certainly, a weekly STR profitability metric comparison, if it existed, would provide a significant reality check that the pricing pendulum has swung to an extreme with negative benefit to hotel owners.  Congratulations hotel business practitioners, you may have consistently won the STR market penetration sweepstakes, but the owners are now bankrupt!

And congratulations, yet again, to the perpetrators of the market share through discount philosophy, you have trained the customer never to accept published pricing again.  Customers are now of the belief that there must be a better room rate somewhere, so this has become their obsessive pursuit, thus undermining corporate rate agreements, convention room blocks, and profitable rate positioning everywhere. 
Owners of hotel real estate, although clearly bought into the pricing concepts, should be irate with brands and operators who have promoted these practices. For many of the hotel owners, however, an attitude change would be too little too late, as the forecasted 2009 year end record breaking decline in national REVPAR performance of 17% - 20% will result in 35% to 40% losses in net operating income/EBITDA and at least that in property valuations.  Hotel owners have already been ruined by ill-advised and out of control pricing practices. The question for the future is what to do about getting back pricing control and, ultimately, profitability. 

The views expressed in this article are those of the author and not Real Estate Media or its publications.

Rick Swig is president of RSBA & Associates, a hospitality industry consulting firm based in San Francisco. He may be
contacted at [email protected].

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RSBA & Associates
400 Spear Street, Suite 106
San Francisco, CA 94105
E:mail:   [email protected]
Tel:  (415) 541-7722
Fax: (415) 541-5333

Rick Swig Article Index:
Hotel Real Estate Owners Face a Brave New World / Rick Swig June 2009
Hotel Operators Will Face Many Challenges As Economy Continues on Downswing / Rick Swig / June 2008
With New Supply at a Near Standstill, Now Is the Time to Buy Hotel Assets / Rick Swig / December 2007
This Year’s Critical Issues Will Escalate If the Hotel Industry Doesn’t Address Them Now / Rick Swig / September 2007
CapEx Discussions Require Balancing Brand, Owner Needs; The current fervor of standard compliance may simply be a reasonable process to catch up on postponed necessities / Rick Swig / June 2007
Lack of Human Capital Is Becoming Serious Issue for Hotel Owners, Operators / Rick Swig / December 2006
Successful Hotel Brand Differentiation Means Connecting With Customers / Rick Swig / RSBA Associates / June 2006
Shortage of Sites, Rising Expenses Should Keep Hotel Development in Check / Rick Swig / RSBA Associates / February 2006
In Today’s Hotel Acquisition Market, How Much Do Cap Rates Matter? / Rick Swig / RSBA Associates / January 2006
Lodging Business in Transitional Year, But Challenges Will Remain After ’05; A Hotel with Truly Unique Attributes Is Worth a Premium / Rick Swig / October 2005
Despite Lack of Long-Term Data, Hotel Developers Favor Hybrid Projects; The Fractional and Condominium Component Not a Proven Solution to Development Prosperity / Rick Swig / June 2005
Travelers Prefer Innovation, Creativity Over Predictability, Discount Pricing / Rick Swig / March 2005
Recent Occupancy, ADR Growth Still Do Not Spell Post-9/11 Relief; Total 2% revenue growth over four years has not kept up with national annual average inflation growth of 2.5% / Rick Swig / RSBA Associates / November 2004
Hotel Success Hinges on Relationship Between Owner, Asset Manager, GM / Rick Swig / August 2004
Hotel Operators Can Gain Market Share Through Distinctive Brand Images; A 100-room boutique hotel can develop more identity within a market than its 1,000-room competitor  through customer impact points / Rick Swig / May 2004
Hotel Operators Must Share Blame with the Economy for Stagnant Performance / Rick Swig / RSBA Associates / January 2004
Investors Seeking Opportunistic Hotel Buys Are Likely to Come Up Empty Handed  / November 2003
Hotel Sector Remains in the Game Despite Reaching Strike Three; Occupancies are now beginning to improve compared with last year and a poor first half of 2003 / September 2003
Some Stability Has Returned to the Hotel Sector, But Its Staying Power Is in Question; The Plundering of Lower Market Tiers Has Cost Upscale Hotels / May 2003
New Business Practices Essential to Lodging Companies’ Success / February 2003
Unreliable Market Trends Yield an Uncertain Direction / October 2002
The Bigger They Are, The Harder They Fall / September 2002
News of Boutiques’ Demise Is Greatly Exaggerated  / May 2002
Management by Spreadsheet Erodes Full-Service Hotel Core Values / Feb 2002
Hotel Lenders Face Challenges In Tough Climate / October 2001
Where We Are Now Depends on Starting Point / Summer 2001
Solid Management Practices Can Improve Franchise Value / May 2001
Hotel Market Stagnation To Continue / January 2001
Here Today…but Tomorrow? / November 2000
Ready, Willing, and Unable? / August 2000
Independent Hotels: The New Brand Alternative / June 2000
Ankle Biter Syndrome / January 2000
Redefining a Mature Hotel Sector / November 1999
Focus On Operations Is Not Enough / August 1999
What’s Next?? / May 1999
Growth Through Management  / Feb 1999
Expect a Subdued Market in 1999 / Feb 1999
Hotel Real Estate: Back to Fundamentals / Nov 1998
The Hotel Investment Barometer For Institutional Investors / 1998
The State of Independents / 1998
Success (or Survival) of Boutique Hotels and Resorts / 1998

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