News for the Hospitality Executive
What if You Reduced Your Hotel Room Rates
and Nobody Noticed?
By Rick Garlick, Ph.D., November 25, 2009
It’s no secret that the hospitality industry has faced unprecedented challenges in recent months. A just-released year-to-year comparative report by Smith Travel Research (STR) cited the following statistics: Hotel occupancy was down six percent to end the week at 52.6 percent. Average daily rate (ADR) dropped 9.9 percent to finish the week at $95.86. Revenue per available room (RevPAR) decreased 15.7 percent to finish at $50.47. Furthermore, a recent Maritz telephone survey of 1,000 Americans indicated holiday travel is projected to experience its first significant decline in a decade, accounting for a reduction of $4.05 billion of travel revenue. The decline was attributed to a combination of financial concerns and fears surrounding the H1N1 virus.
While some see an upturn in travel in 2010, there are still nagging issues that remain. For example, unemployment continues to rise. The Maritz study indicated that 14% had someone in their immediate household lose a job within the past year. Furthermore, there is some lingering impact of the so-called ‘AIG Effect’ where businesses were castigated for sending their employees on ‘unnecessary’ trips. While the travel industry has done a nice job of defending the value of business travel, some companies have learned to adjust and live without travel at their previous levels.
Given the economic climate, it makes sense that hotels would slash rates in a desperate attempt to keep their properties full. After all, an empty room is of no value, right? The problem, of course, is the aforementioned statistics indicate occupancy continues to decline despite these price cutting efforts. Furthermore, a 2006 study conducted by the Cornell Hotel School titled, ‘Why Discounting Doesn't Work: The Dynamics of Rising Occupancy and Falling Revenue among Competitors’ previously made a strong case against discounting as a successful hotel business strategy.
Why doesn’t discounting work more effectively as a means to drive occupancy? The recent Maritz study gave an important clue. When affirming they’d stayed in a hotel within the past three months, survey respondents were asked whether hotel prices had increased, decreased, or stayed the same within the past year. One-third (34 percent) believed hotel prices increased, while another 53 percent said they ‘stayed the same.’ Nearly nine-out-of-ten didn’t even notice that hotel rates dropped significantly.
Of the remaining 13 percent who noticed the decrease in hotel rates, only 23 percent said the decreased rates made them more likely to stay at hotels. Doing the math, this means that discounting rates influences only three percent of hotel travelers, challenging hotels even further to determine how to add value and boost occupancy.
Many hotels have found more effective ways to add value, as opposed to cutting rates. They have devised clever promotional strategies to offer a free extra night, a spa package, free breakfast, dinner/show combinations, etc. to create the perception they are offering a deal without cutting their base rates. It is easier to trumpet these kinds of promotions, rather than a price decrease. Furthermore, creating a memorable guest experience is always critical to adding value to guests. Maritz has conducted proprietary studies that show how guest service ratings are directly related to value perceptions. If hotels do something to stand out, people will be more willing to spend money to stay there. However, if hotels are just another provider of rooms, they become commoditized and therefore, are relegated to competing on price.
Considering these statistics and the challenges they bring to the industry,
it is easy to panic and cut rates. However, if hotels continue to
cut rates and no one notices, they have accomplished nothing. Even
when people do notice rate reductions, it doesn’t seem to have a major
impact on most people’s decision to stay. It requires more creative
thinking to add value in other ways, but garners a greater return on investment.
Rick Garlick, Ph.D. is the Director of Consulting and Strategic Implementation, Hospitality Research Group, Maritz Research. Rick currently focuses on hospitality clients, but has experience in a wide variety of industries. As a consultant for the design and execution of company research initiatives, he helps clients integrate their findings into action plans with bottom-line impact. Rick also provides guidance to research staff and develops new consumer, market and employee research products. He has been published in psychology and communication journals and has appeared on national media outlets CNNfn, CNBC, and NPR. Before joining Maritz, Rick worked at Gallup as a senior research director and managing consultant, and a professor at DePaul University.