By Jean Francois Mourier 
June 10, 2011
Reprinted with permission from www.hotelexecutive.com

They say with distance comes clarity.  Now that the economic nightmare of 2009 seems to have passed, for the most part, we can examine what the hospitality industry did well in the name of survival and what it did poorly.  Perhaps the most visible coping mechanism employed by major hotel brands in the extremely demand-depressed environment of the past year and a bit was deep, across-the-board discounting.  For many hotels (most, it could be argued) the immediate need to put heads in beds superseded any consideration of the impact on the hotel’s brand or brand image. 
 
In a crisis such as the Great Recession presented for the industry, this is at least understandable.  And since a large number of the major chains engaged in across-the board discounting, the strategy can be considered consistent across the industry.  But for many hotels, discounting remains a knee-jerk response to nearly every constriction in demand, and this strategy just won’t work. 
 
Maintaining sound rate discipline should be a top priority for hotels across the country and around the world.  The industry can take a pass on the deep discounts of 2009- call it the mother of mitigating circumstances- but now it’s time to get back to the hard work of optimizing rates and the RevPAR they ultimately generate.
 
The danger of discounts
The rush to discount implies an undue emphasis on maintaining occupancy and a shortsightedness in terms of brand development.  Yes, discounts can attract new customers, and distinguish a hotel in a crowded marketplace.  But competition based on price is not a game many hotels are well-suited to play.  At the extreme, deep discounting in a given market can lead to a pricing death spiral, with each hotel racing the other to the effective rate bottom.  We need only look to debilitating price wars in our sister industry- the airlines- to see the profoundly negative effect this can have on the health of an economic sector.
 
The everyday dangers of discounts are more insidious than the worst case scenarios of slash-and-burn price wars.  Discounts, with their appeal to bargain-seeking travelers, can erode a hotel’s customer base.  Whereas once a hotel might have attracted business travelers with their multiplier effect on non-room spending (think expense accounts and long lounges in the lobby bar), a hotel with a discounted rate might instead attract leisure guests on a budget.  For what the hotel gains in occupancy, it loses in overall per-room revenue.
 
If the hypothetical business traveler isn’t coming anyway, then this is a workable strategy.  If, however, discounting is implemented for the sheer goal of increasing occupancy, then it deprives a hotel of the additional revenue it might have captured with a higher rate.
 
The right focus
The essential problem with a discounting strategy is that it is targeted on the wrong metric for hotels.  Maximizing occupancy, while once the standard for performance in the hospitality industry, is not and should not be the goal of hoteliers.  Instead, the focus should be on RevPAR or a similar metric (GOPPAR, or gross operating profit per available room, is one of these).  Occupancy is a percentage and average daily rate is just a number, but RevPAR is a bankable dollar figure; concentrating on occupancy at the expense of optimal RevPAR is just not good financial sense.  Yet that is exactly what across-the-board rate discounting does.
 
True, with minimal occupancy RevPAR would be also minimal.  But to achieve optimized RevPAR, a hotel must sell as many rooms as possible at the highest possible price.  This is where rate discipline comes into play: it is crucially important not to fall victim to the fallacy of high occupancy equaling high revenues, or profits.  Maintaining rate discipline is the effective prescription for this temptation.
 
The online effect
Rate discipline has another effect, as well.  With the large portion of hotel rooms sold online to individual travelers (through online travel agencies and through the hotel’s own website), rate plays a role in both where a hotel room appears on an OTA’s listing of available rooms and in how that room is perceived by potential buyers.  Posting a rate that allows a hotel’s available rooms to appear within the first few entries displayed on an OTA, for instance, increases the likelihood of sales.  In this case, the highest rate possible can’t achieve this positioning; rather, a hotel’s rates must be flexible within a given range to maximize sales opportunities and maintain optimal page positioning.
 
Consumer perception also factors heavily into online sales.  With a tremendous amount of information at their disposal, including star rating, peer reviews and rates, consumers make purchasing decisions based on an ever-increasing number of factors.  To be certain, a sizable portion of consumers use rate as the primary factor in decision making; therefore, a hotel can avoid or encourage that particular consumer segment by pricing their rooms accordingly.
 
The value of brand
At this point, though, the impact of the rate upon the hotel’s brand must be considered.  Associations between price and quality are natural for consumers to make, and perceived quality is a central component to any hotel’s brand image.  Therefore, a rate discount negatively affects a hotel’s brand. (This is an oversimplification, of course; many hotels define their brand by bargain prices, and a high rate does not guarantee positive brand development.  A correlation does exist, though.)
 
Dismissing this effect as the trivial fluctuation of image is unsound.  Brands have immense value, especially in influencing the purchasing habits of consumers.  According to a 2002 Interbrand study, brand value accounts for approximately 38% of the value of the companies that own them.  For a large hotel chain like Hyatt, with total assets of more than $6.11 billion at the end of 2008, that puts the value of the Hyatt brand at $2.32 billion.  Recall that Hyatt engaged in across-the-board rate cuts in 2009, and consider the brand value lost through that strategy.
 
The Solution
If discounting is damaging to a hotel’s brand, and maintaining one static rate is equally detrimental to RevPAR and occupancy, then the solution lies in variable rates, modified in real-time to best match demand conditions.  This eliminates the either-or quandary of whether or not to engage in across-the board discounting.  Instead, the highest rate likely to generate a sale is presented to the right customer at the right time. This is achievable through the use of advanced revenue management systems, the best of which will also optimize page position on OTAs, manage multiple sales channels, and manage room inventory.  To maximize occupancy and rate, however, automation is key.  Rates must be modified subtly, in real time, to avoid the pitfalls of wide-scale discounting.
 
Discounting is fine for crisis management, and in measured doses on an individual sale basis.  But it is not a consistently workable strategy, and any hotel employing this pricing tactic may gain a short-term boost in occupancy, but will ultimately damage their brand over the long term.  The industry as a whole, and hard-discounting hotels in particular, must come to embrace a more comprehensive revenue management strategy in order to protect their brand and the immense value it represents.
 
Rate discipline will be the watchword through the recovery.  The hotels that maintain it will perform well, and the hotels that don’t will see their brand atrophy. And looking forward to the next article in the revenue management series from REVPAR GURU & Hotel-Online…
 
Going with GOPPAR?
As much as one could say that any hotel industry financial ratio has become trendy and popular, that honor would go to GOPPAR (gross operating profit per available room). Those who believe it in claim that it’s a more useful metric of hotel efficiency, as it factors in the costs of operating an establishment rather than simply the revenue that’s brought in. Although GOPPAR has its uses, RevPAR is still the better ratio to concentrate because it more accurately distills the effectiveness of the hotel’s sales effort. We detail the reasons why, as well as why RevPAR still needs to be front and center of any modern hotel’s approach to the market, in this piece which will be running on June 24, 2011 on Hotel-Online.

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Jean Francois Mourier is CEO & Founder of RevPar Guru, a company that has developed an alternative type of revenue management and real-time pricing solution (combined with automated online distribution) to help hotels maximize occupancy and increase their profits. The company’s Yield Dynamic Price Engine, an integrated revenue management and pricing solution, adds unprecedented power and real-time adaptability to the pricing process, leaving managers more time to run their hotels. You may reach him through www.revparguru.com or by calling +1.786.478.3500.