Deep Discounting Doesn't Work
December 19, 2014 9:29am
Sounds great right? Well, it was… for consumers.
However, for the hotels that participated in this deal (offered through a last-minute deals app) might not have been the best business decision - no matter whether it is done to raise awareness or as a way to boost occupancy. Deep discounting is counterintuitive because giving away rooms for practically nothing results in a drastically decreased RevPAR and because it can damage a hotel's brand.
For years and years, most consumers have associated a higher price point on a product or service, to be indicative of a better product. While it may not always be true, perception is reality, especially in business. By offering a room rate of $7 (in many cases a discount of 95% or more), these hotels were telling consumers that the hotel is a bargain brand, even if that is the furthest thing from the truth. After seeing that a property was willing to sell their rooms for $7 per night, how will a consumer be able to rationalize having to pay full price for their next stay? The answer is simple: they won't.
That means that while this type of deal does increase a property's occupancy, it isn't actually beneficial in the long-term for the property. Extreme bargain-hunters are much less likely to spend on incidentals while staying at your property, like food and beverage or spa treatments, so the money lost in the room rate will most often not be recouped by extras during the guest's stay. Beyond that, most of the consumers that do come to stay during this type of promotion will not return again, no matter how great their stay is, because the value in the regular priced room is non-existent after they were able to get the same product for $7 on a different occasion.
I read an interesting article in Tnooz recently called "Why you should avoid selling rooms for peanuts on last-minute hotel apps", which examined the subject of deep discounting and came to the same conclusion: deep discounting doesn't work.
The Tnooz article gave four great tips for how to increase occupancy and revenues without discounting but I think that it missed one key tip: Using sophisticated revenue management technology to ensure that your property is able to consistently maintain a high RevPAR and occupancy.
Sophisticated revenue management technology enables hotels to price their rooms on the online channel in the "sweet spot" where they will secure the most bookings and the highest RevPAR. As the market changes, as competitors update their rates and as inventory changes, a sophisticated revenue management system can continue to update a property's room rate to ensure that it stays in that sweet spot. Without an RMS, most properties are only able to update their rates once a day - or in some extreme cases, even once a week - guaranteeing that the property is not meeting its maximum earning potential. With an RMS, rate updates can take place in real-time, ensuring that a property is on top of its (revenue) game at all times, no matter the time of day (or night!).
So my best advice is to listen to the experts. We all agree that deep discounts don't work. There are many other much more effective (and less damaging ways) to boost RevPAR and occupancy, so next Black Friday (or any other day of the week that you need to put extra heads in your beds), act strategically and don't go for the deep discount!
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Contact: Jean Francois Mourier
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