Quantcast

Short- and Long-term Implications of Discounting Hotel Room Rates

INNspiring.com | Innkeeper Forum & Innkeeping Resources

Help Support INNspiring.com | Innkeeper Forum & Innkeeping Resources:

JBloggs

Moderator
Moderator
Joined
Oct 7, 2008
Messages
17,743
Reaction score
0
This is from eHotelier.com these are hotel rooms - but we also offer rooms, so we maybe we can glean some info from this.
Excerpt: "Low room rates do not induce demand. Given a choice between two equal hotels, guests may opt for the one with a lower rate, but hoteliers will not succeed by this tactic in bringing guests to the market in the first place."
Short- and Long-term Implications of Discounting Hotel Room Rates[/h2]Nov 03, 09 | 1:57 am

By Amber Cheung and Mark Brady
One of the most important decisions facing hotel managers in an economic drought is determining room rates optimal to maintaining occupancy levels and market share. As occupancy levels fall, rates tend to tumble even more quickly in an attempt to overtake them. In the current recession, rate reductions have occurred across nearly all U.S. markets at hotels representing the economy to mid-scale to luxury segments.
Discounting room rates may be a temporary solution to filling some otherwise empty rooms, but the short- and long-term consequences can be severe. The practice of discounting can also have a negative affect on profits: Smith Travel Research predicts that year-over-year revenue per available room (RevPAR) will decrease 17.1% by the end of 2009.1
Market effectsLow room rates do not induce demand. Given a choice between two equal hotels, guests may opt for the one with a lower rate, but hoteliers will not succeed by this tactic in bringing guests to the market in the first place. For example, major demand generators, such as nearby beaches and the Marine Corps Military Base Camp Lejeune, draw demand to Jacksonville, North Carolina-not the falling room rates of area hotels.
Most hotel operators know that lowering rates will not bring demand to the market; however, they can help increase a hotel's market share. Despite this, hotel rates are extremely transparent, and competitors are quick to follow suit when one hotel drops its rate. The undercutting continues apace, and following the free fall, the market hasn't grown and rates are down by double-digit percentages. In the end, hotels that engage in rampant rate cutting suffer from even lower profit margins and returns.
Short-term lossesTo illustrate the effects of lowering rates to fill rooms, we've provided the following snapshots of typical profit and loss statements for economy, mid-scale, and upscale hotels. The parameters set are for a typical hotel of each type, based on select actual operating histories in 2008.2
Economy Hotels: Assume a 50-room economy hotel commands an average rate of $60 and achieves 55% occupancy. At a typical, well-managed hotel, this would yield a house profit (before fixed expenses) of 37%. Given the same expenses as a percentage of sales, suppose the rates are reduced to $55 to maintain 55% occupancy; house profits are thereby reduced to 34%, equating to a loss of approximately $2 per occupied room, or $34,000 per year. By contrast, suppose rates were raised to $65 and occupancy dropped to 49%: profit margins increase to 39%.
Effect of Rate Discounting at an Economy Hotel

Mid-Scale Hotels: Assume a 100-room mid-scale hotel commands an average rate of $115 and achieves 55% occupancy. At a typical, well-managed hotel, this would yield a house profit (before fixed expenses) of 42%. Given the same expenses as a percentage of sales, suppose the rates are reduced to $105 to maintain 55% occupancy; this move reduces house profits to 39%, equating to a loss of approximately $6.75 per occupied room, or $135,000 per year. By contrast, suppose rates were raised to $125 and occupancy dropped to 49%: profits margins increase to 43%.
Effect of Rate Discounting at a Mid-Scale Hotel

Upscale Hotels: Assume a 300-room upscale hotel commands an average rate of $165 and achieves 71% occupancy. At a typical, well-managed hotel, this would yield a house profit (before fixed expenses) of 30%. Given the same expenses as a percentage of sales, suppose the rates are reduced to $140 to maintain 71% occupancy; house profits are reduced to 25%, equating to a loss of approximately $16.50 per occupied room, or $1.2 million per year. By contrast, suppose rates were raised to $180 and occupancy dropped to 59%: profits margins increase to 32%.
Effect of Rate Discounting at a Upscale Hotel

Long-term effectsIt's a bit harder to demonstrate the business implications of chronic rate reductions in the long term, but these can have the most detrimental effects on the hotel. U.S. Hotel Trends: Yesterday, Today, and Tomorrow, a study developed by HVS, shows that the recession we are facing today is most comparable to the recession in 1980. Unlike the 2001 recession, hoteliers are now faced with prolonged demand declines and a longer recovery period; HVS studies anticipate that growth of both demand and average rates will not resume until 2011. However, RevPAR is not expected to return to 2007 (pre-recession) levels until 2013. This recovery period can have a severe effect on hotel performance and sustainability, and discounting rates contributes to its prolongation. Hotel managers must also consider potential revenue loss during the recovery due to discounting, as the lost revenues compounded year-to-year are likely to have a pronounced negative effect on overall hotel performance.
ConclusionDiscounting rates, even as a stop-gap measure against demand loss in the current economy, can yield negative effects for hotels and the overall market. Nobody wins in the aftermath of a price war. Discounting rates in order to increase occupancy will induce higher costs on a per-room basis and decrease profit margins. Perhaps the most deleterious effects lie in the long term, and these effects may not warrant consideration as hoteliers struggle with the immediate challenges of their day-to-day operations. A better solution to discounting is to offer additional value to the customer without sacrificing rates. Such value additions include Internet service (which can cost up to $15 per night), breakfast or all-day coffee service, or a complimentary spa treatment during a weekend stay. The take-away message is that rate integrity is essential to the profitability of a hotel operation in the short and long term, and it may not be too late for hoteliers to stop the rate hemorrhaging and put their properties in a stronger position to capitalize on an economic recovery.
1 Higley, Jeff. Just Call This Rebound the ‘Swoosh Recovery'. Retrieved August 28th 2009, from Hotel News Now Website: http://www.hotelnewsnow.com/articles.aspx?ArticleId=1800&PageType=Featured&ArticleType=1
2 Representative operating histories for the three U.S. hotel classes were based on data from brand-affiliated hotels of similar size and amenities.
article from here: http://ehotelier.com/hospitality-news/item.php?id=P17455
 

Morticia

Administrator
Staff member
Administrator
Moderator
Joined
May 22, 2008
Messages
17,421
Reaction score
289
For pete's sake. Now they're telling hotels that guests appreciate the 'value added' in the free amenities that we have been doing all along?
You know what? I think I'm going to stop reading HOTEL-based research. It just does not apply to what I'm trying to do here.
 

happykeeper

Well-known member
Joined
Dec 11, 2008
Messages
1,758
Reaction score
0
Nothing new here except that it lays out the case with statistics, which is great for folks who need to see it on the balance sheet. We have watched a few B&B's here slashing rates and throwing amenities out the window. It's like a death spiral. Everything that you are is compromised for a couple short term dollars and your brand collapses.
Adding value - adding value - adding value - and running specials that keep your base rack rate in front of the buyer are the way to go.
 

EmptyNest

Well-known member
Joined
May 22, 2008
Messages
8,741
Reaction score
1
For pete's sake. Now they're telling hotels that guests appreciate the 'value added' in the free amenities that we have been doing all along?
You know what? I think I'm going to stop reading HOTEL-based research. It just does not apply to what I'm trying to do here..
Yes we keep saying we are not hotels..so why listen to them??? Continue to do your thing and I agree with our Hawaiian friend...a voice of reason:)
 

gillumhouse

Moderator
Staff member
Moderator
Supporting Member
Joined
May 22, 2008
Messages
15,609
Reaction score
214
Nothing new here except that it lays out the case with statistics, which is great for folks who need to see it on the balance sheet. We have watched a few B&B's here slashing rates and throwing amenities out the window. It's like a death spiral. Everything that you are is compromised for a couple short term dollars and your brand collapses.
Adding value - adding value - adding value - and running specials that keep your base rack rate in front of the buyer are the way to go..
I agree totally. My 18th Century Thanksgiving is not what anyone would call inexpensive but I have 2 couples coming for it and both have expressed excitement about coming. I will not cheapen my inn and services by lowering my standards or my rates. I hope to reinforce the fact of quality by maintaining my rates.
 

happykeeper

Well-known member
Joined
Dec 11, 2008
Messages
1,758
Reaction score
0
Nothing new here except that it lays out the case with statistics, which is great for folks who need to see it on the balance sheet. We have watched a few B&B's here slashing rates and throwing amenities out the window. It's like a death spiral. Everything that you are is compromised for a couple short term dollars and your brand collapses.
Adding value - adding value - adding value - and running specials that keep your base rack rate in front of the buyer are the way to go..
I agree totally. My 18th Century Thanksgiving is not what anyone would call inexpensive but I have 2 couples coming for it and both have expressed excitement about coming. I will not cheapen my inn and services by lowering my standards or my rates. I hope to reinforce the fact of quality by maintaining my rates.
.
On the idea of reinforcing quality, we have seen a new and unexpected development. We have been attracting guests from higher end resorts as our price point has come more in line with theirs.
 

JBloggs

Moderator
Moderator
Joined
Oct 7, 2008
Messages
17,743
Reaction score
0
Speaking of amenities - I just checked in a couple who are both interested in the local SPA (on the corner) with no appt. People it is 430pm on a Friday. It is one of those things the more you say the less they read. I give the ph# and info so they can call if they want to use it. (This is the place that has a massage therapist who doesn't really give that great of a massage and I feel is overpriced so I am not including it in any packages, just referrals).
We really need to visit other B&B's to see what they are doing. Not so much inn-mates, I am afraid, as they will give you the moon. Are we giving away the farm? Are we adding more value that is not perceived by the guest as added value? Are we not getting it back in return?
 

gillumhouse

Moderator
Staff member
Moderator
Supporting Member
Joined
May 22, 2008
Messages
15,609
Reaction score
214
Nothing new here except that it lays out the case with statistics, which is great for folks who need to see it on the balance sheet. We have watched a few B&B's here slashing rates and throwing amenities out the window. It's like a death spiral. Everything that you are is compromised for a couple short term dollars and your brand collapses.
Adding value - adding value - adding value - and running specials that keep your base rack rate in front of the buyer are the way to go..
I agree totally. My 18th Century Thanksgiving is not what anyone would call inexpensive but I have 2 couples coming for it and both have expressed excitement about coming. I will not cheapen my inn and services by lowering my standards or my rates. I hope to reinforce the fact of quality by maintaining my rates.
.
On the idea of reinforcing quality, we have seen a new and unexpected development. We have been attracting guests from higher end resorts as our price point has come more in line with theirs.
.
Goes to show you do not need to cut prices. Sometimes raising them is what is needed.
I still think there are a lot of people who want to feel special - the "I can afford this" group. And for those who cannot usually, to be able to spend a "special occasion" at a more expensive place makes it more Special. If I am going to go all the way to Hawaii, I want it to be as Hawaii and as big a deal as possible and that is not staying in big box chain that is the same wherever you are.
 

happykeeper

Well-known member
Joined
Dec 11, 2008
Messages
1,758
Reaction score
0
Speaking of amenities - I just checked in a couple who are both interested in the local SPA (on the corner) with no appt. People it is 430pm on a Friday. It is one of those things the more you say the less they read. I give the ph# and info so they can call if they want to use it. (This is the place that has a massage therapist who doesn't really give that great of a massage and I feel is overpriced so I am not including it in any packages, just referrals).
We really need to visit other B&B's to see what they are doing. Not so much inn-mates, I am afraid, as they will give you the moon. Are we giving away the farm? Are we adding more value that is not perceived by the guest as added value? Are we not getting it back in return?.
Joey Bloggs said:
Are we giving away the farm? Are we adding more value that is not perceived by the guest as added value? Are we not getting it back in return?
IMHO-
Added value should not reduce base revenue. It's an addition that requires a combination of:
  • expanding services you already include in your budget
  • some additional cost
  • identifying your existing enhancements in your marketing to encourage guests to make more use of them.
Added value that is not perceived by the guest is not added value, IMHO.
Added value that has a cost should be offset by an innkeeping gain if possible. i.e. Get a value IF you stay 3 nights
saying it is the easy part- doing it is where the excitement comes in!
 
Top