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How to compete successfully in a hotel price war

April 01, 2010 | Hospitality Industry

A new Cornell survey on the effectiveness of tactics that revenue management professionals around the globe used to survive the economic downturn showed that while discounting was the most frequent strategy used, marketing approaches were considered to be the most effective.

Drops in occupancies, ADR and RevPAR in 2009 have been widespread in the hotel industry and the trade press has been filled with articles discussing the downturn and proposing possible tactics for surviving it.

Not surprisingly, hotel owners and hotel operators have disagreed on how best to manage during a recession as owners try to maintain sufficient cash flow to cover their costs while operators attempt to maintain service levels and long-term brand equity.

One of the keys to success in a down market is to avoid offering across the board price cuts, but to instead focus on particular market segments and distribution channels. An ADR is just that, an average, and care should be taken to keep your ADR at near or above the average of your competitive set.

Research has shown that hotels with an ADR significantly lower than that of their competitive set have an inferior RevPAR performance relative to their competitors. This relationship has been shown to hold true across all hotel market levels.

For example, in the luxury market, hotels that have an ADR that is higher than their competitive set have the same or slightly lower occupancies, but have a 8- to 14 % higher RevPAR than their competitive set. Conversely, hotels that have a lower ADR than their competitive set have about the same to slightly higher occupancy levels, but report a RevPARs of 3- to 9-percent lower than their competitive set.

Given that knowledge, the challenge for hotel managers is how to compete in a price war. Essentially the two ways this can be done involve either non-price methods or price-related methods.

Non-price methods include competing on the basis of quality, creating strategic partnerships, leveraging your loyalty program, developing additional revenue sources and developing ad¬ditional market segments.

Price-based methods consist of offering packages, using opaque distribution channels and offering discounted rates to selected market segments. It’s not that hotels shouldn’t discount - it’s that they should do so in an intelligent and strategic way.

The intent of this study is to determine what tactics hotels used during the economic downturn and to evaluate the performance of these tactics. In addition, the study sought to solicit advice on how to approach future economic downturns so that it could develop specific advice for hoteliers on how to approach the next economic downturn.

Download the special report “Successful Tactics for Surviving an Economic Downturn” (PDF 1.7 MB)

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