Integrity of Price during the Economic downturn
By Ahmed Mahmoud
Tough times require creative solutions, not just business as usual! Not only are hotels being buffeted by the economy, but also by new and competitive hotels that have come (or are coming) online in the near future. Make no mistake; there will be winners and losers in this environment - some hotels will prosper and some will capitulate!
With all the bad economic news in the media lately, and with most industry experts expecting RevPar to drop by as much as 5%-10% in 2009, there are few - if any - hotels that are projecting a good financial performance this year.
Overall economic and political conditions in our areas, countries, regions and all over the world are among the most influential factors to be considered upon establishing our pricing. In the past, during times of crisis and reduced travel – such as the 1991 Persian Gulf War, September 11, and as recently as the economic recession 2008 – panic-stricken hoteliers responded by an overall reduction in room rates. Such reactions were understandable; but ultimately, did not attract a significant increase in hotel guests. Rather than reacting in this fashion, it is better from a profit-and-loss perspective to be strategic.
In this regard most of the hotels will start to reduce and their prices to generate demand. This is particularly true when the economy turns south, and management need to get further inside the numbers, searching for anything that might give them an edge on the competition.
The result; you might gain some occupancy but you will lose RevPar, and this will be to your competition. Conversely, those hotels with higher rates relative to their competitive set, will have lower occupancy and higher RevPar. Now, if you are satisfied with higher occupancy and mediocre RevPar, there is no reason to read-on. You may go back to reading your P&L statement while scratching your head wondering why the added occupancy did not improve your bottom-line, and remember your occupancy and your ADR does not go to your bank , only the RevPar is going to the bank.
So before you think to reduce your rates, here are a few suggestions to be considered for maintaining effective pricing of your hotel:
Analyze economic indicators and how they impact your guests’ travel patterns.
Once you have reviewed the economic factors above, it is time to take the appropriate, targeted steps to maximize your business. Typically, there is no need to reduce your rates across the board. Instead, offer a value-added component to your guests, which will be a great deal less costly than cutting room rates. If a competitor has just promoted a continental breakfast or guests have indicated that their meal costs are too high, add your own continental breakfast. This may only cost $4 to $12 a room, depending upon how extensive the breakfast is for your guests. If your guest base is largely transient and this portion of your business is lacking, consider offering free Internet access. If online bookings have fallen, consider changing how much inventory you provide to third party intermediaries. Or, update your website to make it more user-friendly.
By keeping your rates stable and concentrating more on a value-added component for your hotel, guests will feel that they are getting more value for their money. If hoteliers drop rates too much too quickly, it can be more difficult to increase rates during more robust economic cycles. Guests anticipate (and understand) that you will raise rates to keep in line with the cost of living, however, too much of a rate increase can result in a loss of business.
By using the principles of revenue management, it could carry you through the current stagnant economy. Don't give in to the desperation of dropping your rates and crossing your fingers; generating business is hard work.
Stop chasing unrealistic revenue goals with price discounts. ‘Chasing declining revenue with price discounts just makes the problem worse - you end up with less revenue and no profit. Smart prices look for ways to eliminate discounts, especially on high value products and services - even in a downturn!'
Just keep in mind, the right price, is the price the consumer is willing to pay, while providing a profit to the retailer. And this will take you back to the Revenue Management pivot, Selling the right product to the right customer at the right time to the right customer through the right distribution channels.