Small Inn and Bed and Breakfast Industry Articles

05 September 2008
By Patrick Mayock


NATIONAL REPORT—The adage “You’re always safer with heads in your beds,” may still ring true, but as soft occupancy rates persist throughout the industry, experts warn against chasing demand by carelessly lowering rates.

“The way we see it, there are two inherent dangers [in lowering rates to chase demand,]” said Jan D. Freitag, VP of Smith Travel Research. “One, if you’re lowering rate to increase demand, you’re only doing that to basically increase your RevPAR. If you do the math, it would imply that you have to make up a lot of points in occupancy to break even on the lowering of the rate.”

If you own a hotel with 1,000 guestrooms, for example, you’d have to sell another 77 rooms just to break even after a 10-percent drop in ADR, according to Freitag.

He said the second inherent danger surfaces because the move can easily be copied by your competitors, thereby cancelling out the competitive advantage you originally sought.

Chris K. Anderson, an assistant professor at the Cornell School of Hotel Administration, said the price wars that could result from dropping rates is akin to the prisoner’s dilemma, in which two prisoners choose between condemning their fellow prisoner to receive a lesser sentence or risk being condemned themselves and face a larger sentence.

“This little game is analogous to two properties considering a rate cut to stimulate demand,” he said. “If neither cuts room rates, they achieve moderate profits. If one cuts rates and the other does not, the leader achieves short term market share as one expects the other to follow, and they both end up making very little profit if any.”

Said Freitag: “It’s an easy move to copy, and everyone will end up worse off.”

Anderson said that even if you did cut your rate and your competitor didn’t follow, the drop in price may still not be enough to stimulate demand.

“A hotel room is only part of the travel experience, and a cut in price of this component of the travel experience may not be enough to stimulate more travelers, and as such results only in shifting—or stealing—market share, not in creating new or incremental demand.”

However, Jim Rozell, senior director or revenue optimization at Carlson Hotels Group, said dropping rates can produce dividends when done under the appropriate circumstances.

“I’m never going to be a guy who says lowering rates does not stimulate demand,” he said. “However, if you do it all the time and if you don’t understand when it’s necessary and when it’s useful as a tool, then you have real issues.”

Rozell said effective rate drops are a byproduct of accurate forecasting.

If you forecast out 120 days, for example, you can target a few dates to lower rates to shift group business to slower days. When done effectively, the move will not disturb the higher demand that you’d still receive on peak days, according to Rozell.

Anderson said another way to affectively lower rates is to work through opaque channels.

“The key here is that price reductions must be very targeted,” he said. “Opaque pricing is one such method of targeted price reductions. On opaque channels like Priceline’s NYOP or Hotwire or lastminute.com’s ‘Europe top secret hotels,’ properties can offer discounts on these opaque channels where the property name is not disclosed that traditional or regular customers are not interested in. As a result, you tap incremental demand. 

“These opaque channels are like offering private discounts to very price sensitive non-loyal consumers while still pricing at regular rates with loyal customers.”

Anderson said bundling can also stimulate demand, adding that both techniques are only successful when kept private.

“The key for price reductions is to keep them private to avoid dilution whether they are opaque or as bundles, or potentially generated by some sort of marketing campaign.”