Discounting as a revenue management tool

Dec 28, 2016Revenue Management, Revenue Strategy

Most hoteliers agree that discounting is necessary during difficult economic times. It is also necessary during peaking times. Discounting is typically done to achieve additional revenues by enticing guests into booking hotel rooms by lowering rates in order to increase occupancy in the short-term.  

It is a well-known fact amongst senior revenue management experts, that decreasing room rates does not bring higher room revenues. In fact , decreasing room rates dilutes RevPAR. Instead, hoteliers need to focus on the bigger picture — overall strategy and value. There have been numerous arguments and studies surrounding whether discounting is beneficial or harmful to hotels. 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.  

According to research conducted overall, for hotels that held their price below that of their competitive set, average percentage differences in occupancy was higher, but average percentage differences in RevPAR were lower as compared to the competition. For hotels that held their price high relative to their competitive set, on the other hand, average percentage differences in occupancy were smaller, but average percentage differences in RevPAR were greater.  

According to the research, hotels with ADRs 12% to 15% lower than those of their competitive set had 10.38% higher occupancies but recorded a 4.44% lower RevPAR. However, hotels that priced 6% to 8% above their competitive set obtained a lower occupancy by 1.84% but a higher RevPAR by 5.02%.  

The research also included information about the different hotel market levels. The results show that the relationship holds true across all different hotel levels, from luxury to limited service.  

Over the years my own experience supported with research it is obvious that discounting is not the best course of action just because a hotel needs to achieve their budget or to generally increase revenues. My experience in multiple markets has shown:  

  • Hotels still haven’t learned that dropping rates will not recover enough revenues to cover the discounting. These just cause price wars in the long run.  
  • Discounting can cause Price Wars!! How low does one go? It can also cause “rates versus perceived services” issues. If one sells too low this may cause damage to a brand’s perceived image.  
  • Discounting is not a demand generator unless the discounting is tied with a strong marketing plan. Discounting as it is practiced by most hotels allows for customers to buy up but does not necessarily drive demand. Instead discounting has a cascading effect that will impact the overall competitive landscape.  

Why Do Hotels Discount?  

The basic principle and foundation of discounting is to try to fill rooms that would otherwise remain empty.  

Discounting is an attempt to increase occupancy. This is achieved by potentially stealing market share from the competitive set by enticing leisure customers or price- sensitive customers who may respond to the perception of a better value.  

Additionally, by increasing occupancy it provides the hotels with opportunities to generate revenues throughout the other revenue generating departments at the hotel. It also provides the hotel with more cash flow during difficult economic times.  

While there are some potential benefits to discounting it is of the utmost importance that hoteliers understand the complexity and dangers that discounting may potentially bring.  

The following charts illustrate the complexities of discounting and how important it is to understand the impact discounting has on a hotel.  

 They illustrate the occupancy needed in order to make up for the discounts that are applied to the rates.  

Using this example, if a hotel running a 60% occupancy drops its rate by 10% it will now have to obtain a 66.7% occupancy in order to reach the same overall forecasted revenue. This increase in occupancy is necessary just to break even. In order to increase revenue, the hotel would have to achieve an occupancy greater than 66.7%.  

A hotel that drops its rates by 20% and previously ran a 60% occupancy would need to obtain a 75% occupancy to make up for the lost revenue.