By: Glenn Withiam*
After a long and steady effort, the global hotel industry has finally gained some control over its rates in recent years. Then, the international economy reached its current fall and prices have again become a challenge in many markets.
According to Smith Travel Research, at the beginning of this recession the industry held on and withstood the price cut. More recently, it seems that prices in many markets have crumbled as hotels compete for the travelers who still remain.
In this regard, it is no secret that the publication of prices on websites does not help with the subject. Both guests and competitors quickly know what is currently being charged and aggressive competitors will respond in kind.
To make matters worse, there is no real indication of an early recovery in any economy. Asia remains relatively fixed, Europe seems to keep struggling, and even comparatively strong nations (Brazil, Russia, India, and China) have felt the effects of the debt implosion.
In its market forecast for North America, PKF Consulting forecasts potential growth in real earnings per available room (RevPAR), starting in 2011. PKF also states that each market will regain its own dynamics and in a timely manner. Some markets are not suffering as much as others.
With this grim background, you might think I'm foolish or insensitive in suggesting too much care with fees. I've never had the responsibility to set hotel prices and I don't envy those who have to. But I can share the results of a study recently published by a research team, based on data from the Cornell School of Hotel Management.
Cornell researchers and professors Cathy Enz and Linda Canina, along with STR President Mark Lomanno, analyzed the effects of RevPAR of setting its prices or below or above those of its competitors.
You can consult this research study, at no cost, on the page: chr.cornell.edu of the Hotel Research Center. The study called "Competitive Pricing in Uncertain Times" is an extension of previous research on this topic.
This study is not a discussion about discounts. Rather, it compares hotels and their competitors in terms of rates, occupancy, and RevPAR. The study was conducted over seven years from the last recession in the United States from 2001 to 2003 and then during the "bubble economy" era between 2004 and 2007. It was concluded that the economic background made no difference. Hotels that kept their rates below those of their nearby competitors made comparatively less money, although their occupancy was higher than that of their competitors.
The opposite was also true. Hotels that maintained their prices even a few percentage points above those of their competitors had lower occupancy than their competitors, but presented a higher RevPAR than their competitors.
The findings don't mean a hotel should ignore its revenue management system. Each hotel will need to continue to adjust its rates when necessary. The point is to understand the results of a strategy of keeping room prices below those of your competitors (or a higher price than your competitors).
This is a matter of positioning and not discounts. With that said, there is no doubt that it is difficult to hold a price position above that of competitors and see customers opt for competition.
At the same time, we know that hotel guests create their expectations about future prices based on current prices. If the economic recovery is as slow as some observers predict, it may take a long and extensive effort to raise rates once they have fallen.
*Glenn Withiam is director of publications at the Cornell Center for Hotel Research.
