Faculty & Research
Why Discounting Doesn't Work
Vol 4 No 7
By: Linda Canina Ph.D., Cathy A. Enz Ph.D. and Mark Lomanno
Executive Summary: The long-running debate over whether hotels should discount room rates to boost financial performance becomes particularly contentious during tough economic times. The results reported in this study show that discounting relative to the competitive set does, in fact, fill a hotel, but the study also clearly shows that hotels in direct competition make more money when they maintain their price structure and do not discount to fill rooms. Data drawn from over 6,000 hotels between 2001 and 2003 show that hotels with lower prices relative to their competitive set captured market share from the competition, but did not gain higher RevPAR. Conversely, those with higher prices relative to their competitive set had lower occupancy and higher RevPAR. These results suggest a strategy of holding rates constant when competitors are discounting, or even raising prices to a small degree. By raising prices above the competition a hotel will lose occupancy but make up for that loss with higher RevPAR. By offering a lower relative price, on the other hand, a hotel will gain occupancy but its RevPAR performance will be lower than that of its competitive set.
In particular, the data analyzed over the last three years, a difficult period for the industry, show that when a given hotel discounted its room rates to a greater degree than its competitive set, the result was decreased RevPAR compared to its competition (despite increased occupancy). The dynamics between price and occupancy remain quite stable from segment to segment, but the degree to which higher relative prices produce dramatic or gradual relative drops in occupancy does vary by segment. In addition, for 2003 small relative price increases did not enhance relative RevPAR for some segments.
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About Linda Canina Ph.D.
Linda Canina is an associate professor in the School of Hotel Administration's Finance, Accounting, and Real Estate department. There, she teaches undergraduate and graduate courses in corporate finance. Canina also serves as editor of the Cornell Hospitality Quarterly. Her research interests include asset valuation, corporate finance and strategic management. She has expertise in the areas of econometrics, valuation, IPO's, payout policy, mergers and acquisitions, options and the hospitality industry. Canina's current research focuses on strategic decisions and performance, the relationship between purchased resources, human capital and their contributions to performance, the relationship between various liquidity measures and profitability, and measuring the adverse selection component of the bid/ask spread. Her recent publications include: "Agglomeration Effects and Strategic Orientations: Evidence from the U.S. Lodging Industry" in the Academy of Management Journal. Canina's other work has appeared in the Journal of Finance, Review of Financial Studies, Financial Management Journal, the Journal of Hospitality and Tourism Research, and the Cornell Hotel and Restaurant Administration Quarterly. She holds a Ph.D. degree from New York University.
For more information visit http://www.hotelschool.cornell.edu/research/facultybios/faculty.html?id=10
About Cathy A. Enz Ph.D.
Cathy A. Enz is the Lewis G. Schaeneman Jr. Professor of Innovation and Dynamic Management and a full professor in strategy. She recently served as Associate Dean for Industry Research and Affairs, and served as the Executive Director of the school’s Center for Hospitality Research from 2000-2003. Dr. Enz has published over eighty journal articles, book chapters, and three books in the area of strategic management. Her research has been published in a wide variety of prestigious academic and hospitality journals such as The Administrative Science Quarterly, The Academy of Management Journal, The Journal of Service Research, and The Cornell Hospitality Administration Quarterly. Dr. Enz teaches courses in innovation and strategic management. In addition, she developed The Hospitality Change Simulation, a learning tool for the introduction of effective change, which is available as an online education program of e-Cornell. Three additional courses in hospitality strategic management will be available through e-Cornell in 2008. Dr. Enz also presents numerous executive programs around the world, consults extensively in North America, and serves on the Board of Directors of two privately owned hotel companies. Prior to her academic activities, Dr. Enz held several industry positions including strategy development analyst in the office of corporate research for a large insurance organization, and operations manager responsible for Midwestern United States customer service and logistics in the dietary food service division of a large U.S. health care corporation. Dr. Enz received her Ph.D. from the Fisher College of Business at Ohio State University, and taught on the faculty of the Kelley School of Business at Indiana University prior to arriving at Cornell in 1990.
For more information visit http://www.hotelschool.cornell.edu/research/facultybios/faculty.html?id=27
