Faculty & Research
Why Discounting Still Doesn't Work: A Hotel Pricing Update
Vol 6 No 2
By: Cathy A. Enz Ph.D. and Linda Canina Ph.D.
Executive Summary: This report presents an update and an extension of a study issued in a previous CHR Report in which we found that discounting relative to the competitive set increases occupancy, but hotels make more money when they resist the temptation to discount to fill rooms. As explained in the first study, data from 2001 through 2003 showed that when a given hotel discounted its room rates to a greater degree than did its competitive set, the result was decreased RevPAR compared to that competition, even though relative occupancy increased. Conversely, those with higher prices relative to their competitive set had lower occupancy and higher RevPAR. The dynamics between price and occupancy remained stable across market price segments, but the degree to which higher relative prices affected relative occupancy varied by market segment.
The question this report addresses is whether 2001 through 2003 was an unusual period-given that those years saw the disaster of 9/11, a recession, and hurricane damage in Florida and elsewhere. In this study, the previous years' results continue to hold up in 2004, clearly a good year for the hotel industry. The same pattern emerges when we categorize the data by location or by major metropolitan markets in addition to market price segment.
Specifically, hotels that discount relative to their competitive set have higher occupancy and lower RevPAR than do their competitors. On the other hand, hotels that charge a premium relative to their competitive set have lower occupancy and higher RevPAR than their competitors do. In the overall sample, hotels that charged a relative premium of at least 2 percent achieved lower occupancy than that of their competitors. While hotels that discounted at the most 2 percent or charged a relative premium have higher RevPAR than their competitors recorded.
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- Why Discounting Still Doesn't Work: A Hotel Pricing Update By: Cathy A. Enz Ph.D. and Linda Canina Ph.D.
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Comments
Your article 'Why discounting doesn't work' is absolutely true.
We are in the process of implementing this strategy, and to a certain level have been very successful in 2005. This has enabled us to increase our RGI position in 2005, with an increase of 12.8% over 2004. RevPar has also shown a tremendous growth, with an increase of 65.3% This still enabled us to maintain occupancy with 0.9% growth compared to 2004.
I welcome all your reports in the future, and kindly add me on your database.
Best regards,
Binu Samson Varghese
Director of Sales and Marketing
Crowne Plaza Abu Dhabi
P.O. Box 3541
Abu Dhabi
United Arab Emirates
Other Reports or Articles You May Find of Interest
- Low-price Guarantees: How Hotel Companies Can Get It Right by Steven A. Carvell, Ph.D., and Daniel C. Quan, Ph.D.
- The Agglomeration Conundrum: How Co-location Helps Some Hotels and Hurts Others by Cathy A. Enz, Ph.D., Linda Canina, Ph.D., and Jeffrey Harrison, Ph.D.
- Best-available-rate Pricing at Hotels: A Study of Customer Perceptions and Reactions Kristin V. Rohlfs and Sheryl E. Kimes, Ph.D.
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
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
