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Hospitality Leadership Through Learning
Faculty & Research

Competitive Hotel Pricing in Uncertain Times

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Vol 9 No 10
By:  Cathy A. Enz Ph.D., Linda Canina Ph.D., and Mark Lomanno

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Executive Summary: This analysis of the pricing (ADR), demand (occupancy), and revenue (RevPAR) dynamics in the U.S. hotel industry for the period 2001 through 2007 demonstrates the potentially negative consequences of attempting to maintain market share by offering prices below those of direct competitors. This seven-year study examined the outcomes of pricing behavior on total rooms revenue and occupancy for hotels and their competitors in both bad times (2001-2003) and good (2004-2007). The results are the same in both periods. Hotels that offer average daily rates above those of their direct competitors experienced lower occupancies compared to those other hotels, but recorded higher relative RevPARs. For 67,008 hotel observations, this pattern of demand and revenue behavior was consistent for hotels in all market segments, from luxury to economy. Overall the results suggest that the best way to have better revenue performance than your competitors is to have higher average rates. The findings suggest that lodging demand may be inelastic in local markets, and hotel operators may wish to resist the pressure to undercut competitors when possible.

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Comments

I've read with great interest your report, I absolutely agree with each word mentioned here since I've experienced & practiced this myself since the beginning of 2009, I've implemented a strategy by not joining the price war waged to attract more occupancy, as in my own beliefs it may cause a loss of trust from the clients themselves, I've always educated my people (would you buy a 50,000 USD car with only 15,000....no way..you’ll definitely suspect the deal), the same with hotels.

Although it's a tough year in all terms, we ended up leading the market (five hotels in our competitive set) in REVPAR YTD 2009 and increasing our ARR than 2008 by 2% and to raise our position in the ARR from no. 5 to no. 3, while my main competitors had lost 6.8% to 10.8% from their ARR.

As a result their rate decrease strategy caused a negative impact on their occupancy and, believe it or not, my two main competitors  have lost 12.9% to 33% from 2008 REVPAR, while our loss was only 3.6%...amazing...isn't it?

Our strategy proved that we can survive the harsh times by proper pricing and yielding actions and never panic....just think clear to gain our clients confidence.

Amr Hesham
Director of Sales & Marketing
Concorde El Salam Hotels-Egypt

Even before times were uncertain, I tried a similar test at my own property. 

We all know how soft a Sunday night’s occupancy can be especially for a highway property since we rely heavily on walk-ins.  With the current rate of converting a walk-in to a guest being low on Sunday’s, I tried to be competitive and offer a lower rate just for that night of the week.  I kept that lower rate for over 2 months and saw absolutely NO change in occupancy.  I decided there was no reason to continue to lose RevPar if a lower rate wasn’t producing higher occupancy.

In tough economic times, the best thing we can do is exceed in customer service and provide value that each of our guests was not anticipating. 

I appreciate your article regarding this same issue and thought I could give you just one more case to back up your findings on revenue performance.

Jeff Fisher
General Manager
Hampton Inn - Springfield

 

Other Reports or Articles You May Find of Interest

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