In good times and bad, lower room rates cost hotels money
When close competitors cut their prices, the temptation for hotel operators is to follow with reductions of their own.
When close competitors cut their prices, the temptation for hotel operators is to follow with reductions of their own. While that strategy may increase occupancy, it reduces revenue per average room (RevPAR) when compared to a hotel’s competitive group. This is the key finding of a new study from Cornell’s Center for Hospitality Research, “Competitive Pricing in Uncertain Times,” by Cathy A. Enz, Linda Canina, and Mark Lomanno. The study is available at no charge from the center at http://www.hotelschool.cornell.edu/research/chr/pubs/reports/2009.html.
“Our goal was to compare the effects of pricing strategies among close competitors, first during a weak economy and then during boom times,” said Enz, who is the Louis G. Schaeneman, Jr. professor of innovation and dynamic management at the School of Hotel Administration. “Using the database provided by STR, we were able to analyze relative pricing, occupancy, and RevPAR in over 67,000 hotel observations, from 2001 through 2007.”
“Our findings were consistent, despite the economic situation,” explained Canina, an associate professor at Cornell. “Hotels that maintained average daily rates above those of their direct competitors experienced lower occupancies compared to those other hotels, but they recorded higher relative RevPARs. This was true in all market segments.”
Added Lomanno, who is president of STR: “Our overall results suggest that the best way to have better revenue performance than your competitors is to maintain higher average rates.” Lomanno pointed out that the researchers were careful to analyze only comparable hotels in each competitive group. Most hotels that charged relatively lower rates than their competitors had relatively higher occupancy, but that did not mean stronger RevPARs.
Thanks to the support of the Center for Hospitality Research partners listed below, all publications posted on the center’s website are available free of charge, at www.chr.cornell.edu.