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To Discount or Not to Discount?
By Bonnie Knutson, Professor, The School of Hospitality Business/MSU
Come on now ... would you really get up at 5 in the morning on your day off to get to the mall by 6 if it weren't for the "25% Off Day After Thanksgiving Sale"? Would you really buy a whole case of WD-40 oil were it not for the big box store's volume discount? And what are you going to do with that second "free" pizza if you're a single person who rarely eats at home?
Marketers in the retail sector are betting that you, and many others like you, will get up early, buy the multiple cans of oil, and phone for the pizza. They are betting that you can't pass up what you see as a bargain. They are betting that you won't buy their product without some sort of a price incentive. If the proliferation of discount offers is any indication, they are right. Or are they?
While discounting is usually a boon to consumers, it is often the bane of business. Ask the airlines. Ask fast food operators. Ask GM, Ford, and Chrysler. Regardless of the industry, it seems as if the past few years have been awash in companies relying on discounts as a hallmark of their marketing strategies. And it is no different for the lodging sector.
Just for fun, I Googled "hotel marketing and discounts" and got 1,480,000 hits! I then Googled "hotel sales and discounts" and got 10,600,000 hits! Does this tell you something? If you ask a thousand hoteliers if they should discount their products or services in today's economic climate, chances are you will get a thousand different answers. From the many hotel managers with whom I've talked, their opinions seem to fall into one of two categories. On the pro side, there is the argument that it is just common sense to price based on the downturn (elasticity) in demand from all travelers - leisure, business, and group. Or there is the lemming mentality that believes when your competition discounts its rates, you have to follow. Then there is the Star Treker-turned-Priceline.com-spokesman-William Shanter mindset that points out how easily guests can access rates on the Internet and make their decision online; therefore, you have no choice but to cut rates if you want to even be on their consideration-list.
On the flip, or con, side is the line of reasoning that says once you cut rates, it is difficult to raise them back up. Others rationalize that it is better to add value rather than slash prices. And some even argue that, if you drop your hotel's rates significantly, your run the risk of attracting a market segment that you may by wrong for your brand image.
With hotels struggling to compete and make margin, the discounting question becomes more contentious. The issue is not what discounting can do for guests, but what discounting does for or to your business. Whether doctor, lawyer, or widget-maker, at some point in every business's market planning, it will face the moment of truth: Should I discount? The advantages of discounting hotel rates are well known. When done right, a discount can:
stimulate new product trial (such as spa services or the disco lounge);
maintain current guests when a new competitor threatens (darn that new hotel that just opened down the street);
build slow periods of business (so who wants to go to the ski slopes in July?);
introduce a new location or service (try our newest property by the airport - which is the flipside of the #2 advantage); and
increase the frequency of current guests (don't you just love the hook-on-to-your-business-trip weekend getaway package? If judiciously used, discounting can provide a short term solution to a short term problem. The emphasis is on the word short).
However, for long term solutions to long term marketing issues, there are a lot of potholes in the discounting road. Often they are not seen by a hotel until the bump if felt. So before you start down that cut-rate pricing route, make sure your hotel meticulously examines each of these three marketing hazards, as they can impact the long term profitability of your property.
Margins will Decrease; REVPAR May
It stands to reason that if you sell a room for less, and your costs remain the same or increase, you'll make less. Most hoteliers I talk with believe that they can make up for decreased revenues with increased volume. Maybe yes; maybe no. While there are lot of variables that go into the equation, the fundamental questions are how many more rooms do you need to sell to make up for the lost margin and is that increase realistic? The ad may look great in the magazine or on your website, but it sure doesn't on the long-term accounting page.
Encourages "cherry-picking".
If you want to know where the restaurant specials are on any given day, ask a college student or retiree. Chances are they know because they tend to eat by their wallets. Monday it may be the Grand Slam breakfast at Denny's, Tuesday, it's A&W's Coney Dog, and Wednesday it's.... When discounting becomes the norm in an industry, the product of that industry becomes a commodity and consumers become conditioned to differentiate among brands on price alone. This has already happened in the cola wars and pizza battles. We are also seeing it in publishing, retail, and, of course, the housing market. It is even beginning to happen in the heretofore venerable fields of investment banking, real estate, and healthcare. And the cherry-picking seeds have germinated in the hotel industry too.
We all understand and appreciate the fact that, in today's economic environment, guests need to save a dollar where they can and are always looking for the best possible deal from their hotel. However, when the only difference they see between Hotel A and Hotel B is price, you, as a brand, are losing the marketing war. Ask any road warrior what the difference is among major hotel chains, and you'll probably get an answer that begins with a discussion of the company's frequent traveler program. In other words, the difference among the brands is seen to be how much each is willing to discount, not on the attributes of the hotel itself.
What your guests really want is not the best price from their hotel, but the best price-value. Do you remember the old economic formula of Value = Experience/Price? If all your competitors are running discounts, there are only two ways you can maintain your value level in the market.
One, of course, is to join the discount foray; the other is to develop a strategy to increase your guests' experience. Customized amenities (i.e. handcrafted soaps from a local artisan) for a luxury property.
More efficient room-service that doesn't make me hang that blasted card on the door (for everyone to see) by 2 a.m. for mid-price hotels.
And even simple Starlight mints in the room for an economy brand. The possibilities are endless and creative.
Consider, for example, the story that comes from Michael LeBoeuf's book, Fast Forward: There was an Ohio hairstylist who charged $31 for a haircut. A discount hair cutting chain opened a shop across the street from the hair stylist; it has a large sign in the front window that read, "We give $6 haircuts." Rather than counter with a discounted price, the stylist countered with a window sign that read, "We fix $6 haircuts." And he did.
If you just jump into the discounting fray, all you do is join the competitive clutter, not stand apart from it. The best way to get noticed in your market is to offer something different and better, not necessarily cheaper. That's what the Ohio hairstylist did, and he didn't lose customers.
This brings us to the biggest discounting pothole of all: Threatens Your Image
If not used carefully, discounting erodes your position in the market over time. Think back over the past few years. Retailers begin their Christmas sales earlier and earlier. The auto industry has reeled through waves of rebates. And who is buying an Arby's without a coupon? Why? Simple. Buyers have learned that if they don't buy at the regular price today, they will be able to buy at a discounted price tomorrow. Then over time, a funny thing happens in the consumer's mind. The "regular" price becomes the "inflated" price, and the "discounted" price becomes the "real" or "fair" price. This is often called the BOHICA- Syndrome. (BOHICA stands for "Bend over, here it comes again.)
When a hotel resorts to discounting as a regular part of its pricing strategy, it debased the value of the property's name. Guests begin to feel gypped if they have to pay the original rack rate. When a dry cleaner regularly discounts its prices 30% Monday - Wednesday, what does that say to you when it asked you to pay full price on the weekend? What about the restaurant that sells it's $24.95 prime rib dinner for $14.95 on weekdays? Or the oil change company that floods your mailbox with coupons for discounts and takes its competitors' coupons too?
Hello! Will the real price please stand up?
If you are like most people, when habitual discounting is an integral element in a company's pricing strategy, you begin to see the regular price as a rip-off. Once this occurs in the hotel market, the quality image of the brand is threatened.
Discounts, per se, are not an entity-no-grata. Discounting, as a driving force in pricing strategy, is. As I mentioned earlier, when used judiciously, a price break for your guests, current and potential, can be an effective short-term solution to a short-term marketing issue. Remember, the operative phrase is short-term. So, when your hotel is faced with the question of whether to discount or not to discount, be sure to frame your answer so as to defend your margins, discourage cherry-picking, and protect your brand image in the market. In other words, drive carefully down the price highway and avoid the big discounting potholes.
Your REVPAR will thank you!
Bonnie J. Knutson is a professor in The School of Hospitality Business in the Broad College of Business at Michigan State University. She is an authority on emerging lifestyle trends and innovative marketing. Her work has been featured in The Wall Street Journal, USA Today, and on PBS and CNN. She has had numerous articles in industry, business, and academic publications. Bonnie is a frequent speaker for executive education as well as business and industry meetings, workshops, and seminars. Dr. Knutson is also editor of the Journal of Hospitality & Leisure Marketing. Ms. Knutson can be contacted at 517-353-9211 or drbonnie@msu.edu Extended Bio...
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