Mr. McCarthy

Spas, Health & Fitness

Making Friends with Discounting

By Jeremy McCarthy, Director of Spa Operations, Development and Marketing, Starwood Hotels and Resorts

“Discount” is the dirty word of the hospitality industry. For the last ten years, spas and hotels have held discounting as the absolute last straw in any marketing campaign. Unfortunately, the recession of the last few years has forced spas and hotels to exhaust any and all options to get consumers in the door. Loathsome though we were to do it, the economic situation became severe enough to bring us all to our last resort efforts, discounts included.

The spa industry in particular, has had a love-hate relationship with discounting over the past decade. In other words, the consumers have grown to love discounts, and the industry professionals have grown to hate them. In fact, in the last ten years of attending industry conferences and seminars, I can’t think of one where industry professionals didn’t eschew discounting in favor of “value-adding” strategies that leave the pricing integrity of the spa intact.

So where does this hatred of discounting come from? And can the spa industry continue to keep discounting at arm’s length when consumers are already cutting their spa spend due to the economic pressures of the day? Can spas afford not to discount, when competing against deeply discounted deal aggregators such as Groupon, Living Social or Rue La La?

These are important questions to answer when consumers report “finding deals” as the #1 reason they use websites to search for information on spas. And Groupon, just in the last twelve months, has sprinted past Facebook and Spafinder as one of the most popular websites consumers use to find spa information (30% growth over last year according to a recent report by Coyle Hospitality Group.)

Looking at the rise in popularity of websites like Groupon, it would be easy to imagine a future where nobody pays full price. After all, why pay full price for anything if there is always a deal to be had on the internet? For this reason, some argue that Groupon is not sustainable, and is dragging the industry down (the discounts and commissions are so substantial that it is very difficult for a spa to be profitable while running one of these promotions.) But there seems to be no shortage of spas that are desperate enough to gain some market share by slashing prices, at least for a short term event.

The debate around these discount websites is in full swing, with industry professionals on one side cautioning that spas who participate are trading long-term sustainable growth for short-term cash flow (and devaluing the entire industry in the process.) But there are success stories too: spas who say their business was brought back to life by the power of the Groupon masses.

Regardless of whether spas include discounting as a part of their marketing strategy, and regardless of whether spas participate in deep-discount programs such as Groupon or SpaWeek, the time has come for spa professionals to reconcile our longstanding dislike for discounting with the consumers growing desire for deals. Is it time to make friends with discounting?

It is my theory that our industry’s hatred of discounting stems from the period of economic recession that followed the attacks on the World Trade Center on September 11, 2001. The travel industry, in particular, was deeply impacted and hotels were forced to drop their rates to survive. By slashing rates, hotels were able to stimulate their room occupancies fairly quickly to near-normal levels. But their discounted room rates became the “new normal.” The hotel industry learned the hard way, that discounting could have dire and long lasting consequences on its ability to generate revenues.

The Cornell Hospitality School published a detailed analysis of the hospitality industry’s response to September 11 with the catchy title, “Why Discounting Doesn’t Work.” A couple of years later, they published a follow up research study with the even catchier title, “Why Discounting Still Doesn’t Work.” The spa and hospitality industries got the message loud and clear, and “discount” became a dirty word.

But before we discard discounting entirely, it is important to understand the kind of discounting that was done after September 11, and why the outcome led people to steer clear of this as a viable marketing strategy.

The primary problem with discounting is that it affects the “reference price” of whatever service a business is offering. The reference price can be thought of as the general idea the consumer has about the value of a good or service. Before a consumer ever goes to a spa, for example, they have some idea about what the experience is worth. They have in mind some reference point that guides whether or not they feel they are getting a good deal.

The reference price is influenced by many factors including what they have heard from other customers, experiences they have had with other similar businesses, or even the experience they had the last time they visited this specific business. When a consumer either experiences a discount or sees one advertised, it affects their perceived value of the experience and they are less likely to be open to paying full price in the future.

This understanding is what led the spa industry to move away from discounting and towards a strategy of “value-adding.” Value-adding is a way of incentivizing customers to use the spa while holding fast on pricing. In lieu of extending a discount, the spa would try and add something to the experience, in an effort to increase the perceived value. Examples of this in the spa industry include extending the treatment time, offering a free product with a treatment, or adding on a smaller complimentary treatment (such as a manicure or a mini-facial) with the purchases of a full length (and full priced) treatment.

Spas that employ this strategy can (and should) be proud of their creativity as they find ways to draw in new and repeat clients while leaving the value of their services intact. But in the economy of the past couple years, spa professionals have to be wondering if they are doing enough. Value-add incentives can be complicated and difficult to communicate to consumers. On the other hand, there is no easier message to give a consumer than to tell them that a portion of their bill will be going back into their wallet in the form of a discount.

So how do we make friends with discounting? Is there a time and place where this strategy makes sense? Are there times when discounting should be employed, not only as a last resort option, but as an effective strategy for generating revenue and capturing market share?

The concern around impacting clients’ reference price is a valid one. And slashing prices across the board on a long term basis is always going to be difficult to recover from. But there are times when adjusting prices may not only be necessary, it can make perfect sense.

There may be services in the spa, for example, that should have a lower reference price than others. Using simple “supply and demand” economics, it is easy to see that a spa treatment at 2pm on a Tuesday afternoon is never going to have as high a perceived value as the same treatment on a Saturday afternoon. The different demand levels drive different perceived value and a spa that discounts their midweek services is not actually devaluing their services, but rather responding to a differential in value that already exists.

The key is in identifying where these differentials exist and applying discounts in a way that is easy for the spa consumer to understand. An effective discount will be extended to a specific market segment (members, hotel guests, local residents, teachers, military, senior citizens, etc.) and/or at a specific time (weekdays, mornings, evenings, summer, fall, etc.) and/or for a specific service (new signature treatment, treatment with new employees, testing new product line, add-on services, etc.) Adjusting pricing to smooth out these existing differentials also spreads the workload more evenly across the week, reducing inefficiencies and streamlining the operation.

The spas that I have heard from who have had some success with the discount sites like Groupon or Rue La La, have been strategic about when and for what they have applied their discounts. When a discount is applied with clear rules that make sense to the consumer, not only does it not devalue the experience, but the consumer understands it and appreciates it.

Consumers have already been educated on revenue management. They know they pay more to buy a flight last minute, to stay at a resort on spring break, to watch the Yankees play the Red Sox, or to sit in the orchestra section at the theatre. Spa consumers are probably scratching their heads and wondering why more spas aren’t offering some kind of variable pricing.

Whether it is out of necessity or simply an evolution of our strategy, it is time for the spa industry to bring “the d-word” back into good graces. Discounting is not a strategy that should be discarded outright, but one that should be carefully considered, and then adapted to the goals of the spa and the needs of the consumers. By applying discounts at the right time, on the right service, for the right market segment, spa professionals can protect the integrity of their value while flexing to meet the consumer where they need us to be.

Jeremy McCarthy is the Director of Spa Operations, Development and Marketing for Starwood Hotels and Resorts where he is responsible for spa development across all of Starwood’s spa brands worldwide. Mr. McCarthy manages a portfolio of brands including Heavenly Spa by Westin, AWAY Spa by W Hotels, Shine Spa for Sheraton, Explore Spa by Le Meridien, and Iridium Spa for St. Regis Hotels and Resorts. Current projects include the new AWAY Spas at W Koh Samui and W Bali, the Heavenly Spas at The Westin Santa Fe in Mexico City and The Westin Pazhou in China, the Iridium Spa at the St. Regis Lhasa in Tibet and the Explore Spa at the Le Meridien Pyramids in Cairo, Egypt. Mr. McCarthy can be contacted at jeremy.mccarthy@starwoodhotels.c or 914-640-8227 Extended Bio...

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