Ms. Millar

Eco-Friendly Practices

Willingness to Pay Extra Green for Green Hotels

By Michelle Millar, Assistant Professor Hospitality Management, University of San Francisco

A green hotel is an environmentally conscientious operation that promotes and practices energy efficiency, conservation, and recycling, while at the same time providing hotel guests with a sustainable, clean, and healthy product. As green hotels become more mainstream an increasing number of travelers are willing to stay in such hotels, especially as their concern for the environment grows. In fact, more and more travelers are claiming that they have become more environmentally conscious when they travel and are seeking out destinations and hotels that have made commitments to protecting the environment. Hotels have followed this trend and are greening their operations in order to cater to these green travelers. In fact, today there are approximately 130 LEED certified hotels. LEED, Leadership in Energy and Environmental Design, is the most common standard that hotel owners follow in the United States when they decide to green their hotels and create new buildings. By following the LEED standards owners are not only able to reduce environmental impacts but are often able to increase operational efficiency.

To become officially LEED certified is quite expensive and it is often believed that hotel room rates of LEED hotels are thus inflated. Despite the cost of LEED, there are approximately 1600 hotels online to receive the certification. Operating a LEED hotel, on the surface, may appear to be a trend, but when looking at these numbers, the trend appears as if it is here to stay. Because of the high cost of LEED, many hotels are receiving green certification from other agencies. For example, the State of California has certified over 300 green hotels, and the State of Florida has certified just fewer than 700 green hotels. Premiums for green hotels

A premium is the “excess price paid over and above ‘fair’ prices”. The fair price is the price that reflects the true value of the service. Such a premium is a great tool that hotel managers may use to profit from guests that are selecting their hotel because, in this case they, the hotel is committed to protecting the environment. Whole Foods, and Toyota with its Prius hybrid are excellent examples of companies that use premiums as a tool to charge more for their organic or green products, and they have customers that happily pay those premiums. It is often said in the hotel industry that green hotels are charging premiums and are thus more expensive than non-green hotels. A quick search of room rates comparing green hotels to conventional hotels, however, indicates that green hotel managers are not using this tool to charge a premium for their rooms.

When comparing room rates of LEED certified hotels to non-LEED certified hotels of the same type and in the same city, I found essentially no difference in room rates. I compared the room rates for 2 luxury hotels in San Francisco over the course of several weekends. In all cases, the LEED certified hotel was less expensive than the other hotel. The same search was conducted in Chicago using a mid-scale LEED certified hotel and conventional hotel. In that instance, the room rates were all similar, as was the case in Philadelphia and Las Vegas.

If green hotels were in fact charging premiums, then one would wonder why these green hotels were not more expensive than their counterparts. There are many more hotels, both green and not green, throughout the United States so I cannot make assumptions about all of them. I believe, however, that hotel managers still continue to base pricing on supply, demand, and services, and that green hotels may not be charging premiums at all. There has been no evidence, even outside of the experiment conducted here, to the contrary.

Travelers’ perceptions of green hotel prices

Travelers have the perception that hotels with green certification charge a premium room rate, and that they are more expensive than traditional hotels. This perception could stem from knowledge about the cost to build a green hotel as mentioned above, or, perhaps more likely, it could stem from a comparison to prices of other green items, such as organic food or clothing. Both are quite a bit more expensive than their conventional counterparts. Regardless, because of their perceptions, several surveys have been conducted that have asked travelers if they are willing to pay a premium to stay in a green hotel. Some results indicate that they are, although it is not known how much of a premium. It is also not known if travelers would be willing to pay a premium for all types of hotels, from economy to luxury and everything in between, or whether they are only willing for a particular type of hotel.

I would actually question why guests feel they need to pay a premium at all. When talking with industry experts, some claim that their guests wish to pay less when staying at a green hotel, or receive some sort of credit, because many guests know the hotel can save money by using green practices. For example, a popular green practice is encouraging guests to re-use towels during a multiple night stay. This enables the hotel to use less water because less laundry is done, and as a result, the hotel saves money because it saves on the cost of purchasing water and electricity. Some guests feel that any such savings should be passed on to them in a reduced room price. It is no secret that making a hotel’s operations green, and thus more efficient, saves the hotel money in the long run. Since that is true, one would think a green hotel should, or at least could, be cheaper than a conventional hotel.

On the other hand, although guests are willing to seek out and stay in green hotels, according to Faith Taylor, Vice President of Sustainability and Innovation at Wyndham Worldwide, and Marty Collins, President and CEO of Gatehouse Capital Corporation, a real estate and development firm, they do not want to pay a premium for them. A recent study published in the Cornell Hospitality Quarterly supports this claim. Guests simply want to pay the same room rate, no more or no less, as they would whether the hotel was green or not. This is important for the hotel industry to understand because it must be careful not to alienate guests by charging premiums, unless that is their strategy. The majority of the population, however, cannot afford premiums for green products or services.

Changing perception

The perception that there are premiums is not good news for hoteliers. Hotels may be losing out on a larger clientele base because some guests perceive green hotels to be more expensive than others. Hoteliers need to be mindful of this and make customers aware that their product is accessible and affordable, and try to change the misperceptions about green hotels that were discussed earlier. It may also help if researchers such as myself quit asking people if they are willing to pay a premium, and thus implying that green hotels are, in fact, priced differently than other hotels! However, having said that, a hotel manager may also decide to go in the opposite direction by making the concerted effort to charge a premium, especially if hotel guests already perceive green hotels to be more expensive than others. In fact, there are some government organizations that are requiring their employees to stay in green hotels when traveling on business. This could certainly demand a premium. If consumers want to stay at a green hotel and are willing to pay for it, then the hotel can demand a premium just as Whole Foods and Toyota do. In many ways, this is a vicious circle.

Clearing the murkiness

Are customers willing to pay more for green hotels? If yes, then are green hoteliers taking advantage of this fact? There is, thus far no evidence to suggest that they are. On the surface, it appears that green hotel pricing is more on par with similar hotels in their markets. To add to this murkiness, some customers say they are not willing to pay more for a green hotel. To provide more clarity, we need to find out if room rates at certified green hotels are truly more expensive than their conventional counterparts. The 130 LEED certified hotels, and a myriad of other green hotels, are located throughout the country. A comparison of those hotels’ average daily rates, revPAR, and occupancy rates by market and nationally, with conventional hotels of the same type, would provide us the information needed to at least begin to determine if green hotels are more expensive than others. Until we know for certain what the industry is doing in terms of green hotel room rates, we cannot know, one way or the other, how guests will react to the rates and we remain in this vicious circle.

Michelle Millar is an Assistant Professor in the Department of Hospitality Management at the University of San Francisco. She received her undergraduate degree from UC Davis, her Masters of Tourism and Hospitality Management degree from Temple University in Philadelphia, and her doctoral degree in Hospitality Administration from the University of Nevada, Las Vegas. Ms. Millar has worked as a travel consultant in various types of travel agency settings for many years, and from 1998 until 2005 operated her own travel agency. She has extensive knowledge in vacation planning, meeting planning, corporate travel planning, and general business operations. In addition, she has worked in a small hotel, which provided her the opportunity to work in all departments of the operation. Her work experience has proven invaluable when teaching at the University of San Francisco. Ms. Millar can be contacted at 415-422-2498 or mmillar@usfca.edu Extended Bio...

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