Best Practices for Dealing with Price Wars
By Bonnie Buckhiester President, Buckhiester Management Limited | March 20, 2011
Recently I was driving to a client's and had occasion to listen to NPR (National Public Radio). The program featured a speech by Robert Gates, Secretary of Defense. He commented that he'd worked for 8 different presidents, and when a situation elevated to the President's office there were no good solutions. If there had been, someone would have thought of it already and taken credit for it. No, if a problem reaches the President, all that can be done is choose the least damaging of an array of difficult solutions.
So you ask, what does this have to do with price wars in the hospitality industry? Simply put, when you're in the heat of battle in a difficult market, there are no perfect, silver bullet solutions…but there are options far less damaging than fighting the battle with price alone.
Dealing with price wars is clearly the nemesis of many hoteliers during a recession - with aggressive and often predatory pricing being deployed in many markets. The truth is that when demand wanes, 5-star hotels steal from 4-star, 4 from 3, 3 from 2 and so on. So what is a General Manager to do when price becomes the weapon of choice?
Of course the very first move is to manipulate business mix, not price. But managing mix is foremost a strategic maneuver, and decisions must be made over longer horizons. If you're already embroiled in battle you need to start by asking 2 questions: "Are you selling your product for less than the customer is willing to pay?" and "Are you creating products that don't sell?". If the answer is "yes" to both, it's likely you have a pricing problem which offers price points that are too high in some circumstances and too low in others, leaving money on the table either way.
This is a curious dilemma considering the hotel industry is a high fixed cost, low variable cost sector. Every incremental dollar impacts profitability exponentially, and every lost dollar erodes profit in the same, magnified manner. So playing with price is deadly. General Managers and Controllers know this all too well, but do other staff members who make decisions about price understand this unique flow-through relationship? If not, they should. They should also know that reliable studies from respected sources like Cornell University confirm that discounting in the hotel business does not create volume as much as it decreases revenue.
Step 1 - Restate your value proposition
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