Protecting Your Brand from Discounts: The Real Economic Impact of Losing Rate Discipline

By Jean Francois Mourier Founder & CEO, RevPar Guru Inc. | May 07, 2010

They say with distance comes clarity. Now that the economic nightmare of 2009 seems to have passed, for the most part, we can examine what the hospitality industry did well in the name of survival and what it did poorly. Perhaps the most visible coping mechanism employed by major hotel brands in the extremely demand-depressed environment of the past year and a bit was deep, across-the-board discounting. For many hotels (most, it could be argued) the immediate need to put heads in beds superseded any consideration of the impact on the hotel's brand or brand image.

In a crisis such as the Great Recession presented for the industry, this is at least understandable. And since a large number of the major chains engaged in across-the board discounting, the strategy can be considered consistent across the industry. But for many hotels, discounting remains a knee-jerk response to nearly every constriction in demand, and this strategy just won't work.

Maintaining sound rate discipline should be a top priority for hotels across the country and around the world. The industry can take a pass on the deep discounts of 2009- call it the mother of mitigating circumstances- but now it's time to get back to the hard work of optimizing rates and the RevPAR they ultimately generate.

The danger of discounts

The rush to discount implies an undue emphasis on maintaining occupancy and a shortsightedness in terms of brand development. Yes, discounts can attract new customers, and distinguish a hotel in a crowded marketplace. But competition based on price is not a game many hotels are well-suited to play. At the extreme, deep discounting in a given market can lead to a pricing death spiral, with each hotel racing the other to the effective rate bottom. We need only look to debilitating price wars in our sister industry- the airlines- to see the profoundly negative effect this can have on the health of an economic sector.

The everyday dangers of discounts are more insidious than the worst case scenarios of slash-and-burn price wars. Discounts, with their appeal to bargain-seeking travelers, can erode a hotel's customer base. Whereas once a hotel might have attracted business travelers with their multiplier effect on non-room spending (think expense accounts and long lounges in the lobby bar), a hotel with a discounted rate might instead attract leisure guests on a budget. For what the hotel gains in occupancy, it loses in overall per-room revenue.

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