Couponing, Discounts, and Price Benchmarking: A Hospitality Industry Challenge

By Rohit Verma Executive Director, Cornell Center for Hospitality Research | December 04, 2011

Co-authored by Glenn Withiam, Executive Editor, Cornell Hospitality Quarterly

In just the last couple of years, the phenomenon of social couponing has attracted the attention of customers and businesses alike. Fostered by the internet, social coupons involve offers that are activated only when a sufficient number of customers agree to participate in the promotion. After two years of rapid growth, one social couponing firm, Groupon, attracted the attention of Google in 2010, with rumors of a possible purchase. That did not occur, and Google subsequently launched its own social couponing site, known as Google Offers. Yet another social couponing site, LivingSocial, has seen investments from Amazon.com, among other backers.

Given the rapid growth and "buzz" for such sites, researchers have been examining these sites both from the point of view of customers' attitudes and businesses' strategies. In this column we discuss some of these findings, with an eye to setting appropriate strategies, especially since social couponing has repealed neither the economics of couponing nor the basic psychological issues of consumer behavior.

In a case study, Cornell professor Chekitan Dev examines the situation of a tour operator that develops and hosts tours in the Finger Lakes region of New York State. Due to glacial action, the region's soils and topography permit the growing of wine grapes, which has attracted an increasing number of wineries. The tour operator, Experience! The Finger Lakes, has created a series of packages that involve wine tastings and winery tours, among other activities. As is the case with many businesses, growth slowed in 2010, just as Groupon opened a regional office in the vicinity and expanded its strategy of working with small businesses. Intrigued at the possibility of increasing turnover, the tour operator approached Groupon to examine the possibilities for a promotion. The motivation for creating a promotion was the hope that customers would repeat their purchase once they had an initial experience with the business.

Typical of a case study, Professor Dev outlines the economics of the potential coupon promotion-and asks the reader to analyze whether the tour operator should go through with the deal. Most critically, Groupon insists on steep discounts for its promotions, in this case, a discount of 50 percent. The resulting calculations will be familiar to revenue managers and other marketers who are responsible for setting prices and determining promotions. Because the tour operator was selling packages, its cost of goods sold was high enough that a 50-percent discount would result in a loss for every coupon redeemed. To make the deal work at all, the tour operator needed both to increase value and cut costs.

Even with those problems resolved, the tour operator faced additional issues, including potentially unlimited sales of the discount coupon, the expiration date for any coupons sold, and even the cost of credit-card processing, which would fall on the tour operator's shoulders as an additional expense. The economics of the deal remained daunting, even though it was structured to avoid losing money.

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In a recent global consumers report, 97% of the participants said that customer service is a major factor in their loyalty to a brand, and 76% said they view customer service as the true test of how much a company values them. And since there is no industry more reliant on customer satisfaction than the hotel industry, managers must be unrelenting in their determination to hire, train and empower the very best people, and to create a culture of exceptional customer service within their organization. Of course, this begins with hiring the right people. There are people who are naturally service-oriented; people who are warm, empathetic, enthusiastic, pleasant, thoughtful and optimistic; people who take pride in their ability to solve problems for the hotel guests they are serving. Then, those same employees must be empowered to solve problems using their own judgment, without having to track down a manager to do it. This is how seamless problem solving and conflict resolution are achieved in guest service. This willingness to empower employees is part of creating a Culture of Yes within an organization.  The goal is to create an environment in which everyone is striving to say “Yes”, rather than figuring out ways to say, “No”. It is essential that this attitude be instilled in all frontline, customer-facing, employees. Finally, in order to ensure that the hotel can generate a consistent level of performance across a wide variety of situations, management must also put in place well-defined systems and standards, and then educate their employees about them. Every employee must be aware of and responsible for every standard that applies in their department. The April issue of the Hotel Business Review will document what some leading hotels are doing to cultivate and manage guest satisfaction in their operations.