The Room Rate Conundrum: The Leap From Tactical to Strategic
By Gabor Forgacs Professor, School of Hospitality & Tourism Management, University of Guelph | March 06, 2011
We all make tactical room rate adjustments on a daily basis. We need higher occupancy, increased cash-flow, plus show the owners how hard we tried. We also must be sure these tactical decisions are in alignment with our strategic objectives. Actually, do we want to compete on room rates at all?
This is a possible scenario: "We decided to aggressively lower our room rates from $179 to $119 because occupancy was dipping under 60%. We offered the price incentive to stimulate demand. The result was discouraging: we gained some occupancy but our REVPAR took a nosedive and our hotel attracted a new clientele that wanted everything free: parking, WiFi access and buffet breakfast. These new guests ordered local take-out instead of eating at our restaurant. They also complained about anything possible, just to force an apology and a discount at checkout. Is this the new normal?"
The above is an imaginary scenario: it never happens at well-run hotels… Right?... Right. However, if it sounds vaguely familiar, read on. This article will deal with the most pertinent questions and will offer some perspective on our challenging times.
Why Can't We Improve Profits if Lower Room Rates Lead to Higher Occupancy?
It depends on how much we discount and which clientele we attract. Let's look into the changes both from quantitative and qualitative perspectives.
Quantity of units sold. The simple answer for quantifiable changes in profit: it's negative. There are two key variables at play: rate and occupancy. It is very difficult to increase occupancy enough to generate so much more net room revenue (rate minus variable costs) that it covers the net revenue shortfall that results from lower rates. Our rate may drop, but the cleaning costs don't.