Cornell Study Highlights Hotel Discounting Pitfalls

A new report published by The Center for Hospitality Research at Cornell is challenging executives to rethink their hotel discounting strategies. The study, which used data drawn from over 6,000 hotels for the period of 2001 through 2003, found that:

Discounting relative to the competitive set does, in fact, raise occupancy, but hotels in direct competition experience higher revenues when they maintain their price structure and do not discount to fill rooms.

Why Discounting Doesn't Work - The Dynamics of Rising Occupancy and Falling Revenue Among Competitors, was written by Cornell Professors Cathy A. Enz and Linda Canina, together with Mark Lomanno, president, Smith Travel Research.

“These results suggest a preferred pricing strategy of holding rates constant when competitors are discounting, or even raising prices to a small degree. By raising prices above the competition, a hotel will lose occupancy but make up for that loss with higher RevPAR,” said Enz, the Lewis G. Schaeneman Professor of Innovation & Dynamic Management at Cornell. “By offering a lower relative price, on the other hand, a hotel will gain occupancy but its RevPAR performance will be lower than that of its competitive set.”

Results also suggest that hotel managers who choose to discount prices may encounter resistance when attempting to raise prices at a later date. “Raising prices later may be quite difficult for hotels that discount because customer expectations have changed,” Enz remarked.

The report shows that the dynamics between price and occupancy remain quite stable from segment to segment, but the degree to which higher relative prices produce dramatic or gradual relative drops in occupancy does vary by segment. In addition, for 2003, small relative price increases did not enhance relative RevPAR for some segments.

The report is available free of charge from the Cornell Center for Hospitality Research via the CHR website. To access the report in .pdf format, please click here.