HENDERSONVILLE, Tennessee—During these challenging economic times, it is easy to justify discounting rates to capture as much share as possible in the marketplace. But what are the long-term ramifications of managing for short-term solutions? Here is a specific example of what could happen to a hotel when it starts discounting:

Let’s assume that a 117-room, limited-service hotel has had a 69-percent occupancy and US$95 ADR over the past 12 months. Its distributed operating expenses run US$24 per occupied room and undistributed operating expenses are US$16 per available room. (Operating expense assumptions are based on the 2008 STR HOST Study)  Based on these assumptions, this hotel sells 29,466 rooms per year, reports US$2,799,313 in room revenue and captures US$1,408,838 in gross operating profit (equates to a 49.7-percent GOP).

If this hotel decreases its ADR by US$5 in an attempt to maintain a 69-percent occupancy level, its room revenues drop to US$2,651,981 and GOP percentage lowers to 47.6 percent. For comparative purposes, if the hotel tried to maintain the original US$95 ADR and the same room revenue (US$2,651,981), and instead sell fewer rooms, GOP percentage would drop only to 49.0 percent because of the savings in reduced distributed operating expense.  

This simple example shows that more money can be brought down to the profitability line by attempting to maintain rate than by trying to maintain historical occupancy levels.