Many hoteliers contend that discounting room rates is a necessity during tough economic times—and also a strategy to steal market share in good times. With the current global economic slowdown the temptation to drop rates has again surfaced. To prepare owners and operators for how to consider making wise strategic pricing decisions in uncertain times, we conducted a study in which we examined pricing, demand, and revenue per available room dynamics in the U.S. hotel industry for the periods 2001-2003 and 2004-2007.

It is not always clear why competitors drop their prices or why others follow. To explore these pricing dynamics we looked at hotels that price above and below their direct competitors. To ensure that our study captures true competitors, we only look at competitors who had similar revenue performance in the prior year.

In cooperation with The Center for Hospitality Research at Cornell University and Smith Travel Research, we explored the pricing behavior of 67,008 hotels over a seven year period from 2001-2007. In each year we began with a sample of between 11,056 (2001) to 16,369 (2007) hotels. The data were monthly property-level drawn from STRvdatabases.. We aggregated STR’s monthly rooms data to arrive at the annual number of rooms sold, annual number of rooms available and annual rooms revenue for each property and each property’s competitive set for each of the seven year of the study. Properties that had less than 12 months of data were eliminated from the sample.
 
The key variables of interest in this study are the percentage differences between each hotel and its competitive set of hotels on price, demand, and revenue metrics. The percentage difference in ADR was used as the basis for making comparisons among the pricing strategies of hotels relative to their competitive set. To calculate percentage difference in ADR, the annual ADR of a competitive set was subtracted from the annual ADR of each hotel. This difference was then divided by the annual ADR of the competitive set and multiplied by 100. The result of this calculation is the percentage difference in ADR from that of the competitive set. Occupancy and RevPAR percentage differences were calculated using the same approach.

Pricing strategies and hotel differences

The sample hotels (n=67,008) were grouped into 12 pricing strategies based on their percentage difference in ADR from their competitive set. The price difference categories ranged from 20 percent to 30 percent above and below the competitive set to 0 to 2 percent above and below. After grouping hotels according to their pricing differences, the percentage difference between each hotel and its competitive set on occupancy and RevPAR were calculated and mapped.

The initial analyses examined all hotels during the turbulent years of 2001 through 2003. Exhibit 1 shows the average percentage difference in occupancy and RevPAR performance across hotels that both rose or lowered their ADRs compared to their competition. Overall, for hotels that dropped their price relative to their competitive set, average percentage differences in occupancies rose, but average percentage differences in RevPARs fell. This pattern of gaining occupancy but losing RevPAR when dropping rate compared to the prices of competitors was true for hotels in all three years.

RevPAR and occupancy percentage differences from the competitive set 2001-2003:

As shown in the data table of Exhibit 1, the maximum occupancy advantage over the competitive set was obtained by those hotels that had the lowest comparative ADRs. But the key point is that these low priced hotels reported the lowest comparative RevPARs as well. Clearly the strategy of putting heads in beds was accomplished by dropping relative prices. In 2003, the hotels with prices 20 percent to 30 percent below the competition reported annual RevPARs of 12.0 percent below the competition. In sum, while the goal of increased occupancy was achieved, the consequence for these hotels was substantially lower RevPARs than their competitive set.
 
Hotels that dropped their relative prices by less than 2 percent experienced both occupancy and RevPAR gains relative to their competitors. In contrast, hotels that raised their relative prices by less than 5 percent experienced both occupancy and RevPAR gains relative to their competitors. Hotels that raised their relative prices more than 5 percent above the competition were punished with lower occupancies, but rewarded with higher relative revenue.  

As the industry began to rebound in 2004, it seems likely that pricing behavior would also change. Exhibit 2 shows the percentage differences in RevPAR and occupancy performance across hotels that both lowered or raised their ADRs compared to competitors from 2004 – 2007. Interestingly, the analysis suggests a similar pattern of rising and falling occupancies and RevPARs as was seen in previous years. Hotels that dropped their rates relative to competitors experienced rising percentage differences in occupancies, but their average percentage differences in RevPARs fell compared to their competition. This pattern of gaining occupancy but losing RevPAR when dropping rate compared to the prices of competitors was similar to the pattern found for the 2001-2003 period.

RevPAR and occupancy percentage differences from the competitive set 2004-2007:

Pricing by market segment