HENDERSONVILLE, Tennessee—Hoteliers have been hearing different messages from opposing directions, ranging from “get as much business as you can—more heads in beds” to “more rate means more to the bottom line.” Does encouraging properties to have the highest market premiums result in the most profitable solution for hotels at the end of the day?
This article will showcase a case study of two actual hotels competing in the same market and how their marketing and sales strategies have affected their room revenue streams during these challenging economic times. The hotels are located in a downtown sector of a major U.S. market. They are branded, upper-upscale properties each with 400 to 450 rooms. Their competitive set (with them included) is made up of five upper-upscale hotels.
In the chart below, you can see that from 1998 to June 2002, both hotels switched on and off with the highest revenue per available room premiums. But in July 2008, Hotel A started to consistently capture stronger monthly RevPAR indexes than Hotel B. The hotel captured these index premiums from having higher occupancy indexes. In January 2009, Hotel B started capturing higher RevPAR with consistently higher occupancy and average daily rate indexes until April 2009. From April through June 2009, Hotel A regained RevPAR premiums by having higher occupancy indexes.
NOTE: The red dotted line section in the chart reflects the months of the 2001 recession.
Source: STR
NOTE: The red dotted line section in the chart reflects the months of the 2001 recession.
Source: STR
NOTE: The red dotted line section in the chart reflects the months of the 2001 recession.
Source: STR
From July 2008 through June 2009, Hotel A’s average room rate declined 11 percent, while Hotel B’s rate declined at almost half that rate. Although Hotel A discounted more aggressively than Hotel B, its occupancy declined 11 percent while Hotel B’s occupancy declined 6 percent. In that 12-month period, Hotel A’s total room revenue averaged a 21-percent decline versus Hotel B’s average decline of 12 percent.
Percent change comparisons
| |
Occupancy % Change1 |
ADR % Change1 |
Rm Revenue % Change1 |
| |
Hotel A |
Hotel B |
Hotel A |
Hotel B |
Hotel A |
Hotel B |
| Jul 08 |
-15.0% |
-27.2% |
8.0% |
6.4% |
-8.2% |
-22.5% |
| Aug 08 |
-15.6 |
-0.6 |
-1.3 |
-2.6 |
-16.7 |
-3.2 |
| Sep 08 |
-0.5 |
-2.5 |
-3.7 |
3.9 |
-4.2 |
1.3 |
| Oct 08 |
-9.2 |
-5.4 |
-7.8 |
-8.3 |
-16.3 |
-13.2 |
| Nov 08 |
-17.0 |
-16.5 |
-8.8 |
-3.1 |
-24.2 |
-19.0 |
| Dec 08 |
-2.0 |
12.2 |
-7.2 |
-0.9 |
-9.1 |
11.2 |
| Jan 09 |
-8.2 |
4.1 |
-14.4 |
-6.3 |
-21.4 |
-2.5 |
| Feb 09 |
-21.0 |
-6.7 |
-8.9 |
-7.7 |
-28.0 |
-13.9 |
| Mar 09 |
-12.2 |
7.2 |
-25.6 |
-11.4 |
-34.7 |
-5.0 |
| Apr 09 |
-18.2 |
-12.9 |
-20.5 |
-19.9 |
-35.0 |
-30.2 |
| May 09 |
-12.7 |
-8.1 |
-18.0 |
-17.2 |
-28.4 |
-23.9 |
| Jun 09 |
7.7 |
-4.2 |
-21.7 |
-3.8 |
-15.7 |
-7.9 |
1 Percent change versus previous year.
Source: STR
In this example, Hotel B’s restraint in deeper discounting during this current recession has helped mitigate its loss in year-over-year room revenue.
From July 2007 through June 2008, Hotel A’s ADR was US$165 and Hotel B’s ADR was US$156—a US$9 spread. From July 2008 through June 2009, Hotel A’s average daily rate was US$146 (a US$19 decline) and Hotel B’s ADR was US$146 (a US$10 decline). It appears Hotel A managed its rate to match Hotel B’s rate. In doing so, they didn’t captured enough demand that otherwise would have gone to competitors to generate a slower decline in room revenue loss. Now their customers are starting to get used to paying about US$20 less than they had previously paid. Would the hotel have been better off discounting to a lesser degree to maintain rate integrity, yet likely losing more of its occupancy market share premium? Time will tell what efforts it will take for the hotel to regain its revenue growth momentum.
In the second part of this two-part article, you will see what the effects of these two hotel’s pricing decisions was on profitability.
