To reduce or not to reduce the hotel’s ADR?
Following the economic fallout of 2020, many hotels and other tourism businesses have rushed to lower prices in an attempt to stimulate demand. In this article, I analyze the competitive challenges of hotel ADRs in the current climate. We’re also exploring what hotels can do to keep prices down and deliver value ahead of the fast-approaching recovery.
The competitive challenges of hotel ADRs in the current climate
The crisis has resulted in sudden and unprecedented disparities between supply and demand in hotels around the world. Sharp declines in demand, excess capacity, and increased price sensitivity converge to drive down prices and destroy value.
Competitors who have rushed to make aggressive pricing decisions, which in turn push other hotels to follow suit, further compound the problem.
The disparity between supply and demand is unsurprisingly pronounced in the downtown hotel segment. Of the three property segments (downtown hotels, resorts and bed and breakfasts) observed in our PULSE hotel searchDowntown hotels are the most likely to reduce hotel ADD over the next 12 months. However, Resorts & Bed & Breakfasts continue to maintain a more stable pricing strategy.
To reduce or not to reduce the hotel’s ADR?
History and research suggest that hotels that hold the line on price tend to recover from the recession more quickly. In cooperation with Cornell University’s Center for Hospitality Research and Smith Travel Research (STR), researchers studied pricing behavior using 67,008 hotel observations over a seven-year period, from 2001 to 2007.
The study was extremely robust, covering a diverse range of real estate segments and pricing behaviors during the turbulent periods of 2001-2003 and the good periods of 2004-2007.
The results, as shown in the table below (* Exhibit 7 of the research paper), show that regardless of the price segment, RevPAR’s gains came to hotels priced above their competitors. On the other hand, constant shortages of RevPAR fell in hotels that were priced lower than their competitors.
The percentage differences in RevPAR losses for discounters were similar across all market segments and highest for mid-range full-service hotels and luxury hotels.
The general pattern of results was consistent. Whether hotels are going through good or bad times, higher pricing than their direct competitors generates higher room revenues. On the other hand, lower prices than competitors do not stimulate demand enough to give the expected boost in revenues to offset lower prices.
Luxury hotel customers seem less sensitive to price reductions, while budget hotel customers are quite sensitive to small price increases.
But what are hoteliers saying about hotel prices and ADRs in the current recession?
Asked about prices and ADRs in the current climate, Jorgen Christensen, CEO of Small Danish Hotels in Denmark, said: “Obviously, price is a huge factor at the moment, and I’m sure many hotel managers are considering lowering the prices to stay competitive. In Denmark, however, we have the highest VAT for hotels in Europe, at around 25%. All the countries around us have reduced hotel tax due to Covid-19. So if Danish hotels lower their prices even further, they might as well close their doors now. “
Kyp Charalambous, Vice President of Sales at Atlantis the Palm in Dubai, agrees hotels should hold prices to maintain brand integrity when demand picks up. “I am proud to say that at Atlantis, The Palm’s pricing integrity is extremely important to our brand,” he said.
Rather than lower prices, Kyp strongly believes hoteliers should take advantage of this period of weak demand to invest in recovery planning. He says, “Instead of compromising on price, we have used periods of low occupancy to improve the skills of our workforce, prioritize their well-being, redefine our offerings and services and improve our resorts and hotels. . unique with the products offered. “
Daniela hupfeld, Commercial Director of Pierre & Vacances España in Spain agrees. Despite the long road to financial recovery, she believes the speed of a hotel recovery will largely depend on its current pricing strategy. “Getting back to 2019 levels will definitely take us two to three years. Then there is always the question of how to recover this return in demand,” she said.
She argues that hotels that compromise on price during low levels of demand will be badly left behind when it picks up. “We will see some hotels doing very well and recovering sooner because they were able to convert that demand at the right time. Others will lose out just because they are not ready or they just panicked and cut prices. far too soon – ending in a lot of low rate deals that may not have been needed at this point. ”
Hotels should focus on creating long-term value rather than lowering prices
But how can hotels overcome the pricing problem? When neighboring competitors rush to lower their prices, pressuring others to do the same. Well, we have a few suggestions that might help you keep the income flowing during this time – none of them involve drastically lowering your prices.
1. Reduce inventory, but add value to parts
In our Spotlight on Hoteliers for February 2021, co-hosted with Techtalk.Travel and paneled by our CEO Pedro Colaco and an aviation expert, Gavin Eccles, the talking points highlighted the striking similarities between aviation and hotels today.
Much like airlines that switch to smaller planes to implement point-to-point routes and meet current demand, hotels may consider reducing inventory (and costs), while still maintaining prices. Hotels may consider reducing availability, for example by closing rooms for refurbishment.
With the remaining rooms, hotels could offer longer-term rental contracts, or provide an escape for remote professionals to work. Hotels could add a little more value to rooms. For example, a “Stay the night and we’ll let you use our conference room for virtual meetings.”
2. Focus on hobbies and target new markets
In our interview with hoteliers Joao Corte-ReaThe General Manager of the Tivoli Mofarrej Hotel in Sao Paulo, Brazil, he shared his experience on how his downtown hotel is responding to changing demand:“The local market is extremely important to us. Therefore, we continue to shape our sales and marketing strategies around tourists and local customers. “
When asked how his downtown hotel continues to adapt and revamp its offering, he added: “In the past, we served primarily groups and corporate segments, offering short breaks during the week for professionals traveling to Sao Paulo on business.”
“But currently we are seeing an increase in the number of vacationers, including families. As a result, we had to reorganize our offering to meet this new demand – by offering suites and family rooms – which are even more in demand on weekends. our business activity has also shifted from weekdays to weekends. “
3. Work with local hotels and businesses to mark your destination
In the hospitality industry, competitors and partners operate interchangeably. In these uncertain economic times, it’s important that industry leaders work together for a better future. “Together we stand, divided we fall,” as the old saying goes.
In one of our very first Hotelier Spotlight interviews with Nienke badia, Sales Director of the Okura Amsterdam hotel, highlighted a positive element of the crisis – the industry’s deeper focus on sustainable tourism and the branding of the destination.
“Now that global tourism has ceased, hoteliers are now looking closely to bring back local tourism in a way that is beneficial to both the economy and social cohesion. There is also a greater awareness of the impact of travel and what it means for destinations and communities. residents, “ she said.
When asked how hers and other local hotels have contributed to this trend, she added: “Since the start of the pandemic here in Amsterdam, we have frequently engaged with other hotels, partners, venues and governing bodies to strategize on how we can promote this destination and attract visitors who will contribute to its sustainability. and its social cohesion. I expect this will continue after the crisis. “
When demand is close to zero, price is not a factor. So be sure to hold the price line now and when the rebound occurs. The data tells us that destinations and properties that compromised on prices in past recessions took much longer to recover in the recovery that followed.
Therefore, we recommend that hotels focus on long-term value rather than cutting prices to stimulate demand. Remember that the request will come back. Are you serious about driving high volumes of low-cost bookings when the day comes? We didn’t think so.
GuestCentric is a leading provider of cloud-based digital marketing software and services helping amazing hoteliers promote their brand, drive direct bookings, and connect with guests across all digital platforms. GuestCentric’s all-in-one platform provides hotels with the only unified solution to manage their guests’ online travel: award-winning, high-impact websites; an integrated and easy-to-use booking engine; social media marketing and posting tools; a GDS channel code and a channel manager to offer rooms on Amadeus, Booking.com, Expedia, Galileo, Google, Saber, TripAdvisor and hundreds of other channels. GuestCentric is a proud provider of solutions that maximize direct bookings to hotel groups and independent hotels from collections such as designer hotels, major hotels in the world, major hotels in the world, lodges and châteaux, small hotels in luxury and small Danish hotels. GuestCentric is featured on Skift Travel Tech 250, a list of the top 250 travel technology companies shaping the modern travel experience.