How to... resist room rate reductions
With demand for hotel rooms low, many operators will be considering slashing prices to entice guests. Andy Turner explains why this option should be taken off the table
Hotels have begun taking bookings again, opening their doors to paying guests, but there will inevitably be an initial low demand until blanket travel bans and compulsory quarantine regulations get lifted and a ‘new normal' evolves.
One of the key challenges for the sector is pricing. Should operators hold firm on room rates in anticipation of demand returning? Or should they cut rates in the hope of stimulating demand to increase occupancy levels?
History tells us that the hoteliers should resist the temptation to cut prices, as those who have done so in the past have struggled to subsequently increase regular guests back to the original levels when demand returns. Hoteliers will need to ensure that when demand returns, they are not losing out as they have cut rates too low in the short term in order to stimulate demand.
Key performance indicators
Hotels use key performance measurements of revpar (revenue per available room), ADR (average daily rate) and several similar profitability measures to monitor performance. Most are also signed up to receive benchmarking reports of these KPIs for their comparator hotel set. These reports help them have visibility over the pricing decisions their competitors are making and where they rank in terms of their competitor set. If the room rate is significantly different from competitors, this will be evident from the benchmarking report.
Consideration should also be given to the type of guest that will return to the hotel. Initially, this is likely to be the domestic business traveller, so hotels should try to maintain any negotiated corporate rates and use loyalty programmes to provide added value and ensure repeat visits. This will likely be followed by international business travellers, assuming restrictions get lifted, and eventually the return of leisure travellers.
Room rates may well not be the primary focus in the early days of opening, as guests will want assurances over safety and hygiene levels.
"Those who have cut prices in the past have struggled to subsequently increase regular guests back to the original levels when demand returns"
One of the best ways to increase bottom-line profit is to ensure guests book direct rather than using an online travel agency (OTA), such as Expedia or Booking.com. It is important to ensure there is an easy process for guests to make reservations and that the rate strategy is aligned to providing the best value for customers who book direct.
Hotels should also implement flexible cancellation policies for direct bookings, which will reassure guests. There are many examples where OTAs have made it difficult for a guest to cancel, so having a flexible cancellation policy for direct bookings, at least in the short term, will drive direct channel bookings.
In the short to medium term, hotels with good-quality websites may attempt to bypass travel booking sites to avoid the costly commission of such sites. But as the leisure travellers return, it would be foolish to ignore the longer-term potential of these sites. OTAs have a useful role to play, particularly for smaller hotel operators.
There is no doubt that the hotel industry is going to experience many challenges over the next few months and, sadly, some hotels will not survive. Room rates have always been a challenge for hotel operators and they should resist the temptation to reduce rates in the hope of stimulating demand. If they can look very closely at their ability to attract guests directly, this can increase bottom-line profits.
Andy Turner is a partner at accountants Mercer & Hole
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