To discount or not to discount, that is the question.
When faced with declining or stagnant occupancy, a hotel owner or revenue manager has to answer two tough questions: 1) Why is occupancy doing this? and 2) How do I turn this situation around?
The answer to why occupancy rates have dropped is usually situational, with likely two main reasons. The first, is a situation where the hotel is a newer property and was granted the honeymoon phase of high occupancy due to guests’ desire to try something new. In that situation, continuous high occupancy was never going to last, and dipping to stagnant rates are likely a true reflection of the occupancy level that is more reflective of what the market will provide. The second situation is often a result of short-term revenue management decisions. In this situation, the property is likely well established, and to weather past declines in occupancy programs, they have offered discounts to drum up business. As a result, they have trained their guests to wait until discounts are available, and thus, have dug themselves into a discount spiral.
So how do you turn stagnant or declining occupancy around? You stop thinking about occupancy and start thinking about revenue. Is “more heads in beds” really the goal? Consider these two situations: Situation 1 – You have low occupancy forecast for tomorrow, so you immediately discount your rooms to $50. That results in 12 additional room sales. Situation 2 – You have low occupancy forecast for tomorrow, but you typically get a couple of walk-ins every evening. So you maintain your $75 room rate and sell an additional 8 rooms.
In Situation 1, you improved your occupancy in a discount, and netted an extra $600. In Situation 2, you may have had lower occupancy, but you still netted $600 – and you have four less room to clean. In Situation 1, you discounted a product when you didn’t have to.
Linda Canina and Cathy Enz of the Cornell Center for Hospitality Research did a study published in 2003 with an update in 2006 that found even when discounting leads to greater occupancy compared to a competitor, overall, discounting negatively affected participants’ RevPAR. Please check out their findings, it’s worth the read! “Why Discounting Still Doesn’t Work”
Discounting a good or service is common in other industries where there is a fixed supply of a that good or service – if they are not selling, you store them until you can sell them, or you try to unload them with a discount, and that unloading process can take time. But hotels are unique. Each day, your inventory resets… and aside from leisure travel, many of your stays are likely the result of business travel, where discounting is generally not needed to convince someone to stay there. They book rooms on a “I-need-this-thing-next-week” basis, and they book rooms based on “is the property of a baseline quality.” You don’t need to offer them a discount as they walk in the door – they are already in the door, and thus, are not likely to turn around to go elsewhere. The next step in this process, however, is not in the hands of revenue manager or the guest. It’s in the hands of your front desk staff.
Why your front desk staff are the most powerful tool in revenue generation.
As a revenue manager, you can do many things to maximize your average daily rate (ADR) – you pre-set variable room rates, and you update them as the market changes. But at the end of the month, you notice your actual ADR is lower than your forecast ADR. Why? A likely reason – you have a lot-more walk-in guests than ones who prebook online. Why does that matter? When guests book online, they pay the rate that is presented. When guests walk-in, they will often negotiate their rate, taking advantage of the situation where you have rooms available, and want to put “heads in beds.”
Front Desk staff are trained to sell rooms – sometimes at a cost to the hotel. If there is a walk-in guest who is negotiating hard, the staff may likely “give in” to their demands, in fear that the guest might walk out to a competitor, costing them a room reservation for that evening. Train, and encourage, your front desk staff to get the best possible rate for the room, not the most occupied rooms for the evening. Train them to not immediately start a conversation with a guest by offering them a discount. If the guest scoffs at a full rate, have your front desk counter that with an upbeat and positive description of what experiences, both locally and in the hotel, the guest will enjoy by staying at your property.
We know some guests drive hard negotiations. If that is the case, then the potential to discount might be appropriate, but only after all other options have been exhausted. But not all discounts strategies are created equal. Rather than having the front desk offer a discount that is a dollar value – for example, offering a room that is normally $150 a night for $125 a night – offer your discounts as percent off the top rate – a “Manager’s Special”. That allows the discounts to ebb and flow as rates change, while still providing the guest the satisfaction of “getting a good deal.”
That is revenue management – setting a revenue goal, training your staff to understand how to best achieve that goal, and empowering them to help achieve guest satisfaction through strategic negotiations. Innskeeper Hotel Revenue Management offers additional information and resources for developing incentive programs and employee training to help you maximize the revenue for your independent hotel.