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The Perils of Marketing on Price.
By Madigan Pratt
Thursday, 25th August 2011
 
As the Great Recession lingers and talk about a double dip intensifies, it seems appropriate to focus this fourth anniversary issue of Hospitality Marketing Blog on the perils of marketing on price.

It is a topic discussed many times over the past four years and continues to be a hot topic today. A recent article by Robert Mandelbaum from PKF made me think it's a good time to take a look at a couple of the independent studies that both individually and collectively indicate hotels should not be marketing on price.

1. PKF Hospitality Research – Robert Mandelbaum, Director of Research Information Services, wrote:
  • "The driving force behind revenue growth in 2011 is clearly price positioning.  The higher the room rate, the greater the projected growth in ADR and, consequently, RevPAR."
  • The relationship between price positioning and profits appears to be as strong. In general, hotels in the highest room rate categories achieved the greatest increases in net operating income in 2010. Conversely, properties in the lowest rate categories either achieved minor increases in profit, or suffered their third consecutive year of declines on the bottom line.
2. Love Hate Relationship: Occupancy vs. Price – In an article a little over a year ago Stephen R. Hennis, Director of STR Analytics, used the company's research to point out:
  • In 2009, hotels with the steepest discounts suffered the least amount of occupancy erosion.
  • However, the research went on to say, "The more properties dropped rates, the worse their RevPAR index change was, indicating that the upside in occupancy performance did not compensate for the sacrifice in rate."
3. Cornell University Center for Hospitality Research – In an article entitled, "Successful Tactics for Surviving an Economic Downturn," an analysis of 980 hotels around the world conducted between December 2009 and February 2010 concluded:
  • Discounting was the number one tactic used to offset the effects of the Great Recession of 2008–2009. At the same time, most respondents who cut their prices agreed that discounting was not particularly successful in maintaining revenue levels.
4. Time is Running Out On Kerzner and Atlantis – Hospitality Business News last week ran this article citing a Bloomberg Media report that Kerzner International Holdings is in talks to extend repayment of $2.78 billion in loans coming due next month. The article goes on to point out that in recent months Atlantis on Paradise Island, has started to offer rooms at $99 per night.  They only need to sell 28 million room nights at that rate to cover the loans.

Conclusion

The research studies cited are pretty emphatic on the perils of marketing on price – the more you give away on rate the less you get in return. Sounds like a recipe for going out of business.

With price determined not to be a key profit driver, the focus for hoteliers needs to be more on the other three Ps in Marketing – Product, Promotion and Place or distribution to bolster the bottom line.
  • Product – Ensure your property offers excellent value for money. Value is a much stronger long-term proposition than simply offering the cheapest rate.
  • Promotion – Clearly position your hotel vs. other hotel options. Highlight those benefits in all marketing efforts that provide your hotel with a clear competitive advantage.
  • Place – Be sure your hotel is easy to purchase whenever and wherever the customer is inclined to book.
    Small luxury hotels should have a distinct advantage over other properties when if comes to differentiating product and creating a clear competitive advantage.
What do you think?

Madigan Pratt is Managing Director of Madigan Pratt & Associates, Inc., an innovative CRM company dedicated to acquiring and retaining profitable customers for luxury hotels. Prior to founding MP&A in New York two decades ago he held senior management positions overseeing marketing communications for several Fortune 500 companies.

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