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ITHACA, NY-Many a hotelier has preached against discounting room rates as a way to stimulate demand and boost revenues in an economic downturn. Now, there is a study that shows cutting rates is an ineffective strategy—whether the economy is robust or stagnant.

The Center for Hospitality Research at the Cornell University School of Hotel Administration recently released a report titled “Competitive Hotel Pricing in Uncertain Times.” The report’s authors are Cathy A. Enz, a full professor in strategy and the Lewis G. Schaeneman Jr. professor of innovation and dynamic management; Linda Canina, associate professor of finance and editor of Cornell Hospitality Quarterly, both at the Cornell University School of Hotel Administration; and Mark Lomanno, president of STR Global, a leading research firm that tracks hotel data worldwide.

A better understanding of average daily rate patterns in the hotel business led the trio to undertake the study. “Not much is known about pricing in the lodging industry,” Canina states. “One of common trends is that when things are bad hotels tend to discount. But there was nothing written about whether that is a good strategy or a bad one. Because if hotels discount and their profits don’t increase, what’s the point of discounting?”Previous studies tended to look at pricing at the macro level by aggregating data for supply and demand on an industry-wide basis. By doing so, the implication was that lowering ADRs would increase demand and therefore revenues.

However, pricing decisions are typically done in reaction to what is happening at the local level. In other words, Hotel A slashes its rates and its competitor, Hotel B, follows suit. “Hotels either charge more or less than their competitors,” Canina says. “That gave us the idea of looking at the pricing of a hotel relative to its competitors at a local level.”Accordingly, the researchers delved into the pricing behavior of more than 67,000 hotels between 2001 and 2007. During that timeframe, there was a distinct downturn (2001-2003) and a robust period (2004-2007), thereby giving a window into what impact price cuts had in both good and bad economic conditions.

“We categorized hotels anywhere from 30% below to 30% above their competitors in their pricing,” Canina details. “Then we looked at their percentage differences in occupancy and in revenue per available room.”

What the researchers found was that discounting ADRs did increase occupancy. However, those extra heads in beds failed to boost RevPAR. Conversely, those hotels that resisted the urged to cut room rates saw higher revenues per available room, even though their occupancies suffered a bit.

There were some variations based on how much lower or higher a particular hotel’s prices were compared to its competitive set, but the pattern pretty much held true for all lodging segments and in all economic climates.

“This leads us to believe that if you are looking at comparative pricing relative to your competitors, you are better off having higher prices, lower occupancy and higher RevPAR,” Canina says. “During good and bad economic times, the same result holds. So it is not dependent upon the state of the economy.”

Admittedly, when hotels are getting battered as they are today, it’s hard for a hotel operator to overcome the temptation to discount. That is because hotels evaluate their performance based on occupancy, not RevPAR. “So, yes, they will have higher occupancy, but they won’t have higher profitability,” Canina says.

The only way to keep ADRs high and increase revenue and occupancy is to stimulate demand—a difficult proposition when people and businesses don’t have the money to travel. “That’s not happening now because a lot of people are unemployed,” Canina explains. Moreover, wealthy individuals are also feeling the pinch. “Before, luxury properties were not as sensitive to [a downturn in the] economy as mid-scale and economy hotels,” she adds. “But now you are seeing that luxury hotels are being hit quite hard by this recession.”

What’s more, discounting rates only makes it harder to raise them in the future when economic conditions improve. A customer who has become accustomed to staying at a four-star hotel for two- or three-star prices may balk at paying an abrupt rate increase and decide to go elsewhere.

“Hotels can lower prices immediately, but to bring them back up they have to do it gradually,” Canina says. “So they are not just losing now, they are going to lose again when the economy comes back up because they can’t jump prices all of a sudden. They have to go slowly.”

Click here for a copy of the Cornell report.

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