Discounting rooms: what revenue management experts say
For one reason or another, offering discounted rooms is a key element of revenue management – whether it’s because you want to acquire new customers, advance bookings or you know there’s going to be a period of low occupancy. But, according to experts in the field, there are a few golden rules that need to be applied before you can do it successfully, and there are some major mistakes revenue managers often make which can damage a property’s profits.
It’s all about timing
Generally, revenue management experts agree that discounting should be used mainly to encourage people to book early, or to increase volume in periods of low occupancy. “Discounting is a way to open rooms up to people who are looking ahead,” says Jane Pendlebury, CEO of the Hospitality Professionals Association, which provides training in finance, revenue management, IT, marketing, and asset management.
“Good discounting,” she says, “all depends on where you are in the cycle. It depends how close to the booking you are. The main theory of revenue management is you sell your cheapest rooms first—just as the airlines do—or get your cheaper rates secured first. So discounting is good, but the sooner in the booking cycle or the further out from the arrival date you do it, the better.”
Discounting early is a win-win for both the property and the guest: The hotel has guaranteed inventory and can plan accordingly for staffing in departments like housekeeping, while the guest is happy because they got a great rate.
Pendlebury strongly advises against discounting last-minute. “If you get a reputation for suddenly dropping your rates at the last minute, people will then wait to book. Then it’ll be a race to the bottom on price. So discount early and hold your mettle at the end when the demand is there.”
Rate-fence your discounts
It’s not as simple as just setting a cheap advance purchase rate and letting that book up, though, says Neville Isaac, Chief Customer Officer at Beonprice, a revenue management platform.
“There’s a school of thought that says your property needs to offer more than one rate in the market at the same time: A flexible rate with flexible cancellation, and some kind of semi-flexible or non-flexible rate.” The non-flexible rate, says Isaac—be it a pre-payment rate, advance purchase rate, or a rate with a strict or no-cancellation policy—needs to have the discount applied.
“If you’re going to put barriers up, there has to be some benefit for the customer as well,” he continues. “So you might say the customer has to book this rate at least 14 days in advance, but on the other hand, you’ll give them a 15% discount if they do so. Both sides are happy.”
The great thing about tough cancellation policies is that they will likely still encourage people to book your higher rate too. “A business person might not go for the discounted rate,” says Pendlebury. “They might take a higher rate because they are more likely to cancel, so they’ll pay for the flexibility.”
Know the implications
Discounting shouldn’t be used just to fill rooms, though. Ultimately, you need to consider the impact the discounts will have on your overall revenue.
“For me, the biggest error people make is not considering what they need to achieve in order for this discount to be successful,” says Isaac. “The impact of a downward change of price often means you have to obtain a huge increase in volume in order to have the same profitability as you might have had before you changed the price,” he explains. “I’m not saying you never discount, because you have to, but you should know what you need to achieve. You can do it as long as you’re constantly measuring your price elasticity.”
You also need to consider what your competitors might do if you discount. If they also choose to lower their rates, you might well end up achieving the same volume for a lower price, and in that situation everybody loses except the customer.
Alternatives to discounting
If lowering your rates is an unattractive prospect, then there are alternatives that will help you draw more customers in. “You don’t necessarily have to discount your rate,” says Pendlebury, “but you could include something else in it. So, your rate stays constant at £200 a night or whatever it might be, but it also includes breakfast or a bottle of wine in the room. So rather than actually getting the price lower, you’re making the value higher.”
There’s potential hidden profit in these rates too, says Isaac. For example, if a guest books a dinner, bed, and breakfast rate, then doesn’t take advantage of the extra inclusions, there’s extra profit for the hotel.
Ultimately, the way you discount will impact the way your customers feel about you. “One thing I think revenue managers need to really focus on is customer lifetime value,” says Isaac. “By that I mean you want customers who come back, because it’s cheaper to maintain customers than to acquire new ones, and pricing is actually part of the reason they’d come back. If you have a consistent pricing strategy and the customers understand it, and the customers trust you because your pricing strategy is coherent, then that encourages loyalty.”
- Discounts are a necessity for periods of distressed inventory, but can also be useful for guaranteeing advance business
- Lowering your rates last-minute can have a negative impact on your reputation, your revenue and even your market
- Price elasticity needs to be a key consideration before you set any discounts
- Bundling products together, such as dinner, bed and breakfast, is often a better way to offer discounts, and can increase profits in other areas of the hotel
- Your pricing strategy is integral to encouraging customer loyalty