Rate Cuts Only Cut Into Hotel Revenues

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.