Hoteliers’ price wars

In most cases, price wars start because a hotel is trying to stop the declining demand, or one hotel figures that they can buy market share using their current profit margins as a trade off. Dropping prices to stimulate demand or buy market share comes with its own set of penalties.

Hotels, like many other businesses, operate in a competitive environment. Generally, when one hotel makes a bid to buy market share through price reductions, any revenue from market share that is gained is soon lost when a competitor retaliates by undercutting the reduced price and the hotel is forced to sell at even lower rate levels that endanger its profit margins.

Subsequently, when these hotels try to increase prices when demand picks up, they will experience resistance from customers. Competitors also may not follow your attempted price increase in the future, making it difficult for you to return your prices to previous levels for some time to come.

The biggest penalty of a price war is commoditization
If hotels in a market elect to compete solely on price, the only way the consumer or guest can differentiate between different hotel rooms is by their price. In 2001, hotels were extremely price competitive and markets across the world were engaged in price wars. When you add internet booking engines to that mix, the effects of “price wars” would be readily available. Consumers who shopped and booked on the internet could not differentiate hotels by anything other than price. Market segments, which were not so price sensitive, managed to take advantages of lower rates.

How will you intelligently deal with competitors who are aggressively moving prices down or are pricing below cost and act as if no price is too low to win more volume? Here are a few approaches for your consideration:

Don’t make the price war worse
Do not escalate the war. If you only use price as a weapon to compete to win customers, you increase customer price sensitivity and the intensity of the competition. You need to focus on defining products that target specific customers and pricing for differential value in a cost effective way.

When faced with a price war, your corporate customers might also be pressuring you for better deals on their contracts. For example, they might demand more access to your inventory and request last room availability. Consider awarding this by room type rather than at the hotel level. It is not just the price on the contract, but also the terms of the contract that are important. Ensure that the contract allows for re-evaluation of the price and contract terms at regular intervals through the life of the contract based on usage. Also ensure that the usage is actively monitored.

Price discrimination, not price discounts
Learn to fence cautiously. You may consider creating new products to increase your business during periods of low demand. The advantage of offering a range of fenced products is that the market segments that find such offerings meaningful will automatically gravitate to purchasing such new products. This produces previously untapped business, and there may even be other untapped business not identified as a specific market segment as well. This will enhance revenues and better capture the existing demand based on the occupancy levels and business patterns. Fenced products could be defined as the products associated with restrictions, e.g. by arrival day of the week, minimum and maximum lengths of stay, or advance purchase restrictions.

You can also indicate if there are add-on services to the product such as valet service, free internet access, or food and beverage credit and provide the start and end dates for the product availability. The availability date range will enable you to attract customers based on the add-on services for low-demand periods. You can achieve this by analyzing the overall demand patterns to isolate gaps in existing demand.

Look to uncover complementary demand patterns that translate into opportunities for defining new products with the intention of increasing sales without cannibalizing the demand of existing products. The key here is that non-cannibalizing products have unique differentiators built in to allow fencing from existing products.

The advantage of introducing new products is that such products can have restrictions that target clearly identified market segments but remember the focus is on achieving increased revenue, not cannibalization of your existing demand.

Articulate value, not price
The only way to operate at prices higher than competitors is to deliver true value that competitors cannot match. If you do not continue to emphasize your value delivery, you will leave yourself vulnerable and make it possible for customers to choose your competition, even if your product actually delivers more value.

This is the time to ensure that your reservations team is fully aware of the value that various products offer and are confident selling them over the phone. In addition, you need to ensure that your products are appropriately represented on the various internet booking channels.

Plan for the recovery too
Let’s try not to repeat the mistakes from 2001 and 2002. Spray and pray marketing is not an effective strategy. You will need to invest the time and effort to target specific customers where you have a better chance of winning against your competitors. Decide on new products that deliver additional value at a competitive advantage and ensure that your customers make value trade-offs in exchange for lower price.

During these uncertain times, price discrimination and not price-discounting needs to play an important role based on the market conditions. Remember that price cuts in certain markets may get you some volume in the short run, but when you win that volume at your competitors’ expense, it is likely that there will be price retaliation, and the resulting price war will quickly eliminate the benefit of a short-term share increase.

Don’t forget to plan for the recovery and for any opportunistic bursts of demand that can occur well before a full recovery is underway. If you position yourself strategically, you can profit handsomely from periods of stronger demand as they begin to emerge. Optimizing revenues over even a very few days can pay off with higher revenues.