STR Global managing director James Chappell warns hoteliers to consider their specific, current market conditions before embarking on the dangerous path of slashing room rates.
Knowledge is power and for hoteliers selling the most perishable of commodities — tonight’s guest rooms — up-to-the-minute market information is vital if correct pricing decisions are to be made.
Using such knowledge, branded hotel companies develop revenue management strategies with a fluid pricing model to allow them to maximise return on a room dependent on the market conditions.
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In the growth phase of the economic cycle, using price as a means of manipulating demand is an effective tool. Revenue management in a falling market, on the other hand, is notoriously difficult.
The temptation under such conditions is to cut rates, but this can be a dangerous approach that must only be taken when the current market has been put into context.
Following the cycle
Growth in the hotel industry correlates closely with that of GDP and accordingly is of a cyclical nature. The experience of the Dubai market over the last several years (see graph) perfectly illustrates the specifics of the hotel market cycle.
Data from STR Global shows that in late 2002 occupancy picked up, followed closely by average daily rate (ADR). This resulted in a sustained period of growth delivering unprecedented returns for several years.
More recently, but well before the collapse of the world’s financial markets in September 2008, occupancy began to fall followed closely by ADR. The party couldn’t go on forever and in the case of Dubai, more supply arrived on the market just as the world economy started to falter.
As occupancies fall, hotels drop rates in an attempt to stimulate demand — as seen in the Dubai example.
Often this will work initially, but if it continues past a point of diminishing return the misery is compounded and hotels double up on the loss, selling fewer rooms at lower prices. Such price-cutting can have damaging long-term effects.
Take the case of the last major recession in New York, which took almost seven years to build its average rate back up to the levels of 2000. The bad news is that this does not seem to be changing.
An August survey of attendees conducted at STR’s inaugural Hotel Data Conference revealed that 50.6% of respondents believe that it will take three to five years for rates to reach those of January 2008; a further 24.1% believe it will take between six to eight years.
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