Pricing to profit | By Rick Swig

Little did I know, I was experiencing the beginning of a retail trend, which would move from the department stores right into the hospitality sector … with a vengeance! As we’re preparing for the fourth quarter of 2009, the hospitality sector has managed to undermine any pricing strength and/or integrity it once held. The sector managed to follow the airlines and general retailing down the path of failed profitability through unabashed incentives and unprofitable discounting.

Some hotel asset managers wonder what unprofitable versus profitable pricing is. Simply stated, the distinction is that which allows owners their fair or anticipated return on investment. It’s not just about winning the market penetration game or comparable competitive yields on gross operating profit.

According to a number of industry observers the modern era of the hotel business began in 1985 with the unveiling of Smith Travel Research. Although the hotel business really started more than 2,000 years ago for travelers seeking relief from horse and camel trails, STR allowed the most accurate opportunity to measure one’s hotel business productivity within the context of the competitive market. The focus on measuring market share and market penetration (in general and then by market segment) brought a new awareness to the hotel business sector, along with the potential manipulation of those elements through more sophisticated marketing and pricing techniques. Twenty-two years later, Randy is pleased the global industry is addicted to his data, while the industry is better and worse for it.

Especially after the early 1990s recession and the resulting decline of business travel in that period, the airlines and, subsequently, hotel operators discovered they could stimulate the so-called leisure transient segments with pricing incentives and other terms and conditions, such as length-of-stay provisions, Saturday night stays and selected day-of-week pricing. It worked and stimulated travel, cash flow and reclaimed profitability. At no time during that period was there a decline in national average daily rates in hotels.

In the early 2000s, especially during and after 2001, hotel operators expanded on what they thought they had learned in the previous recession and applied those activities to broader business segments and on a seven-day basis. There were ad hoc pricing incentives, as well as special bonuses paid with double and triple frequent guest points or miles. Once again, hotel operators seemingly were able to stimulate demand for their individual hotels … or was it simply shifting market share without any effect on individual market or segment demand?

At this point, STR data really became the monthly metric source to measure competitive effectiveness, as hotel operators became addicted to their measured revenue-per-available-room market penetration performance. Links between pricing incentives and individual hotel RevPAR penetration performance became apparent, so hotel operators just kept discounting to stimulate business—this time with willing conspirators called the e-commerce channels.

Although many hotel operators would argue and quantify they were successful capturing predominant market share for their hotels in 2001 and 2002, that period became the only time since the beginning of time (1987) industrywide ADR declined, and it was only the effective management of expenses that enabled general profit stability. As a result of the discounting epidemic of the early 2000s decade, general ADR levels in many geographic markets didn’t return to year 2000 levels until 2007 or 2008.

The hotel operators went back to the discount trenches in 2008, as demand crashed again. This time, business travel ceased significantly, and meetings became a political and financial scourge. What was a hotel operator to do? DISCOUNT!!!! Why? To generate demand and build market share with favorable reports on an operator’s performance via the now weekly STR report. What about profitability and the protection of a hotel’s product and positioning integrity? Certainly, a weekly STR profitability metric comparison, if it existed, would provide a significant reality check that the pricing pendulum has swung to an extreme with negative benefit to hotel owners. Congratulations hotel business practitioners, you consistently may have won the STR market penetration sweepstakes, but the owners are bankrupt now!

And congratulations, yet again, to the perpetrators of the market share through discount philosophy, you have trained the customer never to accept published pricing again. Now customers believe there must be a better room rate somewhere, so this has become their obsessive pursuit, thus undermining corporate rate agreements, convention room blocks and profitable rate positioning everywhere.

Owners of hotel real estate, although clearly bought into the pricing concepts, should be irate with brands and operators who have promoted these practices. For many hotel owners, however, an attitude change would be too little too late because the forecasted 2009 year-end record-breaking decline of national RevPAR performance of -17 percent to -20 percent will result in 35-percent to 40-percent losses in net operating income/EBITDA and at least that in property valuations. Hotel owners already have been ruined by ill-advised and out-of-control pricing practices. The question for the future is what to do about regaining pricing control and profitability.