Unfortunately, some hotel operators don’t always think about fair competition and the reasonable market rate. Instead, they tend to sell rooms below market, offering unreasonable discounts themselves and often through third-party booking engines too. With expectations that a coming recession will lower occupancy rates in 2023, a race to the bottom could be catastrophic for a hotel. When competition is fierce and the marketplace is shrinking, hotels that compete on value and customer service will find themselves in a stronger position.
Separating healthy from unhealthy competition
Unhealthy competition in the hospitality industry occurs when local hotels compete against each other for higher occupancy by lowering their standard rates and offering larger discounts. Third-party booking sites facilitate unhealthy competition, but it doesn’t happen without active participation by hotel owners and operators.
In contrast, local hotels engage in healthy competition when each competes on the quality of their customer service and amenities. These hotels set realistic revenue goals for their market and hotel class and aren’t driven to achieve high occupancy rates at the expense of other success metrics.
The double-death spiral of competing on price
One local hotel lowering its rates won’t negatively affect the balance of competition among other hotels in the same area. The problem arises if too many hotels respond by also lowering their rates and they reach a tipping point that kicks off a double-death spiral. The first death spiral leads to prices bottoming out because each hotel tries to undercut the other by offering a lower rate or larger discount. As prices decline, the hotels’ level of service and cleanliness inevitably must also decline as management simply can’t afford the resources needed to maintain optimal levels of service. A declining guest experience is the second death spiral. The result is an increasing volume of poor reviews and low star ratings from guests, which further reduces occupancy rates, revenue and profitability.
A hotel that can hold on to its reasonable rate amidst local price competition may experience short-term loss, but could recover by maintaining its strong service and amenities. Indeed, the short-term loss can be seen as an investment in the opportunity to establish the property as a top choice hotel in its tier and location.
Compete by offering the greatest value
The foundation for engaging in healthy competition is to keep rates at the market level and entirely avoid offering discounts. Through regular analysis of the weekly STAR benchmark report, hotel owners and operators know what the fair price and occupancy rate is for a hotel at their star rating and location.
Those that keep rates at market value are now motivated to compete on value. Hotels should promote their particular value at every opportunity and through all their marketing channels. Adding all industry award badges earned to the hotel website and online listings are obvious ways to advertise the hotel’s value, but the hotel should do more. Instead of giving desk staff a generic script to be used when answering the telephone, their script could go something like, “Thank you for calling [Hotel Name], winner of the [Award Name]. How can we serve you today?”
Hotel management should take advantage of every opportunity to promote the hotel’s value, constantly reinforcing it with potential and current guests alike. When reservation agents quote the nightly rate, their scripts should include language that emphasizes a point of value, for example extended hours for complimentary breakfast service that’s outside the norm for that market. While prospective guests hear the same ballpark rate from other local hotels, they’ll remember which hotels offer extra value for that price.
Besides the regular promotion of the hotel value, a property can fortify itself against an atmosphere of unhealthy competition in other ways:
Invest more effort in increasing sales and marketing to capture more local business. Internal sales teams should look at local businesses, schools or other organizations that have regular visitors coming to the area. Then, they can identify what kind of additional value means the most to different types of organizations and use that to build tailored outreach campaigns.
Independent hotels can establish their own loyalty programs to target return guests. While loyalty programs typically offer free nights, the program could also include special services or preferences for member guests, such as later check-out times or preferred room location.
Hotel operators always have options to compete on value over price. It just takes some creativity and a mindset for healthy competition.
Keep promises made in promotions and marketing campaigns
Whatever value is advertised and promoted, the hotel must then meet guest expectations for that service, as well as basic cleanliness. Failure to keep any promise made in an ad or promotion triggers critical reviews from disappointed guests who never return. Keeping promises and exceeding expectations are why guests return, and also leave positive online reviews, which, of course, helps the property stand out, including on third-party booking sites, without offering a promotional discount.
Healthy competition among local hotels benefits everyone
Hotel operators that regularly analyze their local market, have realistic revenue goals, and know how to train and manage staff to keep service levels high can successfully compete on value. It’s those hotel operators that can’t reliably produce a quality experience that have to rely on third-party sites and follow the pack that’s cutting their rates. Operators can sidestep the low-rate death spiral by focusing on the quality of staff, amenities, and atmosphere. When they can foster trust by consistently and reliably providing value, hotel operators can build loyalty that transcends pricing.
Pradip Patel is the founder/owner of Real Pinnacle LLC and has more than five years of experience in hotel management.