Price wars vs value adds

2013-02-01 11:02
Guest want a broader experience during a stay as well as feeling it was money well spent. Group Operations Manager for Premier Hotels & Resorts takes a look at how this can be done. Price wars are not the answer. Offering added value instead of lower prices creates a stronger value perception and a vitally better bottom line.

Today’s marketplace is incredibly competitive. In July 2011, analysis by PwC predicted that the average annual occupancy rates in five-star hotels would remain below 45% till 2015 and that average room rates would be R2 200 -increasing by between R25 and R100 per year.

One of the theoretical (and perhaps true) reasons for this is that global recession, increasing fuel costs and the subsequent increase in basic consumer goods have lead to cost cutting far and wide – whatever the income group.

Customers are cautious and budget oriented. Money is spent with a plan and a very definitive outcome in mind 

In response to this landscape, the last couple of years have seen a surprising price war strategy taking place - from the top down.

In a Fin24 article on 16 September 2012, Joop Demes, chief executive of Pam Golding Hospitality was quoted as saying that ”the discount on five-star hotels’ daily rates for rooms is 19.4%, that on four stars 19.9% and that on three stars 12.2%. The discount is calculated by extrapolating the average 2008 room tariffs using the inflation yardstick of 6% a year, and comparing it with current average room tariffs”.
And while the solution may seem a dynamic or aggressive price strategy, in reality it is creating a towering pinnacle where the five-star level discounting is forcing down the tariffs of other levels – resulting in an unsteady and ready-to- topple leaning tower of Pisa.

At Premier Hotels & Resorts, we have always believed that sustainability has nothing to do with price and everything to do with service, convenience and added value. Many have scoffed over the years, but we stick by our philosophy and I’ve detailed more below.

Adding value vs lower prices

In challenging economic times hotels should avoid price wars that could potentially lead to the decline of the one-two and three star properties that will hugely impact on the hospitality landscape AND they should be fiercely protecting their brand. 

Our answer to the conundrum of the bottom line versus affordability is to add value as opposed to slashing prices.  Added value can be defined as the enhancement of the value offering.  It is about giving your customer that much more for their Rand and it is about broadening their experience in your hotel so that they believe their money has been well spent. 

Discounted pricing on the other hand corrodes the brand while lowering bottom line margins.  Some will debate that the best way to increase occupancy is to create a demand through discounted pricing.  But discounting does not create a demand or offer medium or long term value, in fact, I believe that it sets a dangerous precedent.

It is about customer you want, not the one you need.

An article by Connor Kenny in talks about why price strategies are a bad idea and, interestingly, why aggressive discounting puts you in a position where your brand is perceived to be for ‘everyone’.  The author suggests that hotels need to look for more of the customers they like and for less of the ‘bargain-hunter’.  Kenny says this can be done by asking the following questions:

What do we offer?
Who is our offer for?
What do we have that makes us different?
What makes us unique?
What is the personality of our business and lastly,
Why should the customer pick us?

All very vital questions when looking at how to offer added value in order to attract the customers you want whilst retaining brand integrity.

So what is added value?

Added value can take many forms.  At Premier Hotels and Resorts we offer various extras including add-ons to our conference packages, spa deals, inclusive meals and various promotional deals (3 nights for the price of 2 type deals) and we are in discussions with possible brand partners with whom we can develop package deals.  These deals will include flights, accommodation, meals and entertainment.  Packages are a powerful way to package a complete solution for your customer – who then has little reason to shop around

The same article in talks very succinctly about a brand defining their ‘high-impactables’.  This is a great way of saying that hotels should look at what they can offer that has a high impact but is low cost and ultimately a win-win for everyone i.e, the customer feels that they have got more bang for their buck and the hotel’s bottom line has not been compromised.

Driving demand

So is discounting ever ok? A white paper published by Sara Duggan from TravelCLICK Inc. talks about ‘responsible discounting’ which she lists as ‘discounting through strategies that drive demand but don’t lock you in.’ She quite rightly points out that discounting in isolation will not drive demand and will only hurt the brand and decrease margins.

In a recession there has to be a give and take but it is also important to retain perspective.  While customers do not have as much money to spend, they are still travelling. So through responsible management that does not discount in isolation but rather looks at strategic ways to add value, hotels will be able to manage their occupancy in a beneficial and long-term sustainable manner.

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