The declining economy has spurred the latest issue of BusinessWeek to come out with a timely article headlined “Low Prices Are Not Always Your Friend” – a useful pointer for hotels in all segments and markets as the industry reflexively tends to cut rates at the first signs of a real downturn.
Among the many relevant points in BusinessWeek’s article is how pricing is an indicator of value. In the online world, hotel rates are a strong signaling mechanism for value. Most customers do want a “bargain” but likely will steer clear of a hotel whose rates are markedly lower than its competitive set based on location and range of amenities as they appear on the internet. Tough economic times often bring about a slashing of prices in the expectation of inducing customers to stay. But the empirical evidence points to that being a sub-optimal strategy. For example, the aftermath of the first Gulf War brought about a price war that resulted in hotels in New York giving away the store and as mentioned in a Fortune magazine article of 1992, hoteliers were lamenting rampant price discounts, often in contravention of corporate polices, in pursuit of a goal of “staying alive till 1995”. Despite the price cuts many, like the St.Moritz and Doral hotels in New York, simply did not.
New York hotels have, thus far, remained almost surreally, insulated from some of the negative economic news but the onset of a nearly 20% increase in inventory combined with a further weakening of the economy likely will change that and result in, as Yogi Bera said, Deja-vu all over again.