Mid-Scale Hotels: Assume a 100-room mid-scale hotel commands an average rate of $115 and achieves 55% occupancy. At a typical, well-managed hotel, this would yield a house profit (before fixed expenses) of 42%. Given the same expenses as a percentage of sales, suppose the rates are reduced to $105 to maintain 55% occupancy; this move reduces house profits to 39%, equating to a loss of approximately $6.75 per occupied room, or $135,000 per year. By contrast, suppose rates were raised to $125 and occupancy dropped to 49%: profits margins increase to 43%.



Upscale Hotels: Assume a 300-room upscale hotel commands an average rate of $165 and achieves 71% occupancy. At a typical, well-managed hotel, this would yield a house profit (before fixed expenses) of 30%. Given the same expenses as a percentage of sales, suppose the rates are reduced to $140 to maintain 71% occupancy; house profits are reduced to 25%, equating to a loss of approximately $16.50 per occupied room, or $1.2 million per year. By contrast, suppose rates were raised to $180 and occupancy dropped to 59%: profits margins increase to 32%.




It's a bit harder to demonstrate the business implications of chronic rate reductions in the long term but these can have the most detrimental effects on the hotel.

US Hotel Trends: Yesterday, Today, and Tomorrow, a study developed by HVS, shows that the recession we are facing today is most comparable to the recession in 1980. Unlike the 2001 recession, hoteliers are now faced with prolonged demand declines and a longer recovery period; HVS studies anticipate that growth of both demand and average rates will not resume until 2011. However, RevPAR is not expected to return to 2007 (pre-recession) levels until 2013. This recovery period can have a severe effect on hotel performance and sustainability, and discounting rates contributes to its prolongation. Hotel managers must also consider potential revenue loss during the recovery due to discounting, as the lost revenues compounded year-to-year are likely to have a pronounced negative effect on overall hotel performance.

Discounting rates, even as a stop-gap measure against demand loss in the current economy, can yield negative effects for hotels and the overall market. Nobody wins in the aftermath of a price war. Discounting rates in order to increase occupancy will induce higher costs on a per-room basis and decrease profit margins.

Perhaps the most deleterious effects lie in the long term and these effects may not warrant consideration as accommodation managers struggle with the immediate challenges of their day-to-day operations.

A better solution to discounting is to offer additional value to the customer without sacrificing rates. Such value additions include Internet service (that can cost up to $15 per night), breakfast or all-day coffee service, or a complimentary spa treatment during a weekend stay. The take-away message is that rate integrity is essential to the profitability of a hotel operation in the short and long term, and it may not be too late for hoteliers to stop the rate haemorrhaging and put their properties in a stronger position to capitalize on an economic recovery.

Mark Brady
Mark Brady serves as the marketing editor for the HVS offices in Dallas, Atlanta, Boston, Mexico City and Washington DC. His duties include writing and editing marketing materials, assisting with the curriculum and instruction for training sessions on writing, working with appraisal staff to write and revise articles, and assisting with portfolios. Mark graduated from Colorado State University with a bachelor's degree in creative writing.