When clients disappear, and demand dries up, it is tempting to cut prices. Businesses try to lure customers back with a good deal, particularly those that sell perishable items (for instance, food and flowers), seasonable items (for instance, Father’s Day cards and gifts) and services (for instance, restaurants and hairdressers).
Hotel managers, for instance, see heavy discounting as a way to not only survive a crisis, but also make up for lost room occupancy, afterwards. However, that may not be the best strategy, in the long term. Various studies looking at recovery from crises in the hospitality industry have shown that those hotels that pursue aggressive price discounting fair worse than their competitors.
Misun Kim, Wesley Roehl and Seul Ki Lee studied the effect of price discounting among Houston based hotels, following the Economic crisis of 2007-08. The results are published in the paper “Effect of hotels’ price discounts on performance recovery after a crisis” published in the International Journal of Hospitality Management (paid access, only). Controlling for past performance, the authors found that room rate discounts may alleviate cumulative occupancy loss (i.e., number of bedrooms used) suffered during a crisis, but do not reduce the cumulative revenue loss. Moreover – and more significantly – they found that heavy room rate discount reduced the speed of recovery, both in terms of occupancy and in terms of revenue.
The authors also identified various hotel-specific characteristics which may impact on recovery:
- Higher end hotels tended to have slower recovery, but also experienced lower cumulative losses, than economy hotels;
- Likewise, larger hotels and chain hotels experienced slower recovery, but also lower cumulative losses, than smaller hotels and independent hotels;
- Hotels that operated for longer experienced faster recovery but also higher cumulative losses than newer hotels;
- Hotels with conference facilities experienced faster recovery but also higher cumulative losses than hotels without a conference facility;
- In terms of occupancy, urban hotels experienced slower recovery but lower cumulative losses than non-urban hotels. However, in terms of revenue, urban hotels experienced slower recovery as well as higher cumulative losses than non-urban hotels.
- Airport hotels experienced faster recovery but higher cumulative losses than non-airport hotels.
When dealing with crises resulting from the physical environment (e.g., earthquakes, floods, blackouts… and pandemics), firms need to focus on minimising damage. When dealing with crises in the social environment (e.g., terrorist attacks, national labour strikes, boycotts… and economic recessions), firms need to prioritise calm enhancing measures. In turn, crises resulting from managerial failure (e.g., customer deception, social media crises, PR crises…) are best addressed by organisational measures that target the origin of the problem, such as adopting strict codes of conduct or switching suppliers.
I appreciate that this is easier said than done, when faced with an erosion of customers. However, it is really important to avoid knee jerk reactions to a crisis, and the COVID-19 one in particular.
Short-term actions such as heavy price discounting are best reserved for short term, and very localised problems. For instance, a hotel that suffered an unexpected cancellation from a large group, might want to give a discount to guests already in the hotel to extend their stay. However, for generalised problems, which impact the whole industry, as is the case of COVID-19, we want to use other measures – possibly even in collaboration with our competitors.