A story in today’s Saigon Times reports that several Ho Chi Minh City hotels, suffering from low occupancy, are cutting their rates by as much as 40% in order to sell more rooms. It seems like an obvious tactic – cut your prices, and you sell more product. But does it work?
We’ve found in the past that it doesn’t. Previously we’ve cut rates for certain low periods such as public holidays or weekends, but the effect on our occupancy has been negligible, and we’ve noticed that rate cuts have the following negative side-effects:
- Lower revenue, as customers who would have booked with you anyway end up paying less for their rooms, while few new customers are attracted
- Negative value perception – whilst budget travellers are sensitive to price variance, luxury hotel guests are largely impervious to both discounting and increasing, and indeed they will often see discounts as a reflection of a decrease in a hotel’s quality, standard and brand value
- Customers get used to the new low rates, making it difficult to increase them again
- Gossip! When competitors and customers see a hotel reduce its rates, it isn’t long before tongues start wagging – “They must be struggling”, “Business must be bad” etc.
Many hospitality experts feel the same – have a look at this article by Neil Salerno, in which he concludes that the small occupancy gains that may accrue from rate discounting aren’t worth the decrease in revenue. As he says: “Hoteliers who myopically focus on cutting expenses to produce profit, without a substantial effort to improve top line revenue, are doomed to failure”.