The real impact of highly discounted rates

©Dmitry Kalinovsky via 123RF

Price wars

During low demand, focus very quickly shifts to having the cheapest rate, as opposed to conversion and profits. Sometimes you are lucky, and you do get some business from the highly reduced rate, but very seldom achieve the desired results. When you ask someone that has applied highly discounted rates if this strategy has for them and if they are now yielding good occupancies, 9 out of 10 people would say no.

But let’s say that they achieved half of their desired occupancies: the price changes are often so vast that they have eroded their profit margins to less than what they would have made by selling half the rooms at their normal prices.

For example, if the cost to maintain a room is R300 and you sell it for R1,000 you run a 70% profit margin. If you now discounted your rates by half, the room still cost you R300, so your profit reduces to R200 per room. For you to make a R700 profit again you would need to sell four times the amount of rooms at your half-price rate. So, the question is: with highly reduced rates are you selling enough rooms to meet your profit threshold?

Reputational risk

Other than a price war and eroded profit margins, you are also impacting your reputation. You send out a message to the public when you suddenly dropping your rates considerably. It raises eyebrows asking what is wrong with your product or “are you that desperate?” Highly reduced rates also attract a completely different market to your establishment and you have to consider how that impacts your regular business.

Strategic revenue plans

Lastly, how does this impact your strategic revenue plan? How does this impact your loyal partners that continue to support you through good and bad times? How do you recover from this when times are good again? If a guest pays R500 for a room this winter and next winter you push your rates up by 100% to charge R1,000 for the same room, your guests won’t be very happy at all! Especially if you allowed your discounting strategy to impact your contracting business. If you are forced to apply annual increases of say 10% (if you are lucky) it will take you eight years to get back to your R1,000. Yes, my example is perhaps extreme, but it is clear what you get yourself into.

Am I saying no discounting in distressed demand periods? Absolutely not. You must discount, but you must know when to stop. You must understand your market to know when you can gain business and when you are just throwing money away. You must understand your financials to know the impact that you are causing on the bottom line. But lastly be clever with your pricing so that it appeals to your target market, but still protects you in your long-term strategy. Do not just blindly follow the masses. You might just find yourself on the back foot when demand recovers.