Title

Explaining The Pricing Decision-Making Process In The Hotel Industry

Abstract

This chapter provides a theoretical framework that investigates the fundamentals of discounting, and empirically assesses the efficacy of the discounting process in the lodging industry. By applying the rational expectations theory, the dynamics of the cyclical behavior of the lodging industry are recognized as integral variables in the discounting strategy process. This differs from previous research studies that imply the lodging industry functions as a static entity, and thus fail to take into account the substantial price variability of the cyclical lodging industry. The chapter claims that the theoretical framework presented provides sound explanation for discounting as a strategy of the lodging industry. The chapter's study contributes to the considerable hospitality literature denoting explanation and comprehension of the rationality of discounting on hotel financial performance. The results of the chapter's study reveal that there is a positive short-term relationship between hotel financial performance and discounting thereby providing evidence for those who support discounting as a strategy. It further implies that managers behave rationally in their pricing behaviors. A cointegration analysis and an error correction model were principal in the determination of these results. The data utilized in this study was obtained from a convention hotel in the Central Florida lodging market.Consider the following scenario:A newly appointed general manager of one of the Springs Hotel franchises sought consultation from the revenue management department for advice on how to maintain or increase financial performance during the low occupancy season. An appointment was arranged and the manager and advisor held a meeting."How about discounting the room rates?" asked the manager."Discounting is a bad idea in the low season because while the discounting may lead to an increase in market share, the increase in occupancy level doesn't necessarily mean that the hotel will make more money. In short, occupancy as a consequence of discount will not equal greater revenue."The manager left the advisor's office and thought about the fact that hotel room nights are perishable products. He recalled from corporate management training the familiar catch phrase of "once a room night perishes, its profit perishes as well." The manager thought to himself, "As long as I can sell the room for more than the variable cost associated with the room, the hotel will still make money. If I don't sell it at all, we don't get anything; and, we incur the fixed portion of the costs associated with the room. It must be better to sell the room at a discounted rate instead of not selling it at all."Wishing to think on these conflicting statements, the manager researched the professional literature for greater understanding. The results of his research left him stymied by more contradictory thoughts regarding the success of discounting. So, still uncertain about what to do, he contacted the revenue management department again for further consultation. This time, he met with a different advisor."It is wise to discount during the hotel's low season because in decreasing the room rate, you could increase room demand, based on the microeconomic principle of supply and demand," explained the revenue management advisor."Can you elaborate on that idea a little further?" asked the hotel manager."We can expect that the hotel industry will continuously be impacted by seasonal cycles. Also, because lag times exist between supply and demand of room nights, it is necessary to compensate for lost revenue during the decreased room demand times. By using our past demand schedules, we can accurately forecast future anticipated room demand.?"Wait a minute! The other revenue management advisor said that discounting room rates is an ineffective pricing strategy. Now, you say that discounting room rates is a good pricing strategy; and, the hospitality literature is equally contradictory. What is correct?"The manager, perplexed, shook his head and returned to his office.The dilemma experienced by this manager is far too common throughout the lodging industry. In the struggle to preserve hotel revenue during diminished demand seasons, confident strategies that would insure market equilibrium and thus revenue are necessary. Yet, if industry studies do not reflect consistent results regarding the effectiveness of those strategies, the lodging industry may not consistently recognize discounting as a viable strategy. © 2010 Nova Science Publishers, Inc. All rights reserved.

Publication Date

12-1-2010

Publication Title

Hospitality and Tourism Management

Number of Pages

95-119

Document Type

Article; Book Chapter

Personal Identifier

scopus

Socpus ID

84892068205 (Scopus)

Source API URL

https://api.elsevier.com/content/abstract/scopus_id/84892068205

This document is currently not available here.

Share

COinS