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News Article

Higher prices mean higher hotel revenues

Cornell study shows benefits of maintaining room rates

Setting room rates to maximise revenue is a vital part of hotel management: set rates too high and you may lose business to your competitors, set them too low and even at high occupancy rates you won't make much money. Hotel pricing has been the subject of a number of studies at the Cornell Center for Hospitality Research (CHR), and the latest - on pricing versus competitors in European hotels - has just been published by Cathy Enz and co-workers.

The paper examines the pricing, demand (occupancy), and revenue (RevPAR) dynamics for European hotels for the period 2006 through 2009. The data set used 8,026 hotel observations, provided by STR Global, which combined data from the two international leaders in the benchmarking arena, Deloitte's HotelBenchmark and The Bench, with STR's European databases. The analysis compared comparative rates (ADR), occupancy, and revenue per available room (RevPAR) for hotels in all parts of Europe. While hotels that maintained an ADR below that of their competitors did gain somewhat on occupancy (in comparison to their competitive set), those low-rate hotels also recorded relatively lower RevPAR.

The hospitality research team also found that hotel size or management structure (that is, chain or independent) did not alter the pattern. While the hospitality research analysis noted that small and medium size hotels gained relatively higher occupancy when they offered prices lower than their competitors, as compared to large hotels, the study's main findings still held.

The European data were taken during 2006 and 2007, just at the end of the last boom, and during 2008 and 2009, when most nations endured an abrupt recession. The findings were also consistent for all regions of Europe, although the results showed more volatility for hotels in southern and eastern Europe. The results support the view that lodging demand may be inelastic in local European markets, a finding consistent with previous work in the U.S. and Asian markets. The results of this study appear to confirm the view that RevPAR is not stimulated by dropping competitive prices, and that hotel size and chain affiliation do not in meaningful ways alter the patterns found for the percentage difference in occupancy and RevPAR.

"Our international hospitality research study included well over 8,000 observations from good economic times and from the last two years during this terrible recession, and the results are consistent," says Enz. "Hotels that maintain a higher price position than their competitors record relatively higher RevPARs, even though their average occupancy is relatively lower. We are well aware of the current pressure on hotel managers to drop their prices, and we cannot speak to a specific hotel or market situation-each hotel has to determine its own position. But what we do know is that relative demand does not seem to respond sufficiently to offset relative price changes within a competitive set. Plus, our new analysis shows that the pattern holds regardless of hotel size or the presence or absence of chain affiliation."

The results mirror those in a similar study in the USA (Enz et al., 2009), and also from the Asia-Pacific region (Canina and Enz, 2008).

Hotel pricing can be affected by proximity to competing hotels, with luxury hotels experiencing price erosion when operating in locations with high proportions of economy and mid-scale hotels (Enz et al., 2008). In some studies, however, higher or rising prices have been found to actually increase a customers' propensity to book, perhaps through sending a signal that the hotel may sell out, or by indicating quality (Schwartz and Chen, 2010; Chen et al., 2009).

Other studies of revenue management and price setting include Chen and Schwartz (2008), Cross et al. (2009) and Collins and Parsa (2006).

The latest Cornell study can be downloaded free of charge through this external link.

Article details

  • Author(s)
  • David Simpson
  • Date
  • 23 March 2010
  • Source
  • Centre for Hospitality Research, Cornell
  • Subject(s)
  • Hospitality Sector