Price Wars – Impact and Value
Competition exists in every industry. Regardless of how niche a product/service you create, there will always be someone else who offers (or will eventually offer) something similar in the marketplace. This holds true for hotels as well. The emergence of competitors in a market alters the playing field from time to time and hotels, in an attempt to retain or gain market share, employ various competitive strategies. When faced with intense competition, the easiest one they tend to succumb to, unfortunately, is the ‘price war’. Let’s take a look at how this war plays out and is it always as harsh as it appears?
‘Rate’ or ‘price’ is the amount your guest pays for your hotel’s products and services. His willingness to pay the price you ask is often determined by the quality of what you offer, among other factors. The rate not only defines your positioning in the market but also directly impacts your top line and subsequently, profitability. Having said that, price is an extremely important consideration in consumer purchasing decisions. Fact is also that every sellable room night is a perishable product with an extremely limited shelf life. With such conditions, it is tougher for hotels, particularly in the upscale and luxury categories, to gain a greater share of the market as competition increases, and there is enough incentive for these hotels to cut prices – this is usually where the war begins.
The basic and underlying concept of a price war is that two or more firms in an industry lower their prices in the battle for business. Some hotels, especially those with larger inventories, are willing to chip their rates to attract guests – a competitive strategy that has become fairly common and admittedly harder to fight. However, when a higher-positioned hotel decides to open its rooms to guests at predatory prices, the lower-positioned hotels are forced to further drop their rates in order to maintain their market share. This is in addition to the other similarly-positioned competitors who think it necessary to follow suit for the same reasons. The strain is, thus, felt across the market and the only winner here is the guest.
In some cases, the price war is a double-edged sword. Playing on the economies of scale, a 400-room hotel may cut prices to fill its rooms and remain profitable, but the rate pressure could leave little or no scope for the smaller 100- 150-room hotels to yield profits and yet stay competitive. What we don’t often foresee in adopting this strategy is its unintended long-term implications. A price war is the fastest way to push your hotel to a perceivably lower positioning, and once it starts getting identified with a specific price point, it is extremely difficult to move up the ladder without strong differentiators and aggressive marketing strategies (which would entail additional costs). In the course, your hotel now also caters to a different consumer base. Furthermore, based on the scale of operations, a hotel can manage its operating costs, but one cannot ignore the high fixed costs involved, including the substantial debt service burden that new hotels shoulder. Lowering prices not only means thinning those profit margins but in some cases, possibly even risking them altogether.
As the market matures, competition is inevitable, but it need not always be detrimental; competition in fact can work to your benefit. At the very least, it helps keep any possibility of complacency at bay. It is also not uncommon to have the presence of sufficient competition induce more demand and increase the market size for all hotels in the radius. New Delhi’s Aerocity or North Goa hotels are testimony to this fact. Healthy competition encourages change, forces the hotel to distinguish itself and can push the team to strive for more. From altering product offerings, technology and guest interface to possibly the most important in our industry – improving the overall guest experience – hotels could employ various non-pricing strategies to attract guests.
One must bear in mind that price changes in the market may be beneficial but should be approached with consideration and caution. As competition grows, the older hotels that previously had a first-mover advantage often witness a price correction, and the market gradually stabilizes towards a more rationalised rate. However, if a competitive hotel lowers its prices significantly, it is important to try and understand if this strategy is for the short term or long term, and if it’s sustainable for your property. Competitive benchmarking is always a prudent exercise, which could prevent your hotel from losing market share and may even result in increased room night demand; however, adopting a high-volume strategy oriented towards occupancies vis-à-vis rate, requires close monitoring. After all, there is a fine line between competitive pricing and a price war. Prices can be lowered only to a point where it doesn’t hurt your hotel or brand positioning, and more significantly, the hotel’s profitability. Beyond that, it is a destructive force that causes more damage than good; it’s war. As history has time and again taught us, there has never been a war that did not cause significant destruction, and that was best avoided in hindsight!