Hotels compete with each other using both pricing and non-pricing tactics – depending on their circumstances.
Pricing tactics adopted by the hotel industry include discounting, value-added packages, and use of opaque distribution channels while non-pricing tactics include quality improvement, leveraging loyalty program, finding additional revenue sources and developing new market segments. (Kimes, 2010; Kimmons, 2006).
Kimes (2010) claims that discounting was not to be used to maintain the revenue but to focus instead on marketing programs. It was suggested to use rate-obscurring approach with the emphasis on value-added package. Having said this – in an oligopoly, non-pricing tactics can be more effective in a long run.
Hotels might argue that discounting is a necessity during the economic downturn. It might be true that hotels could have the market share by discounting – but at a price. Canina and Enz (2006) find that discounting helps fill the rooms but decrease the revenue. Their study from 2001 – 2004 shows that hotels in direct competition make more money when they have comparatively higher prices and do not undercut competitors by discounting the rates to fill the rooms.
This phenomenon is well understood with Prisoner’s Dilemma. According to Wikipedia, Prisoner’s Dilemma is ‘a canonical example of a game analyzed in game theory that shows why two individuals might not cooperate, even if it appears that it is in their best interest to do so.’. If two competing hotels are in price war by discounting their rooms rates, they would not be better off compared to when they did not do discounting. When a hotel decrease their rate, it takes years to get it back.
Kimes (2010) suggests if the hotel should give discounting, it has to be done intelligently like creating innovative package or using opaque distribution channels. Kimmes also suggests to consider marketing approaches combined with rate-obscurring practices. And most importantly – maintaining the service level. One of the most successful non-pricing tactics is Apple’s strategy of Branding, for example. A reports says that a customer buying an Apple product think of themselves as ‘member of Apple family’ when she or she pays a premium price for an Apple computer or other devices. (Mullin, 2007).
To summarise, as the person responsible for the revenue management for the group, I would do this following:
1) Developing marketing initiatives: developing new market segments such as online distributions (OTA, deal-of-the-day Websites, etc), finding new revenue sources (spa, food and beverage outlets, meeting rooms, etc), adopting performance marketing (Cost per Sale), using effective cost-per-click advertising, improving loyalty and ambassador programs, etc;
2) Doing effective cost-cutting: reducing operating hours or closing facilities for renovations;
3) Maintaining quality of the service: to ensure that cutting the costs will not comprise the service levels;
4) Adopting rate-obscurring practices: to create value-added package (such as complimentary spa treatment, free airport transfer, Stay 4 Pay 3, etc) and use opaque distribution channels intensively;
Discounting will be the last thing I would do as it would trigger the price war as well described by Besanko (2002) in his article “The Mother of All (Pricing) Battles”: The 1992 Airline Price War”. Discounting would only benefit the guests but not the hotels – especially int he long run. When the rates drop, it will take years for them to get back.