I love new reports from Cornell University’s Center for Hospitality Research. The report just released, “Competitive Hotel Pricing in Uncertain Times”, is creating headlines across the hotel industry.
The short version of the 18 page report can simply be distilled to this axiom for hoteliers,
“Maintain higher rates than your competitors and you will have higher profits.”
The layperson may not understand all the data and mathematical analysis required to reach this conclusion for what likely amounted to years of research and I am sure research assistant number crunching. However, the layperson would likely intuitively reach the same conclusion that charging higher room rates than your competitors will result in higher profits for hotels.
Gotta love college.
Loyalty Traveler’s thoughts from the viewpoint of a hotel room consumer on the research paper “Competitive Hotel Pricing in Uncertain Times”.
The basic conclusion of the research paper is a hotel that has a lower average room rate than its competitor hotels in the same location and same market segment will have a higher occupancy rate, but lower profitability.
The research study of thousands of hotels between 2001 and 2007, the bad years and the good years for hotel occupancy, indicates hotels are more profitable when they charge rates 5 to 10% higher than the competitor hotel set in the same location and market segment. The research indicates this trend is valid across all hotel market segments from budget economy to luxury hotels.
As a frequent guest I find average room rates listed on sites like TripAdvisor, Expedia, and in the AAA TourBook virtually useless.
Real-time hotel room rate searches are the only numbers that matter. For this I go to Kayak.com and a hotel set I can with fair assurance justify placing in a location specific competitive set.
Luxury Hotel Rate Comparison from Kayak.com search for Saturday, July 11 San Francisco
St. Regis San Francisco $359 (+15.1% above average for set)
Four Seasons $325 (+4.2%) [Four Seasons rate is from Four Seasons website]
Mandarin Oriental $295 (-5.4%)
Ritz-Carlton $269 (-13.8% below average rate for set)
Average Price = $359 + $325 + $295 + $269 = $1,248 / 4 = $312 average price
Basically this data shows that in this competitive set the average price for a luxury hotel in downtown San Francisco for July 11 is $312. The St. Regis is following the no rate cut advice from Cornell with a nightly rate more than 15% higher than the average for this set.
From a consumer standpoint I would be going with Ritz-Carlton all the way and save $90 per night. Grab this hotel while it is a bargain rate.
One of my favorite lines from the Cornell CHR report is
“You’ve also got to be careful not to attract the wrong type of customers to your business, which you may do if you drop your rate dramatically.”
Looks like the St. Regis is trying to keep customers like me from infiltrating their lobby, but as a consumer I imagine I will be just as happy at the Ritz-Carlton. I like their rooms too.
San Francisco Fisherman’s Wharf offers a good competitive set to analyze. All the major hotel chains have a primary brand hotel within a couple blocks of each other. Here are their rates for Friday, July 10.
San Francisco Marriott Fisherman’s Wharf $169 (+9.7%)
Holiday Inn Fisherman’s Wharf $161 (+4.5%)
Hyatt at Fisherman’s Wharf $159 (+3.2%)
Radisson Fisherman’s Wharf $148 (-3.8%)
Hilton Fisherman’s Wharf $144 (-6.5%)
Sheraton Fisherman’s Wharf $143 (-7.1%)
Average rate for Fisherman’s Wharf competitive set = $924/6 = $154/night
The Cornell CHR report suggests that the Sheraton Fisherman’s Wharf is probably higher in occupancy than the Marriott, however, Marriott should be making more of a profit if these specific hotels follow the prevailing trends for the 15,000+ hotels in the Cornell study.
Loyalty Traveler’s primary thoughts on the Cornell CHR report conclusions
Hoteliers will likely try to follow Cornell’s CHR research advice. In a tough economic climate the ability to raise rates is limited by the actions of your competitors. Hotel rates have to be somewhat in line with competitors and the overall industry has seen declining rates this past year across all hotel market segments. This research should push management into trying to escalate rates in cooperation with competitors seeking better revenue in tough times.
The consequences for us as hotel room consumers is the pressure we may feel if hotels raise average room rates in a coordinated fashion and settle for less occupants. Rooms will ultimately cost more. Fewer frequent guests.
I assume many locations will have a hotel market competitive set similar to what I show for San Francisco Fisherman’s Wharf. The Cornell CHR research paper showed data on the distribution of hotel rates based on comparable competitive hotel sets. I interpreted the data as meaning on average 2/3 of hotels are within 10% of the average rate for a hotel competitive set.
In my Fisherman’s Wharf hotel example this holds true in that the price range for hotels in the major chains falls within 10% plus or minus of the average for the set. Marriott is at the high end and Sheraton is at the low end, but they are all grouped around an average rate of $154 per night for my one night sample.
For hotel loyalty program travelers I think the good news is that given the tendency to set hotel rates comparable to hotel rates of the competitive set in the same hotel market segment (midscale, upscale, luxury) in any given location means the primary difference in value is not likely to be the hotel rate but rather the hotel loyalty program benefits received for your hotel stays.
In other words, hoteliers following the Cornell CHR advice will result in comparable hotel rates for comparable hotels in any given location regardless of the hotel chain you choose for loyalty. The loyalty traveler seeking to maximize hotel value should be more focused on the value-added benefits from loyalty membership that will accompany the hotel stay rather than the small differences in hotel rates.
Loyalty Traveler is making the argument that loyalty program promotions and benefits will generally be a more significant monetary value than the hotel rate differences over the course of many hotel stays and the variety of hotel rates among the different brands.
I know that right now I can take $1,000 in Starwood Hotels spending and get more than $1,000 in additional added value for a $2,000 hotel stay value. Added value comes from the points earned during the hotel stays, the complimentary room upgrades to better room categories, and the free weekend night promotion that earns a free night with every two hotel stays.
Rather than looking at the choice of a $140 hotel or $175 hotel, consider the benefits your loyalty program offers will provide. Generally you will find there are loyalty program promotions and special offers with value-added benefits that have a higher monetary value than the rate differences between comparable hotels in different chains.
Loyalty Traveler advice:
1. Be an active hotel loyalty program member and sign up for promotions. Realize that while your preferred hotel chain may be 10% to 15% more than a competitor for any given hotel stay, the opportunity for earning 20% to 50% or more in value-added loyalty program benefits, bonus points, and credit towards free nights is often available with hotel stays at a major hotel brand.
2. Earn Hotel Loyalty Program elite status. When possible focus your hotel stays with one major chain and go for top elite status. When you have developed a preferred market segment for your hotel stays (are you a Four Seasons kind of traveler or a Four Points by Sheraton hotel guest?) then your hotel loyalty program will generally add sufficient value to your hotel stays to negate price differences between hotel brands.
You may pay more for staying in a hotel chain brand due to your hotel loyalty program choice, but Cornell’s study indicates the higher room rates will generally be no more than 10% to 15% more than comparable hotels in any given location and market segment.
When you travel around, the low-priced Hilton hotel in one city may seem preferable to the high-priced Hyatt hotel based solely on rate. In another city the Hyatt hotel may seem like the better deal when compared to the higher-priced Hilton hotel. You can divide your loyalty and stay based solely on room rates. My Loyalty Traveler argument is you will receive value-added benefits and promotion bonuses by sticking to one hotel loyalty program that exceeds the extra cost paid for minor rate differences between hotel brands in different loyalty programs.
Hopefully over the course of the year in hotel stays in different places you will have some higher than average hotel rates and some lower than average hotel rates for your preferred hotel chain.
Spending time learning how to maximize your hotel loyalty benefits will provide more value than spending lots of time chasing the lowest hotel rates.
In other words, saving $200 on hotel rates is not really a savings if you bypass $400 in value-added hotel loyalty program benefits you would have received by paying a higher rate and maximizing the benefits of a major chain hotel loyalty program.
Hotel Competitor Sets
Be aware of the concept of competitor hotel sets in your hotel location to recognize which hotels are lower than the average cost within the market segment for your destination. This may be hard if you don’t know the area, but generally easier when focusing on major hotel chain brands. Use Kayak, Expedia, Travelocity, or Orbitz and sort hotels by Hotel Star ranking to see rate patterns for possible hotel competitive sets in a particular location.
How does a consumer define a Competitor Hotel Set?
Hotels in San Francisco know their hotel market segment competitors. St. Regis is competing with Ritz Carlton, Mandarin Oriental, and Four Seasons. Westin Market Street is competing with Marriott, Hilton, and Hyatt in San Francisco. Hotel management studies the room rates offered by its competitors and adjusts rates accordingly.
How does the consumer determine a hotel competitive market set?
The consumer is left with an inability to know the competitor set of comparable market segment hotels. TripAdvisor ranks hotels and they may be a way to find competitive hotels. Or is it?
One of the drawbacks I find in TripAdvisor is the popularity ranking of hotels has no regard to market segment.
TripAdvisor San Francisco Popularity Ranked Top 10 Hotels:
1. Hotel Drisco – $317 – 4 star (AAA 3 diamond)
2. Inn at Union Square – $265 – 3 star (AAA 3 diamond)
3. Fairmont Heritage Place – $575 – 5 star (new hotel not listed in AAA)
4. Omni San Francisco – $271 – 4 star (AAA 4 diamond)
5. Orchard Hotel – $217 – 4 star (AAA 3 diamond)
6. Chancellor Hotel on Union Square – $204 – 3 star (AAA 3 diamond)
7. The Donatello – $193 – 4 star (AAA 3 diamond)
8. Ritz-Carlton – $440 – 5 star (AAA 5 diamond)
9. White Swan Inn – $240 – 4 star (AAA 3 diamond)
10. Mandarin Oriental – $481 – 5 star (AAA 4 diamond)
TripAdvisor popularity does not help the consumer with defining a hotel competitive set since the hotels are in different hotel rate market segments. 3 of the top 10 hotels displayed for San Francisco fall in the luxury hotel category with an average rate over $400 per night (although I did find the Ritz-Carlton at $250 per night for a 7 night stay in July including parking and breakfast). The rest of the hotels appear to be in the upscale to upper upscale category.
None of these TripAdvisor Top 10 hotels are an upscale brand of the large hotel chain properties in Marriott, Starwood, Hyatt, IHG, or Hilton. The hotel list on TripAdvisor does not compare competitive set hotels. The Top 10 TripAdvisor hotels in popularity do not belong to points-based hotel chain loyalty programs. Ritz Carlton is affiliated with Marriott, but only for points redemption, and not for points accumulation.
Hotel Drisco is listed as AAA 3 diamond and has a $317 average rate according to TripAdvisor data. The same ranking is given to the Orchard Hotel with a nightly room rate $100 less. As a consumer having read the Cornell research I guess Hotel Drisco is making the profits while Orchard Hotel is bringing in the guests.
I know Orchard Hotel would likely get my search attention first for a booking based on these simple rate average comparisons.
Sort hotels by Star ranking to get a closer match for hotel rates in a local hotel competitive set. The Cornell research shows that hotel competitive sets tend to be within 10 to 15% above or below the average for the hotel set. Prevailing rates, hotel reviews, and star rankings improve the ability to analyze hotel rates for good deals within a particular hotel market segment in any given location.
And when that 5 star hotel shows up on Kayak.com at a rate $200 less than all the others, you will have a sign that the hotel is probably incorrectly categorized by the website.