How Discounting Damages Hotel Brands

By Ray George

Hotel discounting has evolved from being an occasional competitive tactic to a price of entry, even more so since 9/11. And while some may argue that the short-term gains of such tactics are necessary, discounting can have a negative impact on a hotel brand and business over time. While hotel occupancy appears to be recovering and the American Consumer Satisfaction Index among hotels has stabilized, hotel discounting continues to drag down revenue per available room (REVPAR). How does discounting impact brands? First of all, a brand is not a name, a logo, an advertising campaign or a hotel property. In fact, a brand is the combination of these and all other interactions that a hotel company has with its customers and intermediaries.

Strong brands deliver a relevant and consistent experience across a broad range of high-impact customer interactions. The goal of this customer experience is to help support a company’s business strategy. Therefore, a company’s brand should reflect and facilitate achieving a company’s business goals.

In general, discounting without providing customers any other differentiated value erodes the expectations associated with a brand. Customers begin to associate brands with low price instead of more important qualities such as exceptional service. And since brands are strategic assets that can help drive tangible business results, diluting your brands promise in the eyes of the customer can have a negative bottom-line impact.

The five pitfalls of discounting below highlight more specific instances where discounting has undermined brand strength both within and outside the travel services industry:

1. Focuses the point of competitive differentiation on price

Kmart’s descent into bankruptcy provides a cautionary tale in competing on price alone. Kmart chose to go head-to-head with Walmart based on price rather than service or in-store experience. As a result, Walmart not only had a more consistent in store experience and closer ties to the local communities, but also is perceived as the low-cost retailer. Target, on the other hand, chose to differentiate based on image - a step-up from Walmart that has been extremely successful. As a result, Kmart was left without a point of difference other than price, accelerating it business woes.

For hotels, the online sales channel has made it extremely easy for consumers to compare and locate the lowest prices. Therefore, discounts are not a point of differentiation but rather an “ante to game.”

2. Decreases the overall perceptions of quality

Ford and others in the auto industry who offered 0% financing after 9/11 demonstrated a short-sighted approach to managing brand equity. Ford, still reeling from the Explorer/Firestone safety issues, pursued this discounting strategy without providing consumers confidence that safety issues were being addressed. After reporting a loss of over $5 billion in 2001, Ford will have difficulty convincing consumers that “quality is job 1.”

Hotel customers are also focused on quality and service in their purchase decision. In fact, in many cases price is not a decision driver. Overall convenience, the quality of the bed, the inclusion of amenities such as health clubs and high-speed Internet access and the service provided by the staff - all of these contribute to the purchase decision for consumers. Frequent discounting is not changing minds - it is avoiding the real issue of quality.

3. Promotes customer churn rather than customer loyalty

For long distance phone companies and credit card companies, switching barriers are non-existent and there are few incentives to stay with your current plan/card. The focus of these offers are low rates (APR or per minute) rather than unique services or other branded benefits. As a result, the churn continues…

By leveraging price as the key point of differentiation between competing hotel chains, customers are losing incentive, other than loyalty programs, to stick with one brand. In addition, online travel sites have made it even fast and easy to compare hotel options for the lowest price. Therefore, as hotels continue to discount and use price as a point of difference, the more damage they are doing to customer loyalty.

4. Alienates your most loyal consumers

Each day, every single person who owns a cell phone sees advertisements from their current wireless providers promoting monthly minutes options that are exponentially better than their current plan. Why are we not offered the lowest possible deal, particularly those of us who have been loyal customers for years? As a result, wireless’s most loyal customers are their most disgruntled, significantly sacrificing lifetime customer value.

Discounting drives more opportunistic purchases with travelers less likely to stay with your hotel repeatedly. Therefore, the beneficiaries of some discounting are not loyal customers - in fact your loyal customers may feel they are subsidizing the value-priced occupants.

5. Provides legitimacy to more value-priced segments

Name-brand consumer products have faced this challenge from private label brands in drug and grocery stores. For example, Softsoap was a market innovator with the liquid soap product. When Duane Reade and others launched their private label liquid soap, Softsoap competed by lowering their price rather than providing continuous innovation. Rather than maintain market share, they provided consumers a reason to believe that the private label brand was just as good as the branded item.

The difficulty for hotel properties will be raising prices - what value proposition can they offer consumers other than “that is what we used to charge”? To raise prices, consumers need to feel that they are getting a trade-off: for example, in PC’s a higher price might mean a better microprocessor, more harddrive or memory or a DVD player. For hotels, discounting over a long period of time has forced them to provide a reason to raise prices, a reason that hotels may not be able to offer.

Rather than discounting, hotel properties should focus on the long term by understanding relevant customer needs and filling those needs with unique capabilities and services. By consistently delivering unique value to the customer, brands will garner a price premium and will foster loyalty and lifetime customer value. A few examples below define how successful companies within and outside the travel industry have avoided discounting despite the economic downturn:

Maintaining customer relevance

Nokia understood that a cell phone was more than an electronic product, but could be a fashion statement or expression of personal style. Nokia recognized that cell phones were fast becoming a commodity, and that its competitive point of difference could be maintained through appealing to customers’ emotional needs. Their launch of interchangeable phone covers and styles has allowed them to gain market share in a highly competitive category.

Among hotels, the concept of all-in pricing by hotels such as Wingate Inns is something that simplifies the business travel process. By providing one price that reduces annoying extras like local calls, health club usage, high-speed internet access and the ridiculous “energy charge”, hotels not only eliminate the annoyances of checkout, but also simplify the business traveler’s expense claim process.

Consistently demonstrating added value

In arguably the most competitive and fastest evolving industry, Dell has emerged as a powerhouse brand amongst computer manufacturers. Dell has taken customization and manufacturing expertise to the extreme - and consistently delivered on customer expectations. And while price reductions are the norm in the PC industry, manufacturers are constantly increasing processor speed and amenities. Dell, in addition to providing more for less, also has superior product service and support, delivered by exceptionally trained customer service people.

Similarly, Leading Hotels of the World understood a key promise of their brand was exceptional properties with a unique local feel. In order to avoid a hostile takeover during economic difficulties, they developed “poison pill” financial strategies to thwart a takeover. These strategies, which would make it financially unattractive for a potential suitor to acquire this business, communicate to the financial community, employees as well as customers the importance of their independence. In executing this strategy, Leading Hotels of the World demonstrated a focus on building and maintaining a key brand attribute rather than on short-term discounting.

Building desired brand capabilities

Fidelity saw the economic downturn over the last 9 months as an opportunity to fill gaps in their capabilities and brand image specifically around technology. Their focus on developing technology such as voice recognition for key financial data during corporate earnings calls and web portals to help consolidate and manage corporate plans has distinguished them in an industry focused on short-term performance. Fidelity has positioned themselves to compete effectively in the long term.

Hilton also took the slowdown as an opportunity to reinforce key brand associations. Hilton took advantage of the low occupancy to renovate and improve its hotels - focusing on a long-term perspective rather than short term results. As a result of this focus, Hilton sits atop the American Consumer Satisfaction Index for Q1 2002 with 76% satisfaction vs. 71% industry average.

Instilling an intense customer focus throughout your organization

One of the few successful online businesses is Ebay, whose relentless focus on the customer has yielded a wealth of customer information. Tracking all interfaces between their 37 million customers and their website, Ebay is not only able to tell you that a Corvette is sold every three hours, but has also developed an objective buyer/seller rating system managed by customers. This data has allowed them to provide a detailed portrayal of their customer demographics, interests and behaviors to potential advertisers and partners. As a result, Ebay not only continually introduces the types of products and services that their customers want, but can allow others to reach potential customers with greater accuracy.

Intense customer focus also led the Four Points by Sheraton near the Los Angeles airport to offer round the clock check-in/check-out for their guests. Understanding the unique needs of the business traveler arriving and departing LAX at odd hours, the hotel management determined that breaking tradition and designing the service around the consumer was a way to break through the competitive clutter. Despite the logistical obstacles and the fundamental challenge to traditional hotel concepts, this hotel has maintained 90% occupancy by offering a ground-breaking service compared with most big city hotels with occupancy in the 60-70% range.

Despite the overwhelming urge to discount to fill rooms, hotels should focus on developing and delivering compelling points of difference that will lead to sustained brand and business success. Businesses both within and outside the hotel industry that have executed this strategy continue to inspire all businesses with their innovation and leadership.

A version of this article was featured in the July 2002, issue of National Hotel Executive magazine

 

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