http://www.hotel-online.com/News/PR2003_2nd/Apr03_RatesDemand.html
For Every 10% Decrease in Hotel Room Rates, Demand Rose 1.3%, Not Enough to Boost
Overall Revenue; Researchers Find Hotel
Discounts Don't Drive Demand By Jerry W. Jackson, The Orlando Sentinel, Fla.
Knight Ridder/Tribune Business News
Apr. 20, 2003 - Hotels in Orlando and nationwide have reduced rates for more than a year in a desperate bid to fill rooms in a down economy. But Cornell University researchers have found that discounts don't drive demand very much, and hoteliers may want to take a harder look at holding the line.
"All you are doing is cannibalizing your rate structure. Lowering your price doesn't introduce new entrants to the market," said Steven Carvell, associate professor of finance at Cornell's School of Hotel Administration.
Carvell and a colleague, associate professor Linda Canina, examined more than a decade of data for 22 metro areas and found that for every 10 percent decrease in room rates, demand rose 1.3 percent, not enough to boost overall revenue.
In a hypothetical example using their model, the Cornell researchers said that a 300-room hotel that sold about 240 rooms a day, and cut its room rate by 10 percent from $100 to $90, would increase demand by 3.12 rooms per day. The net effect: $24,000 per day in room revenue before discounting and $21,880 per day after discounting, an overall decline in revenue because the additional demand did not make up for the lower rate.
"An individual hotel may gain, but the average hotel will not benefit from reducing rates," Carvell said.
Although Orlando, Las Vegas, Anaheim, Calif., and Oahu, Hawaii, were left out of the study because of their heavy reliance on tourism, the basic findings would apply to Orlando and other markets, Carvell said.
But Peter Yesawich, an Orlando travel consultant and Cornell hospitality school board member, said discounting works better in leisure markets such as Orlando, and it's not always a money loser.
"If it's selective and targeted to leisure, it can work," Yesawich said.
The Cornell study on lodging demand looked at survey numbers supplied by Smith Travel Research for 480 hotels in 22 metro areas, from 1989 to 2000.
It was the first study, Carvell said, to examine hotel demand in such detail, rather than relying on aggregate data.
Metro areas included Miami-Hialeah and Tampa-St. Petersburg in Florida.
Others were Atlanta, Boston, Chicago, Dallas, Denver, Detroit, Houston, Los Angeles-Long Beach, Minneapolis-St. Paul, Nashville, Tenn., New Orleans, New York, Norfolk-Virginia Beach, Philadelphia, Phoenix, San Diego, San Francisco-San Mateo, Seattle, St. Louis and Washington, D.C.
Yesawich said those markets depend more on traditional business travelers.
He said his own surveys have shown that the "psychology" of leisure travelers prompts them to be more responsive to price cuts.
Discounting is risky because it is hard to raise rates if they stay down very long, said Domien Takx, general manager of the Four Points Sheraton Orlando-Kissimmee and chairman of the Orlando-Kissimmee Hotel & Motel Association, a group formed by smaller hotels along U.S. Highway 192.
"As a hotelier, I would say discounting works short term," Takx said. But filling more rooms at lower rates carries extra operating costs that eat into revenue, Takx noted, echoing a point raised in the study.
The U.S. 192 tourist strip has been one of the harder hit areas in the Orlando market since the Sept. 11, 2001, terrorist attacks, along with International Drive, and both have discounted heavily. The most recent hotel numbers, for February, show that those areas had the steepest cuts in rates compared with the same month a year ago -- more than double the statewide and national rate declines -- yet their occupancy levels fell by greater margins.
Cornell's findings generally supported previous research but broke new ground in several areas. The study found, for example, a connection between consumer expectation for future income -- as measured through the Consumer Confidence Index -- and hotel demand.
The effect was small but statistically significant, the researchers said, showing that for every one-point rise in consumer confidence, hotel demand goes up 0.03 percent.
The finding offers a way for hotel companies to more accurately forecast how much more business they might get as consumers grow more confident, researchers said. Conversely, the model would allow hoteliers to refine estimates of losses as consumer sentiment falls.
The study also took the novel approach of separating gross domestic product into personal income and business income, and found that increases in personal income had twice as great an effect on hotel demand as increases in business income.
Cathy Enz, executive director of the Ithaca, N.Y., school's Center for Hospitality Research, and others are taking a closer look at hotel discounting and its impact on the industry to come up with coping strategies. The preliminary findings, she said, show that the negative effects of discounting are multiplied by the ability of consumers to surf the Internet for hotel deals, booking through third parties.
Many consumers, she said, "have learned to book a room at one price, shop for a better price, and then cancel and rebook."
Third-party sites such as Travelocity can serve a useful purpose by clearing surplus-room inventory, Enz said, but hotels must be careful to make sure that discount-oriented sites are actually getting surplus rooms to avoid adding to price-cutting pressure.
Regaining control of distribution and pricing, Enz said, "is critical for the hotel industry."
For Every 10% Decrease in Hotel Room Rates, Demand Rose 1.3%, Not Enough to Boost
Overall Revenue; Researchers Find Hotel
Discounts Don't Drive Demand By Jerry W. Jackson, The Orlando Sentinel, Fla.
Knight Ridder/Tribune Business News
Apr. 20, 2003 - Hotels in Orlando and nationwide have reduced rates for more than a year in a desperate bid to fill rooms in a down economy. But Cornell University researchers have found that discounts don't drive demand very much, and hoteliers may want to take a harder look at holding the line.
"All you are doing is cannibalizing your rate structure. Lowering your price doesn't introduce new entrants to the market," said Steven Carvell, associate professor of finance at Cornell's School of Hotel Administration.
Carvell and a colleague, associate professor Linda Canina, examined more than a decade of data for 22 metro areas and found that for every 10 percent decrease in room rates, demand rose 1.3 percent, not enough to boost overall revenue.
In a hypothetical example using their model, the Cornell researchers said that a 300-room hotel that sold about 240 rooms a day, and cut its room rate by 10 percent from $100 to $90, would increase demand by 3.12 rooms per day. The net effect: $24,000 per day in room revenue before discounting and $21,880 per day after discounting, an overall decline in revenue because the additional demand did not make up for the lower rate.
"An individual hotel may gain, but the average hotel will not benefit from reducing rates," Carvell said.
Although Orlando, Las Vegas, Anaheim, Calif., and Oahu, Hawaii, were left out of the study because of their heavy reliance on tourism, the basic findings would apply to Orlando and other markets, Carvell said.
But Peter Yesawich, an Orlando travel consultant and Cornell hospitality school board member, said discounting works better in leisure markets such as Orlando, and it's not always a money loser.
"If it's selective and targeted to leisure, it can work," Yesawich said.
The Cornell study on lodging demand looked at survey numbers supplied by Smith Travel Research for 480 hotels in 22 metro areas, from 1989 to 2000.
It was the first study, Carvell said, to examine hotel demand in such detail, rather than relying on aggregate data.
Metro areas included Miami-Hialeah and Tampa-St. Petersburg in Florida.
Others were Atlanta, Boston, Chicago, Dallas, Denver, Detroit, Houston, Los Angeles-Long Beach, Minneapolis-St. Paul, Nashville, Tenn., New Orleans, New York, Norfolk-Virginia Beach, Philadelphia, Phoenix, San Diego, San Francisco-San Mateo, Seattle, St. Louis and Washington, D.C.
Yesawich said those markets depend more on traditional business travelers.
He said his own surveys have shown that the "psychology" of leisure travelers prompts them to be more responsive to price cuts.
Discounting is risky because it is hard to raise rates if they stay down very long, said Domien Takx, general manager of the Four Points Sheraton Orlando-Kissimmee and chairman of the Orlando-Kissimmee Hotel & Motel Association, a group formed by smaller hotels along U.S. Highway 192.
"As a hotelier, I would say discounting works short term," Takx said. But filling more rooms at lower rates carries extra operating costs that eat into revenue, Takx noted, echoing a point raised in the study.
The U.S. 192 tourist strip has been one of the harder hit areas in the Orlando market since the Sept. 11, 2001, terrorist attacks, along with International Drive, and both have discounted heavily. The most recent hotel numbers, for February, show that those areas had the steepest cuts in rates compared with the same month a year ago -- more than double the statewide and national rate declines -- yet their occupancy levels fell by greater margins.
Cornell's findings generally supported previous research but broke new ground in several areas. The study found, for example, a connection between consumer expectation for future income -- as measured through the Consumer Confidence Index -- and hotel demand.
The effect was small but statistically significant, the researchers said, showing that for every one-point rise in consumer confidence, hotel demand goes up 0.03 percent.
The finding offers a way for hotel companies to more accurately forecast how much more business they might get as consumers grow more confident, researchers said. Conversely, the model would allow hoteliers to refine estimates of losses as consumer sentiment falls.
The study also took the novel approach of separating gross domestic product into personal income and business income, and found that increases in personal income had twice as great an effect on hotel demand as increases in business income.
Cathy Enz, executive director of the Ithaca, N.Y., school's Center for Hospitality Research, and others are taking a closer look at hotel discounting and its impact on the industry to come up with coping strategies. The preliminary findings, she said, show that the negative effects of discounting are multiplied by the ability of consumers to surf the Internet for hotel deals, booking through third parties.
Many consumers, she said, "have learned to book a room at one price, shop for a better price, and then cancel and rebook."
Third-party sites such as Travelocity can serve a useful purpose by clearing surplus-room inventory, Enz said, but hotels must be careful to make sure that discount-oriented sites are actually getting surplus rooms to avoid adding to price-cutting pressure.
Regaining control of distribution and pricing, Enz said, "is critical for the hotel industry."
10% = 1/3% but 20% probably have a larger effect.
I bet they do 
