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Hotel prices in the absence of discounting

March 23, 2011 |

While much research has been completed that reveals discounting in the hotel industry rarely pays, the fundamental laws of economics support the notion that excess supply leads to declining prices. But what if hotel managers had simply elected to adjust their room rates in sync with inflation - as opposed to discounting?

Data from STR reveals United States industry-wide average room rates during the third quarter of 2010 experienced their first year-over-year quarterly increase since the third quarter of 2008. This outcome brought to an end an unprecedented two-year period of severe price discounting during which, in real terms, the average cost to rent a room returned to 1996 levels. This reality brings to mind a lament heard often at many industry conferences: “What if hotel managers had simply elected to adjust their room rates in sync with inflation—as opposed to discounting? Think about how much higher prices would be today!”

A term for this mindset is counterfactual thinking, a concept that deals with the tendency people have to imagine alternatives to reality. Humans are predisposed to think about how things could have turned out differently if only ... and to imagine: what if? The unfortunate reality is hotel managers did not discount their room rates willingly. Their actions were a consequence of the most severe disconnect between the property (supply) cycle and the business (demand) cycle that occurred since STR began collecting data in the 1980s.

While much research has been completed that reveals discounting in the hotel industry rarely pays, the fundamental laws of economics support the notion that excess supply leads to declining prices. STR reported the average daily rate for all hotels in the U.S. declined by 8.5% in 2009. This phenomenon held true in each of the 50 U.S. markets that comprise the Colliers PKF Hospitality Research Hotel Horizons universe. The range in outcomes during the period included an ADR decline of 2.6% in Pittsburgh (the best performer) to a decline of 22.3% in New York.

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