02 Oct 2013
Words
Tim Admin
Don't Fall Into the Discount Trap
The temptation in times of lower demand is to try to boost occupancy by discounting room rates. Don’t do it! Discounting spells disaster for your bottom line and, ultimately, for the value of your motel. In some areas, it has become almost standard practice for motels to put out sandwich boards advertising discounted prices. It seems a simple enough strategy. Consumers are always looking for a bargain. So a discount might help sell more rooms or, at the very least, maintain occupancy levels. After all, it’s only $10 a night. Not much, right? WRONG! A seemingly small discount of $10 per night will have far reaching negative consequences. To illustrate the impact, consider the following example, based on a 25-unit motel operating at 63% occupancy. A discount of $10 per room night ($9 nett of GST), if occupancy remains the same, would make a difference of $51,740 per annum to the bottom line. That’s a fall in nett profit of $51,740 – more than 25% – in just 12 months. The discounting strategy would need to boost occupancy dramatically to 69% in order to just maintain the nett profit the motel was already generating before it started discounting. The motelier’s income would be no better. In fact, it may still be lower, as their workload and variable costs would rise along with occupancy. And that’s not the end of the bad news. Should this motel owner then consider selling the business, they would be in for another rude shock. Most motel leases sell at a yield of approximately 30%. So, in this case, if occupancy remained at 63%, the selling price of the business would be reduced by a very significant $165,000. And all because of a lousy $10 per night discount. Discounting is a simplistic approach to revenue management that just doesn’t work. It damages your bottom line. It devalues your business. And it cheapens the wider tourism sector in your region by sending out a negative message. The primary goal of revenue management is to lift your bottom line – not necessarily to lift occupancy. Remember, increased occupancy has its own associated increases in costs – linen, disposables, housekeeping payroll, etc. The key to increasing net profit is to find ways to increase the average room rate. Just as discounted rates come off your bottom line, most of every dollar added to your tariff goes on to your bottom line. So, don’t sell down … sell up! Many motels are quick to discount if reservations are down. Yet they do nothing when reservations are stronger than anticipated. Instead of discounting in times of low demand, why not lift rates in times of high demand? Think about the last time you flew somewhere. If you purchased your airline tickets in advance, before the seats began to fill, you probably got a good deal. But if you left it until the last minute, when the flight was nearing capacity, you would have paid the highest rate. The airline concept is simple: as occupancy increases, the rates available for sale also increase. Motels should operate on the same principal. Yet, strangely, many tend to do the opposite, discounting rates to fill those last few rooms. Adopting an ‘advance purchase rate’ tariff structure has several benefits. It will encourage advance bookings, helping to fill rooms earlier. This assists with many management issues, including ordering, catering, staff rostering, etc. In times of higher demand, you are then able to charge a premium for sought-after accommodation. The higher tariffs paid for last minute reservations and walk-ins help to balance any periods of lower occupancy, with most of the increased revenue adding directly to your bottom line.
