Hotel Room Rate Discounting During Recessionary Times: Effects by Hotel Class

Abstract

Previous research regarding the costs and benefits of hotel room rate discounting during recessionary times has produced mixed results and recommendations. However, it has become clear that virtually all hotels offer discounted room rates during economic recessions, regardless of the conclusions of research studies, and that includes the recession that began in 2020. Media reports have indicated that certain rogue hotels are quick to offer discounted room rates during the early months of recessions, and therefore, operators of other hotels in their competitive set feel compelled to follow the lead, perhaps regretfully. This study found that while virtually all hotels offered discounted room rates during the recession of 2008 and 2009, there was variability in discounting during the early months of the recession. As a result, we sought to explore recessionary variability of room rate discounting, and to provide an empirical, nuanced perspective regarding the effectiveness of such discounting. Notably, we found the effectiveness of recessionary discounting varied depending on the class of hotel, with higher class establishments experiencing different outcomes from discounting than hotels categorized as relatively lower class properties.

Price elasticity of demand and its impact on hotel revenue performance during the COVID-19 pandemic

“…A more recent study examined pricing, occupancy, and RevPAR relationships during the economic recession of 2008 to 2009 in a sample of 408 hotels in six submarkets across the United States (O’Neill & Yeon, 2022). Using monthly operating performance data from STR, the authors explored whether and how discounting room rates contributed to RevPAR performance in hotels of various classes.…”

“…Finally, this study examines revenue performance using both absolute levels and percentage changes in RevPAR performance. Prior research assessing the impact of external shocks on revenue performance used only absolute RevPAR level (Noone et al, 2013;O'Neill & Yeon, 2022) or the average RevPAR position without assessing the change in that position (Enz et al, 2004(Enz et al, , 2009. Although a levels analysis can provide some useful information, it lacks the insights that can be drawn from examining percentage changes.…”

“…Whether discounting is an appropriate pricing strategy in the midst of an external shock is an empirical question. The evidence from the limited number of existing studies to-date has produced conflicting or mixed findings (Enz et al, 2004, 2009; O’Neill & Mattila, 2006; O’Neill & Yeon, 2022). For example, using monthly data, O’Neill and Yeon (2022) find that luxury and upper upscale hotels that continuously discounted rates during the 2008–2009 recession generated higher RevPAR relative to similar hotels that avoided discounting rates.…”

“…The evidence from the limited number of existing studies to-date has produced conflicting or mixed findings (Enz et al, 2004, 2009; O’Neill & Mattila, 2006; O’Neill & Yeon, 2022). For example, using monthly data, O’Neill and Yeon (2022) find that luxury and upper upscale hotels that continuously discounted rates during the 2008–2009 recession generated higher RevPAR relative to similar hotels that avoided discounting rates. In contrast, other studies (Enz et al, 2004, 2009) using annual performance data suggest that hotels should not discount but rather maintain or raise rates.…”

“…The current study differs from prior research and makes a significant contribution to the lodging academic literature via several distinguishing aspects. First, unlike prior research investigating the shocks from 9/11 (Enz et al, 2004, 2009; Noone et al, 2013) and the economic recession of 2008–2009 (O’Neill & Yeon, 2022), the focus here is on the impact of COVID-19 on annual hotel revenue performance from 2018 to 2021. Second, lodging demand studies tend to focus on macro factors at the aggregate level (Corgel et al, 2012; Fujii et al, 1985; Lee & Jang, 2012; Qu et al, 2002; Tsai et al, 2006; Wheaton & Rossoff, 1998) instead of a disaggregated level (Canina & Carvell, 2005; Hiemstra & Ismail, 1990).…”