Slashing prices is not the answer

Slashing your room rates to get increased occupancy is not the answer to generating higher sales margins.  Whereas it might increase occupancy rates slightly it will have a negative impact on your customer’s perception of quality, a massive impact on your margins and, once cut, it is extremity difficult to put prices back up again.

However, the Buy One, Get One Free or Two for the Price of One promotions still offer additional value, but leave you the flexibility to offer these only on certain items, or at certain times, or to a specific target customer. A variation on this is half price offers, but this still devalues your customer’s perception of quality, and the potential for you to only sell half as many.

A variation on price promotions is offering free upgrades on availability. People often remark that once you have flown first class you’ll never want to go back to economy! This follows the same principle – giving people a taste for your best offers, services and products can encourage them to upgrade at their own expense next time around. It also leaves them with a better experience than they may have expected which promotes a talking point and a great way to prompt testimonials and get referrals.

When conducting price promotions remember the rules of costing out beforehand, and think of high value to customer, low cost to you. You might therefore want to offer buy one, get one free just on your main courses, but all starters, side orders, deserts and drinks will still be at full normal price. The main meal is normally the price that customers will look at first so from their perspective this offers great value for money. For accommodation you might offer one night, get a second night free, for nights which otherwise have very low occupancy.  Result – a booking you might not have otherwise had, with minimal additional cost to you for the second night, so minimal impact on your margin.

I have just produced a new report “57 Ways to Boost Sales and Get More Repeat Bookings for Your Hotel“.  To get your copy click the link here.

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5 thoughts on “Slashing prices is not the answer

  1. Robert Bylett

    Before you succumb to the temptation to win new business by offering a discount take a moment to consider the following:

    Discounts focus attention on price—as if that were all that matters. If your only competitive advantage is price, you are in trouble, because price can always be matched.

    Discounts start price wars. The business that usually wins is the one with the biggest balance sheet—the one who can afford to hold out the longest.

    Discounts can affect the customer perception of your service. The less they pay, quite likely the less they will value it.

    Discounts will affect your profit margins. Consider what would happen if all your competitors met your discounted price—do you think your customer is going to accept any less quality?

    Discounts may affect quality of your service. Yet, if you compromise the quality of what you sell, you risk disappointing customers and you may lose repeat business, and lose credibility or gain a bad reputation, or end up spending time fixing complaints. One way or another today’s discounts could rob you of future business, and profits.

    Discounts may lead to customers purchasing more while the price is lower. This will affect demand and potential profits in the future.

    A reduced price can be a short-sighted – a ‘quick fix’ that reduces business growth in the long run.

    Before you discount, stop and think: Is this the only way to give value?

  2. Thierry Poupard

    Same comment as on Linkedin.
    Caroline, what you say is 100% true. I wrote so many articles on that topic and I obviously agree that, in the hospitality business, low cost should be applied to the management of the restaurant or the hotel, not to prices. Cutting prices is like sending out a desperate signal. Now, I’m just wandering, as far as restaurants are concerned, about the best way to provide more value in order to attract more customers: is it, for example, a buy-one-get-one-free on the main course (as you suggest) which is the item the customer came in for anyway, or is it on making an attractive offer on a side product the customer is likely not to order, like free coffee if you buy a dessert? The second strategy provides additional sales and profit (actually Flow Through Profit, hit by variable charges only) you wouldn’t have got without the offer, whereas the first generates a ticket with a party size of 2, but with half the profit.
    Thierry

  3. ccooper Post author

    Thierry, thanks for your comments, and your suggestion of offers on items they would not otherwise buy. Whereas this my not always be enough to tempt people in initially, it is certainly a great way of upselling.

  4. Manish

    Dear All,

    I could not agree more on what you have all posted, however I feel that it would only make sense to sustain in the Present turbulent Market to offer Discounts that Value Add-ons. I strongly believe that the Discounting is extremely region and Source Market specific. Indian Markets are by far the most Price sensitive markets, how far can a Sales Rep look business going to Competition because of the Prices!! We are now focusing on effective RevPARs rather than ARR!! A Very good Example would be doing 50% Occupancy at and ARR of $200 and doing 70% Occupancy at an ARR of $170 the RevPAR would be $100 and $119 Respectively!! well it might be a $30 Discount but if it can get the Occupancy to grow by 20%, I think it would make some Sense to offer that Discount!! Yes it would have some repercussions and doubts raised on the Quality of Service, but internally there would not be any Cost-cutting of the Quality as the effective revenue and Gross Operational Profit would be more. I am not of an opinion that the rates should be slashed, but I feel there is no other way out!!

  5. Oscar

    If you have access to information like “how many desserts are order for every two people eating at the same table”. If you see that only one buys one dessert, then you´re not losing business by offering the second one free. You invest a little bit of cost, but very likely, that customer will take an extra cup of coffee that will pay for it because he/she already felt that she/he has saved money.
    Upselling and beating the competition based on quality (even when your product is of inferior quality) not price, is a tough road, but you eventually learn to succeed on it.

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