Study at Cornell shows why hotel discounting usually doesn’t work

Hotel demand in large cities fluctuates more in response to personal income than to changes in hotel prices, according to a new study issued by the Cornell Center for Hospitality Research (CHR).

That’s why cutting prices during recessions rarely brings in more revenue and raising room rates in good times doesn’t seem to diminish demand.

Linda Canina and Steven Carvell, both professors of finance in the School of Hotel Administration at Cornell University, examined the demand for rooms at 480 city-center hotels in 22 top metropolitan areas in the United States from 1989 through 2000. They tested the sensitivity of room demand to a set of economic measures, including gross domestic product (GDP), personal income (PI), business income, the consumer-confidence index (CCI) and room rates (ADR).

The analysis found that for every 1 percent increase in GDP, the demand at the hotels increases by 0.44 percent, and for a 1 percent increase in ADR, room demand falls by 0.14 percent. “That means that hotel demand responds to income, though not dramatically, and that price discounts will not increase demand enough to increase revenues,” says Canina.

The Cornell researchers’ examination of the effect of consumer confidence on hotel demand provides the first known connection between demand and consumers’ future expectations for income. While the effect is relatively small, it is significant: For every 1 point change in CCI, the demand for hotel rooms increases .03 percent.

“Consumers respond to anticipated changes in the economic environment when making current travel decisions. Therefore, hotel operators and owners may wish to consider consumer confidence as well as current income and prices when estimating expected hotel demand,” says Carvell.

The study also examined changes in demand both when a hotel changes its own price (ADR) and the substitution effect that occurs when competitors’ prices change. While the researchers found that demand for an individual hotel does, in fact, decline as the price increases, that effect is so small that Canina and Carvell conclude that cutting prices and selling more rooms rarely results in greater revenue.

Complicating that analysis, however, is how consumers choose more or less expensive hotels because of changes in income or changes in relative prices. Thus, while the study’s findings imply that price discounts will not usually enhance revenues, consumers’ willingness to trade up when they see discounts in upscale hotels means that discounting has at least the  appearance of boosting demand, if not total revenues across the market.

The report, “Lodging Demand for Urban Hotels in Major Metropolitan Markets,” can be downloaded from the CHR Web site at www.chr.cornell.edu. The study was made possible by data provided by Smith Travel Research.