Many industry commentators write that the hotel business is returning to a period of increasing occupancy, rate and yield. That may be the case for honeypot locations such as London, Paris, Rome, Stockholm, Venice or New York but many hotels in principal, and certainly secondary locations, have still to experience this uplift. For the majority of hotels, business is still very tough, and getting tougher by the month. For this group of hotels, creative ways of attracting business is a daily struggle. What place do widely distributed discounts have in this promotional activity and do these discounts result in the acquisition of loyal customers?Major consumer brands have always distributed coupons to potential customers. Traditionally and still widely used, the coupons were printed in print media. Customers spent hours cutting them out and then using them in retail outlets to buy at a discount. However as commerce moved to the web so coupons also moved to the web which allowed the customer to print out their own coupon. Then, taking it a stage further, the Groupon business model was launched where customers not only viewed the discount on the web but actually bought the product off the Groupon site. Groupon has been a huge success and has been embraced by the hotel industry in a major way. The idea of hotels being able to promote their hotel to a wide database of potential customers has been too hard to resist for many hotels. But what are the implications for hotels that use type of promotion via Groupon?
Understandably, customers are looking for a great deal in times like this. Many customers have become fixated to the “deal” and cannot or will not buy unless some sort of discount is evident. For many, the idea of paying the “normal” price has gone. There is a potential group of customers who are just waiting for the deal and there are many hotels that are all too eager to offer discounts on Groupon. Hotels see competitors embracing Groupon and think that they must too promote themselves via this method. But is this business “good” business for the hotel?
There are of course many perceived advantages to promotions on Groupon for hotels. The hotel achieves a wide distribution of their offer to potentially “new” customers. New geographical markets are penetrated and the hotel is exposed to a very large number of potential customers. On the face of it, it is a very low cost method of promotion and there are many customers just waiting for the next attractive hotel deal to buy. Many hotels will acknowledge that a Groupon promotion was successful and that many hotel stays were purchased within the time window allowed, resulting in a large increase in business volumes. However did this increase in business result in additional profits and the acquisition of new customers who became loyal to the hotel. Unfortunately, it probably did not.
Before a hotel deal is accepted as a Groupon promotion, it must offer a “face value” which illustrates a discount of at least 50% off the “normal” published price. This is the hook to the customer. Groupon need some profit from the promotion so their commission on every deal bought is around 25% of the promotional price. As you can see, the net price to the hotel is nothing close to the “normal” price. Imagine a 2 night hotel stay with breakfast & dinner (the normal Groupon type hotel promotion) for which the hotel could justify a price of £340.00. 50% off this brings the price of the Groupon offer down to £170.00. This is highly attractive to the customer and it is not surprising that these types of hotel deals are very successfully sold on Groupon. However, if Groupon take 25% commission off this, the net price to the hotel is £127.50 for the provision of two nights’ accommodation, two breakfasts and two dinners. There is little profit, if any, in this type of pricing.
The influx of Groupon customers also creates unexpected operational issues for the hotel. As business volumes rise above normal for the period of the promotion, staffing numbers have to be increased to manage the additional guests. Payroll costs will inevitably increase which eats further into profit. Variable costs of laundry, cleaning and consumables also increase. Hotels are very close to becoming busy fools.
But what about the perceived advantage of attracting a new group of customers to the hotel and converting Groupon customers into loyal customers who will book direct next time? Unfortunately this is just wishful thinking. Most customers on discount deals are loyal to the “deal” and not loyal to the “hotel”. These deal seekers are promiscuous users of hotels and move from hotel deal to hotel deal. This group of customers has become conditioned to the deal and to the discount and would never dream of paying the “normal” price. There is little opportunity to acquire new, regular customers.
Managing this type of business also has its issues at the hotel. Loyal hotel customers are loyal to the hotel and its quality of product and service. Mix this with a group of customers who have no loyalty whatsoever to the hotel and you have a potential difficult mix of guest types. They do not necessarily sit well together and the hotel is taking a risk by upsetting its loyal, less price sensitive guests. An influx of bargain seeking, deal hunters may damage the hotel positioning and cause more profitable, loyal guests to reconsider their hotel choice. Hotels run the risk of displacing highly profitable business with much less profitable business. If a customer is loyal to a hotel, they are unlikely to be attracted by promotional deals. From this perspective, the problem with the focus on providing discounts to loyal customers becomes clear: they’re precisely the consumers you don’t need to discount for!
So what promotional lessons are there for hotels seeking additional business in difficult times? I would suggest that hotels need to get back to basics of building a customer database of their loyal customers and using regular and targeted digital and traditional communications to offer customers a sustainable deal which is seen as a “thank-you” for their loyalty. Yes, new customers must be attracted, but they should only be attracted at a price which creates profit for the hotel and certainly at no lower a price than the hotel’s loyal customers.
Untargeted, deeply discounted promotions are a slippery slope to the bottom.