Senior Lecturer in Business, Hotel and Tourism Management, Dr Anthony Brien, warns that discounting may not be a good long-term strategy for tourism operators.
Desperate times calls for desperate measures – but letting desperation drive you to discounting can end up with disastrous results. Offering discounts as part of getting your business open, attracting customers, and getting that all-important cash coming in has a downside, including (at the extreme) potentially only delaying liquidation. Therefore, operators should think hard before offering and promoting discounts.
In times of crisis, which can lead to desperate times, the first thing operators need to do is stop, breathe, and think strategically before acting.
Some hindsight advice from tourist operators (hotels and activities) in countries that suffered a crisis in the past (New York - September 11, Hong Kong - SARS, the GFC in Europe, etc) and offered discounts to stimulate business post the crisis advise the following: don’t offer discounts!
They found out the hard way that their discount strategy only saw them lose more money over the long term. Attracting more people now who pay less doesn’t always mean more profit, or even breaking even.
I fully understand that suggesting not offering discounts is not what many struggling tourism operators (large and small) may want to hear, and definitely not what potential customers want to hear. But there are serious financial and reputation reasons why you should not offer discounts and consider alternative strategies.
Before I carry on – some context. In the main, tourism operators are in the ‘experiential’ business and part of the ‘experiential economy'. Three characteristics of operators in this economy are that they (1) generally have high and engaging levels of serve (high labour costs), (2) often have capacity constraints (hotel rooms, jet boat seats, etc), and (3) have expensive 'fixed experiential assets.'
This means tourism experiences are very different from manufacturing, which sells mass-produced products to the masses at low/discounted prices. Manufacturing has economies of scale opportunities, the option to use machines instead of people, and can increase or decrease production much more quickly than tourism operators.
The experience with an automatic dispenser is very different from that of a human interaction – and many operators market their point of difference as being the 'people experience.'
While New Zealanders are being encouraged to see their own country, I’m already reading stories from some travellers about how expensive it is to travel in and experience New Zealand. Really?
It's entirely appropriate for operators to change appropriately for the products and services they offer. Further, most comparisons are made to overseas experiences these people have had – which is an invalid and incorrect comparison.
For example, using constant currency, hotel accommodation (at all levels) in New Zealand is cheaper than most overseas destinations. The fact that you will stay in a budget hotel while travelling overseas but want a five-star hotel when travelling in New Zealand (for the same price) is not a fair comparison.
Now back to the ‘think before you discount’ debate.
Generally, a business doesn’t find out if discounting ‘worked’ for some time after the discount period. Finding out in months to come that the fast injection of cash due to discounts hasn’t translated into business profit, - or worse, survival - can be due to several post-discount happenings.
First, the research says that discounting doesn’t necessarily build loyalty, even though many business owners think it does, or hope it will . Yes, people came and experienced your product/service, but won’t necessarily return when you eventually increase the price (which you will/have to); indeed, they will possibly speak negatively about your business as part of any future price increase.
A discounted product/service for many is a one-time-wonder. They wouldn't typically have purchased it, and probably won’t in the future. They scored a great discount deal, at your expense.
Next, you risk brand degradation. Did you really provide the full experience on the discounted price, or a trimmed-down version because you couldn’t afford the usual staff to customer ratios? If it’s the latter, it may result in the customer who paid the discount walking away, saying, “It wasn’t as great as I expected or was promised.”
If you did provide the full experience, chances are this will reduce your overall profit (same costs for less revenue). If you continue to do this, you may eventually be trading at a loss. Speaking of brand, if you discounted, are you saying your ‘experience’ is worth less than you would normally charge? If so, you need to rethink your pricing and marketing strategy.
Every crisis is different – including COVID-19 – and each one affects business and potential customers differently. For some potential customers, the COVID-10 lockdown didn't economically impact them; indeed, they saved money, and now have money to spend. These people had jobs and may still have them going forward.
However, others have been significantly impacted by the lockdown and will be for a long time. Many of these people lost their jobs or may lose them in the near future. While the former can afford to pay the pre-COVID-19 price and don’t necessarily need a discount (but will take it if on offer), the latter is highly unlikely to engage in tourism-related activities and no amount of discounting will attract them.
As I scan the many promotions presently happening, there are some great accommodation deals/discounts, but I can show you heaps of research that proves discounting doesn’t work as a long-term revenue maintenance and growth strategy – and not just for hotels.
If you are competing with other business, discounting ends up as a price race to the bottom, where everyone loses: the businesses (running at a potential loss, and certainly less profit), the customers (who may not have got the full experience), staff (who may lose jobs as businesses look to reduce costs), and the country (who become known for a less-than-expected experience).
So what are the alternatives to discounting to stimulate demand and get the cash rolling in?
First - stop, breathe, and prepare to think strategically.
Be strategic as to when you open your business, how much of your business you open (yield well), and who you want to target as customers. The latter is where a business needs to maximise its customer database (assuming you have one) or develop a target market strategy.
Add value to your product or service, but still, be aware of the added costs to do so.
Rethink your online marketers/third-party/OTA relationship who take a slice (often large) of your profit. Remember, you own your product or service, they don’t.
Maximise your website and promote a book-direct approach, and if strategically appropriate – a book-direct discount – which will be cheaper than someone else’s slice of your profit.
The New Zealand tourism industry has big challenges ahead, and for some, it's going to be a very rough ride. But we’re a resilient bunch of business entrepreneurs offering fantastic products and experiences. Be proud of what you offer. Stay strong.
While domestic tourism is here now and we look forward to welcoming them to our businesses, international tourism will be back – and New Zealand, as a country, needs you to be there to welcome them as well.