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White Hutchinson Leisure & Learning Group, Kansas City, MO, USA

Higher prices than competitors more profitable?

It’s intuitive to think that during recessionary times when consumers are more price sensitive, a business should try to maintain market share by offering prices that are lower than its direct competitors. In fact, we currently see this happening in many industries.

Well, like many things in the business world, what works best on pricing is actually counter-intuitive, at least according to new research by The Center for Hospitality Research at Cornell University. The study examined the outcomes of pricing behavior on total room revenue and occupancy for hotels and their competitors in both bad times (2001-2003) and good (2004-2007). The results were the same for both periods. Hotels that offered average daily room rates higher than those of their direct competitors experienced lower occupancies compared to those other hotels, but recorded higher room revenues. This pattern was consistent for hotels in all market segments, from luxury to economy. The results suggest that the best way to have better revenue performance than your competitors is to have higher prices, at least for hotel rooms, as lodging demand in local markets is probably inelastic. You can access the entire study by clicking here (www.hotelschool.cornell.edu/ research/ chr/ pubs/ reports/ abstract-15087.html) .

For other types of location-based leisure and entertainment businesses, this is definitely something to ponder when it comes to pricing strategy versus competitors.

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