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Why Discounting Won’t Work to Survive this Recession

The tourism industry has often boasted of its resilience and ability to rebound after drops in demand caused by such negative factors as 9/11, SARS or natural disasters. The adaptive response most frequently deployed is generic discounting. But does this serve the individual business or the tourism community well and will it work this time? I believe the answer is NO and for the following reasons:

1. We’re not looking at a temporary blip in demand. Life and business, as experienced between 2003 and Q3 2008 will not return to normal. The growth in demand for discretionary services was fuelled by cheap credit, cheap energy (until 2007), and asset inflation – all unsustainable illusions based on a denial of environmental realities. Expansion in capacity (airline seats, condominiums and ocean view apartments, whether sold in wholes

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or fractional units, hotels and restaurants) was all based on an over estimation of demand by suppliers and consumers alike. Now only the airlines have the option to remove excess capacity from circulation by parking their vehicles in the desert. As identified by Time Magazine in February 2009 , consumers shop very differently today. As indicated by McKinsey as far back as 2007[i], boomers won’t be spending as freely after seeing their assets (first homes, second homes, pensions and equities) plummet in value; and the kids, who were supposed to be filling a major labor shortage due to retirement of the boomer workforce, will face tough competition from people old enough to be their grandparents.

2. We are looking at fundamental changes in the nature of demand; the way consumers make decisions and respond to brand messages and the way suppliers gain their attention. Not only do consumers regularly turn their backs on advertising, they worry more about the opinions of peers or society. Sean Gregory’s article in Time identified three kinds of consumer in terms of their willingness to spend right now. In short:

  • Those that can’t (they’ve lost their job or income)
  • Those that might but won’t (they fear they might lose their job or income or are simply being prudent/cautious)
  • Those that could but still won’t (because they don’t want to send the wrong signal to peers)

3. We are looking at deep and major changes in the source of travel demand and businesses must be more granular and refined in their approach. In their 2006 article, McKinsey showed how price sensitivity varied by a factor of 13 across regional markets and even by a factor of 3 across zip codes in the same cities. In other words, consumer behaviour cannot be predicted by macro demographics, psychographics and post code but by individual circumstance, perception and attitude. Individual consumers are demonstrating their individuality. Destinations that continue to rely on macro economic models to prioritize top ten performing countries will miss out big time. This is the time for more in-depth research into customer perceptions and motivations not less.

4. We are also looking at fundamental shifts in the way consumers spend their free time (internet usage now exceeds TV watching for many) and the way customers are reached and influenced. Furthermore, the relative cost and ROI of various distribution channels can vary enormously as illustrated by McKinsey’s research[ii]:

anna-post1.jpg

In this context, blanket reductions in marketing spend across the board combined with a reluctance to change channels would spell disaster.

At a time when customers have ceased to trust brands; when they favor the recommendations of friends and peers over the exhortations of sales personnel; and when they can research a producer’s claims or compare supplier’s prices on their mobiles as they walk to the check out stand, loyalty cannot be bought. It can only be earned through assiduous attention to detail, through rigorous honesty, through genuine respect for the customer’s intelligence and through genuine gratitude for past business. Tough but true.

So if these four observations have some validity, why do so many businesses in tourism continue to slash prices and offer blanket discounts at the first deep drop in occupancy statistics or passenger loads? Random or blanket discounting can only do more harm than good:

a. It sends a very dismissive signal to past loyal customers – essentially saying their loyalty is worthless and implying that the profit margin is so high that the supplier can afford to discount indiscriminately now. Can it surprise if the following thought passes through such a client’s mind “so if, when I visited your resort last year I was being fleeced why should I return this year when times are tough for both of us?” How many times have you been attracted to an offer made by your own supplier only to read the fine print that says “this offer doesn’t apply to existing customers.” So much for appreciation.

b. It reinforces the notion that if the seller doesn’t value their own product, why should the buyer? How often do you see de Beers slash the prices of their diamonds?

c. It further commodifies the industry and, by necessity, downgrades service levels. How do 5 star hotel properties manage to offer 50%+ discounts without reducing back of house staff and dropping service levels? Once upon a time and a long time ago, travel was a joyful and sometimes glamorous experience of positive discovery and excitement. Now it is an exercise in stamina requiring an infinite capacity to endure rudeness, boredom, indifference and alienation not to mention body searches.

d. It will make it very difficult to raise prices and capture back customers when interest rates, taxes and the price of energy, carbon and other key inputs rise and rise they most certainly will within the next 18-24 months.

So what’s the alternative? Which businesses and destinations will come out of the recession ahead in terms of resilience and fiscal health?

1. Those who act on the truth that marketing is not a battle but a dance in which the customer does the asking and takes the lead and that markets are not monologues broadcast by suppliers but conversations between customers that occasionally involve suppliers.

2. Those that bend over backwards to sustain a conversation with past guests – find out which ones are suffering and cheer them up with an attractive offer or who reward loyalty with carefully crafted offers to past guests. Note: well over 70% of business is influenced by the recommendations of peers and the stories people want to read in gloomy times are happy stories told by delighted customers who feel cherished and supported when time are tough.

3. Those that engage their employees in collectively finding ways to combat the downturn together; who offer discounts to employees’ networks of friends, peers and families simply because they are connected to a person who helps co-create the brand; and who do whatever they can to retain and incentivize good and loyal staff to go the extra mile.

Companies are not just legal entities with a profit motive built into their DNA but also communities of people sharing a common purpose, culture and considerable time together. Remember, it is always during tough times that corporate rhetoric about our people being our greatest asset is shown to be true or false – with potentially disastrous consequences for service, loyalty and guest satisfaction.

In summary – successful businesses understand that companies are communities courting customers though respectful conversations. The provision of discounts has a place alongside active listening, on-going support and exemplary customer care but only if tailored to the specific needs and circumstances of customers and are perceived as a way of saying thank you – for trying the product or sticking with it. What do you think? Let’s start a conversation.


[i] David Court,

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Diana Farrell, and John E Forsyth, “Serving Aging Baby Boomers” McKinsey Quarterly, November 2007[ii] David Court, The Downturn’s New Rules For Marketers, The McKinsey Quarterly, December 2008.

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8 Comments

2009-04-10 08:16:14

[…] Pollock wrote an insightful article, titled “Why discounting won’t work to survive this recession“. Check it out, and we would be interested in your comments. The Tourism Internet Marketing […]

 
Comment by Claude
2009-04-11 08:22:43

Anna, thanks for this great post and large views.

Discounting is a easy behaviours for many operator. In fact you can discount, but you have to be cleaver and do it in a good & smart way( as you say for discounts to employees’ networks of friends…)

For mid size and big hotel chain, I think they can have ressources and tool to handle the crisis.

But for small hotel (25 rooms, with no CRM, simple website and simple booking engine, no channel manager, no dedicated sales team, etc, …) how they can find a way to be in the market?

Their first reaction it’s to make discounting ;-(

Best regards

Claude

Comment by Anna Pollock
2009-04-14 12:01:36

Thanks for reading and commenting on the post Claude.
Sadly, it’s the independently owned, small to medium-sized hotel that is most vulnerable in such recessionary times. They face tough competition from the chains whose discounting practices result in starred properties being sold for the same or less than the independents, who do not enjoy the same economies of scale when it comes to purchasing etc. Their survival strategy should be deployed in boom times – provide the best possible personal service and create genuinely loyal relationships among their guests. It’s the character of the small independents that contributes most to a destination brand…Cheers Anna

 
 
Comment by Lee Dunbar
2009-04-11 13:28:05

Your comparison of “de Beers slashing the prices of their diamonds” is somewhat faulty. While de Beers may not “slash the prices of their diamonds” as a dealer in a wholesale commodity, retailers selling end products using diamonds certainly do – and they are the more comparable of the two.

While your points are very well-taken and certainly subscribe to mainstream thinking, cash flow is king. You can manage your consumer channels as much as you want, but there are times when you may need extra motivation. Discounting or adding value in some way may be the difference – but clearly the initial motivation or intention needs to be there.

I might be thinking about going to Disney, but I am uncertain. Wow, free dining plan! That might put me over the top. I might be thinking about going to Niagara Falls. Wow, free passes to the indoor waterpark. That could just do it for me.

Discounting/value adding might seem like the seemly underbelly of the industry, but at certain times, done right, it is a necessary and effective tool.

 
Comment by Claude
2009-04-13 13:31:36

Anna,

Thanks for this great post.

I am convince a good social media and travel social media strategy can make a strong difference with your position in Google Universal Search, as I explain some months ago in my post in your blog :

Google Universal Search and your travel industry business. Are you ready?
see here http://attractionstourism.com

it could be interesting to see if ComScore have new data about the market share for Google Universal Search.

Best regards

Claude

 
Comment by Jose Philibert
2009-04-21 04:15:41

I continue to believe that price wars are not advisable in marketing during difficult periods. Our Mauritian Tourism Industry is keeping its resilience through hard work, devotion and promotion, while bettering the offers with additions to packages and continued improvements to the destination. JP

 
Comment by David S
2009-05-06 16:44:54

The problem is that we have to re-discover ways to balance the value equation (what consumers get for what they pay). As we all know, price is only part of the value equation. However, if a tourism operator does not have the will or the means to increase the value of his offering, his only recourse is to re-balance the equation by lowering his price.

I think the reality of this new economy is that for the past few years, demand so far outpaced supply that it was a seller’s market. Operators got sloppy when simply opening their doors meant unrealistic profits. Now the demand side has so drastically been reduced and operators seem to have forgotten how to compete, other than with price.

 
Comment by Tyson
2009-06-05 18:14:48

Anna –

Well written post and you definitely raise some good points. In general I’m a big supporter of yield management for tourism companies and I believe that when done right it provides a revenue boost without undermining brand equity.

I posted a pretty detailed counterpoint over on my own blog:

http://travari.wordpress.com/2009/06/05/discounting-tactics-for-adventure-travel-operators/

 

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