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Revenue Management and Packaging Strategy
by Gabor Forgacs and Hoffer Lee, November 2006

A current study was undertaken to develop a better understanding how hotels utilize the revenue management strategy of value added packaging. The following is a summary of the key findings.

What is Packaging?

If a hotel offers other products and services bundled together with room nights we call it a package. The most frequently offered packages include food and beverage delights, entertainment or wellness/fitness components. Discounting any or all components is at the discretion of the service provider. Hotels don’t necessarily have to discount the packaged items of a given value proposition in order to be successful in maximizing revenue opportunities.

Package of Internal Components

One way to bundle items together into a package is to use only internal components. That means: each item is produced and controlled by the hotel offering the package. 

Example: transportation from airport to hotel, a welcome cocktail, a room night in a junior suite plus a dinner for two -- can be marketed as a “Weekend Getaway” package. The hotel offers its own shuttle bus for the transportation, lounge bar for the drink and restaurant for the meal. In this case the hotel has the highest level of control over the total package in terms of quality, price and other product attributes.

Package with External Components

Another way to bundle items together would be a mix of internal and external components. 

Example: a room night, a drink, a show ticket and a sight seeing coupon can be offered as a “Night on the Town” package. In this case the hotel only controls the room and the drink but the show (or a sporting event) and the sight seeing are offered by other operators. The hotel may negotiate a favorable rate with the theatre (or major league sports franchise) and a tour operator but has no control over those items.

Some managers question the rationale of external items being bundled using the argument “why discount my rate to sell someone else’s product?” There are no simple answers, however it is important to point out that if a show or game ticket can help us sell a room night that otherwise remained unsold than that may be a good enough reason. There are also cases of packages where the entertainment component is perceived to be the main driver instead of the accommodation component of a package deal. In these cases hotels may benefit from the cross-marketing exposure and generate business as result of their association with events, attractions or high profile shows.

The Objective of Packaging

Hotels in different markets use packaging for different purposes but there is one common element: the fundamental purpose of packaging is to create the perception of value. This relates right back to the notion of discounting: if a hotel is successful in creating an appealing value proposition at full rates that guests perceive as a good deal, discounts may not have to be applied. The temptation to discount is significant as dropping rates is a lot easier that creative package development. Great packages are the result of coordinated efforts of marketing, sales and operations management and they can help a hotel earn the business of a guest by differentiating it from its competitors.

A significant difference was found between the objective of metropolitan commercial properties and resort hotels. It was evident that the primary purpose for urban hotels with packaging was to boost occupancy while resort properties offered packages to boost revenue in the first place.

Another difference was also identified: resort hotels seem to favor a high variety of different packages while urban properties favor a smaller selection of high-content packages instead.

Packaging and Segmentation

Leisure travelers find different packages attractive than business travelers. If a hotel has a well defined approach to segmentation, customized packaging is the most effective for  targeting a specific market segment. A corporate traveler may not be enticed by free parking or a coupon to the local zoo. However, leisure guests who travel with kids driving their own car will welcome the packages that include an entrance to a theme park, free valet parking, breakfast and unlimited video games played in the convenience of the guest room using interactive television features.

The point is: each hotel has to figure it out for themselves the needs and wants of their clientele plus know intimately what their competitors offer. This way differentiation and demand drivers can be managed successfully to maximize revenue.

A current segmentation challenge has been identified: the combo package. A number of commercial hotels experience that a growing segment of corporate guests tend to blend a day or two leisure time with a business trip. Example: first two nights a guest is a conference attendant but on the third day he/she becomes a tourist. Same guest, same room, same rate, different buying behavior on the third night. In response, some brands are successful with pre- and post event packages, custom packages or dynamic packages when guests would select from a number of options to build their own package. This may involve air, car rental, room and local attractions, entertainment, gambling or spa visits. 

Revenue Streams Management

It is important for hotels to identify the profitability of each component in a given package. Food and beverage products have different margins than room nights, guided sight seeing or car rental margins differ from spa treatments. High margin and low margin items may be bundled together just fine, however the overall revenue impact and profitability implications need to be clearly identified and aligned with the hotel’s strategic marketing purposes.

Conclusion

There is a tremendous potential in value added packaging. From the guests’ perspective we see a preference for one-stop shopping (driver: convenience) and inclusiveness (driver: value). From the service providers’ perspective value added packaging is a well invested effort that helps generate more revenue, boost occupancy and maximize profitability of hotels.



 

Gabor Forgacs is an Assistant Professor at the School of Hospitality and Tourism Management at the Faculty of Business, Ryerson University, Toronto, Ontario, Canada. He can be reached at gforgacs@ryerson.ca.

Hoffer Lee is a recent MBA graduate from the School of Hospitality and Tourism Management, University of Guelph, Ontario, Canada. He can be reached at hoffer@uoguelph.ca

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Contact:

Dr. Gabor Forgacs
School of Hospitality and Tourism Management
Ryerson University
Toronto, Ontario, Canada
Tel. 416.979.5000 x6693
www.ryerson.ca/shtm
 

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Also See: Brand Asset and a Balancing Act in the Hotel Industry; Asset Value of a Hotel Brand Rides on the Solid Foundation of Balanced Marketing and Operations / Dr. Gabor Forgacs / July 2004
Top Ten Revenue Management Mistakes Hotels Can Make / Dr. Gabor Forgacs / June 2004
Revenue Management in Challenging Times / Dr. Gabor Forgacs / July 2002


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