From Physical Assets to Customer Equity - Leveraging the Real Values in the Hospitality Industry
By:
Fall 1996
It is often said that you are what you measure, and you measure only what you think is important. The ways that organizations gauge performance reflect their historic roots and basic orientation to creating value. Clearly, that maxim holds true today in the hospitality industry. Our industry has historically measured itself with a standard metric used worldwide - revenue-per-available-room (REVPAR). More than simply a way to quantify results, REVPAR reflects our industry's fundamental structure and value proposition based on physical assets (hotel rooms) as the driver of wealth.
With the magnitude of change driven by technology, it is now essential to ask is REVPAR still the best measure of performance for a hotel organization, or does it reflect an outmoded view of a hotel's performance horizon? We submit that the latter is the case. Technology is changing every aspect of how we live, work and profit, and it should come as no surprise that technology must also change how the hospitality industry serves customers and measures itself. In short, the "end game" can no longer be REVPAR - revenue measured by the physical asset. The most profitable hotel organizations of the future will be those that capture an increasing share of the customer's purchasing power - while they are in the hotel, at home or anywhere else in the world. What drives this change is technology, which makes it possible to serve customers in both physical place (the hotel room) and virtual space (anytime and anywhere). The historic measure of hotel performance - REVPAR - must thus give way to a metric that reflects the customer as the more fundamental driver of value in the hospitality industry. Revenue-per-available-customer (REVPAC) does just that.
In our contemporary world, hotel organizations are no longer constrained by physical location in serving customers. New media and systems technologies offer extraordinary efficiencies in delivering products and services with greater speed, lower cost and improved flexibility. Furthermore, technology offers unprecedented opportunities for innovation in an industry's changing menu of products and services. What does this mean for our industry? We are witnessing a period of major change as the fundamental value proposition of our industry is overturned. Customers - not physical assets - drive wealth in all industries, and the hospitality industry is certainly no exception. Technology deployed in enterprise-wide platforms makes it possible to get closer to customers. It provides tangible benefits as it offers opportunities to increase business value, reduce operational costs and create new opportunities for growth in the industry.
Customer Equity in Hospitality
Hugh McColl, chairman and chief executive officer of Nationsbank Corp. just last summer told the Wall Street Journal that "technology is fundamentally changing the banking industry ... and has become not merely a way to boost productivity but an important - and profitable -channel for delivering (new and additional) financial services." 'That is just as true for hospitality, as it is in other industries.
At stake is technology's impact on customer equity - defined as the degree to which an industry has fully developed relationships with its customers, providing them with more products and services to meet exiting and emerging needs. REVPAC, as a measure of performance, embodies a shift in perspective from an "asset play" based on hotel properties and rooms to a focus on leveraging customer equity for shareholder wealth.
REVPAC casts a spotlight on a number of key questions for the industry on the eve of the 21st century. How can hotel organizations "talk" to customers in a way they have never been spoken to before by the industry? What must companies do to "hear" their customers in new ways, learning how to better represent them and their needs in the market? How can hospitality organizations maximize revenues by making the most of their relationships with customers? Hotel guests are not lust customers who seek room and board, and perhaps a fax machine in the room. They represent a consumer with an array of needs, whose time is Limited and who, in many cases, will respond to diverse products, improved service and convenience.
In the future, the traditional "marketplace" (the physical realm made up of destinations and hotel buildings) will be greatly expanded to incorporate the virtual environment or "marketspace" - a market context and environment rendered accessible by technology as physical location becomes irrelevant. Understanding the potential of both the marketplace and marketspace sets the stage for delivery of expanded products and services - some traditional, others less so - to customers.
Talking and Listening to Customers
Technology thus plays a key role, both in delivering products and service in virtual space, but also in enhancing the ability to listen and talk with customers in new ways. Sophisticated management information systems allow companies to identify with increasing precision the customer segments and markets that offer the greatest opportunities for growth, given the pace of change in a global economy. A technology platform must incorporate two systems, however, to support the hospitality industry's potential for improving customer equity. Customer reservations systems track when and where customers are going, and what they will do when they get there. Customer information systems track who the customers are, what they purchase, and how they live and work. Hospitality companies already use reservation systems to get customers into the hotel. Information systems generate customer profiles based on tracking consumption patterns in the process defining a diverse range of wants and needs.
This poses a number of challenges. Certainly, it will be important to integrate data generated at the property level with reservations systems and customer information in a total system solution that provides for data warehouses and networked communications. In such a system, customer information is captured from a variety of sources, and becomes the platform for the highly focused marketing and product development strategies of the future.
From Hotel Room to a Customer’s Home PC
The hospitality in the industry will thus require two types of infrastructure to do business - real estate and technology - to support a shirt from depending on "place" to a reliance on "space" to fully meet customer needs. This follows a four-stage evolution currently taking place in industries across the board.
The hospitality industry, for example, historically focused on developing major physical assets, with an almost exclusive orientation to financing and building individual properties. At this first stage, companies achieved relatively low customer equity, providing a narrow band of products and services, traditional to the hospitality industry, at various physical locations. As the industry matured, it differentiated itself to meet more diverse customer needs with properties matched to the various market niches. In this second stage, business hotels and all-suite properties are examples of such differentiation. A third stage involves serving customers in ways that do not require a physical address at all, including telephone marketing and catalog sales. And in the fourth state - the age of electronic commerce - the "real estate" is actually owned by the consumers themselves in the form of a personal computer located on a desktop, eliminating the need for many types of businesses to own significant physical assets in order to create wealth.
At each of these stages, the potential for customer equity rises with increased access to customers, regardless of their physical location, while the costs associated with fixed-assets (real estate) declines. The evolutionary track moves from exclusive reliance on major assets to combinations of physical assets and technology in reaching customers. Indeed, new media and systems technologies can be designed to give hotel organizations greatly enhanced access to larger numbers of customers - regardless of physical location. These technology platforms also spawn rapid innovation in products and services, combined with improved speed to market. The result enhanced business valuation and higher stock prices as a company's strategic, technological and financial architectures are aligned to generate customer equity.
The Franchise, REVPAR and REVPAC
Hospitality companies can dramatically improve the valuation of their companies by using new technology to bring them closer to their customers. This is particularly the case with major companies that have not fully served their large customer bases and have good potential to build customer equity. In many cases these organizations are our industry's major franchisors, whose goals are typically to sign up new franchisees and improve the yields from each property. In a nutshell, these companies are using franchising as a growth vehicle and their orientation is to maximizing fee income.
For these organizations, an intermediate performance measure might be described as revenue-per-available-franchisee (REVPAF). The challenge here will be to develop ways to reach the primary customer (hotel guest) directly, rather than simply through the franchisee organizations - with the end game being improved REVPAC. The typical franchisor catches the primary customer in its reservation system, but typically doesn't "speak" to that customer again, either during the guest stay or after leaving the hotel property. Franchisors will benefit as they begin to develop the strategies and systems allowing them direct access to the primary customers, with a goal of increasing REVPAC.
A New Vision
In the years ahead, we will need to change the way we think about the hospitality industry. Indeed, we will need to transform ourselves with a new vision of serving customers, or the customers will do it for us.
Are hotels an asset play - or a customer access play? The real values of the industry have always rested with the customers that stay in our hotels, but opportunities to serve them are vastly increased by technology. REVPAC is a performance measure that matches the capabilities of the Information Age, and underscores the strategic directions hotel organizations must consider in the years ahead to return shareholder value. U
(Roger S. Cline is Worldwide Director Arthur Andersen's Hospitality Consulting Services. He is based in New' York. Barry D. Libert is Managing Director of Arthur Andersen's Transformation Group, a worldwide management consulting practice assisting public and private companies adapt in the information Age. He is based in Boston.)
©Arthur Andersen
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