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Planning for Next Years Hotel Budget?

Take the Ego Out of It.

by Jil Larson, October 18, 2010

It’s the least wonderful time of the year, time to prepare next year’s hotel budget with a dash of industry predictions, a sprinkle of historical performance, and a healthy dose of guesswork.  But it doesn’t have to be that way.

The experts have all come out with industry projections, but for every article projecting double digit RevPAR growth there’s a contrasting article advising caution.  ADR is going to be up somewhere between 2% and 20% depending on whom you choose to believe.  Occupancy performance is going to depend heavily on which market segments provide the foundation of your business. 
No matter which industry forecast you adopt for guidance, there is one fundamental principle to keep in mind when building your hotel’s 2011 budget. 

None of the hotel industry predictions apply to your property. 

Allowing an industry forecast to influence your hotel’s 2011 budget projection is like using your country’s GDP to forecast your receptionist’s productivity.  The figure is far too general to be of use at the unit level.  Unfortunately, these guidelines tend to bring out the ego in everyone.  As soon as industry projected growth is mentioned, we become obsessed with outperforming the industry, regardless of our hotel’s individual circumstances.

Fortunately there is an algorithm that can assist each hotel in determining where its greatest opportunity lies to increase share, at least for the transient segments.  This in turn can set the table for an optimal strategic plan and an accurate budget.   The formula is a combination of two measurements and requires the following:

  • Retail ADR – Most hotels have a market segment dedicated to transient retail sales.  These are the sales at the best available rate, rate of the day, or whatever term is used for the lowest unrestricted, non-negotiated rate. 
  • Overall Transient ADR – The ADR for all transient segments, including the retail segment. 
  • STR Report – With an accurate comp set, preferably by segment so transient data can be isolated. 
Armed with this data, one quick calculation can determine the optimal transient strategy with no influence from industry forecasts necessary.
Step 1:  Divide the overall Transient ADR by the Retail ADR.  Research across a wide variety of property types has consistently indicated an optimal result is around 85%, give or take a few points.  This figure has different names in different organizations, for the sake of this article it is called the Transient Rate Ratio (TRR).
Step 2:  Apply the results from Step 1 to the hotel’s transient performance on the STR report.
A total of four combinations can result, with a separate optimal strategy for each combination.
  1. TRR above 85%, STR transient occupancy index is above the transient ADR index.  This is an indication the property’s retail ADR is likely too low, there is room to push the retail rate within the marketplace.  Even if doing so loses a few sales, overall revenues are likely to increase. 
  2. TRR above 85%, STR transient ADR index is above the transient occupancy index.  This indicates the non-retail business (discounts and negotiated rates) is likely priced too close to the retail rates.  Offering larger discounts for restricted rates should result in more sales and improved RevPAR. 
  3. TRR below 85%, STR transient occupancy index is above the transient ADR index.  The property’s non-retail business is likely underpriced.  This could apply only to discounted rates, or negotiated corporate rates, or both.  Whichever non-retail segments are producing significant room nights at reduced rates should be reviewed with an eye to reducing the gap between the segments’ ADRs and the retail ADR. 
  4. TRR below 85%, STR transient ADR index is above the transient occupancy index.  There’s no easy way to break this news, the retail rates are likely overpriced.  Reducing the retail rates can generate increased occupancy and increase the mix of retail sales, improving revenues. 
This tried and true algorithm consistently produces optimal transient strategies at the individual hotel level.   Ideally it should be applied to each month, as one transient strategy rarely fits all seasons.  Further disaggregation can include calculating it by weekday versus weekend if the differences between the two are significant.

There will still be plenty of mystery and surprises in the year ahead, but using your property’s specific performance within the comp set to determine transient strategy takes both the guesswork and the ego out of planning for 2011.

Jil Larson is a twenty-five year veteran of the hotel industry with revenue management leadership experience within the Starwood, Marriott, Intercontinental, and Fairmont organizations as well as that of several independent hotels. 


Jil Larson 
Dynamic Revenue Management Ltd.

Also See: True Concessions - Determining the Costs of Those Subversive Clauses in any Group Contract Such as Comp Room Allocations and F&B Discounts / Jill Larson / September 2010
Revenue Management or Urban Myth? The Fun Part of Hotel Revenue Management / Jill Larson /August 2010
OTA Issues - Not All OTAs Are Created Equal, But One of Them Is Due for a Comeuppance by the Hotel Industry / Jil Larson / July 2010
Uncommon Common Sense: Transient Rate Strategies to Take to the Bank / Jil Larson / July 2010

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