News for the Hospitality Executive |
By Dr.
Gabor
Forgacs
April 2011 We all make
tactical room rate adjustments on a daily basis. We need higher
occupancy,
increased cash-flow, plus show the owners how hard we tried. We also
must be
sure these tactical decisions are in alignment with our strategic
objectives.
Actually, do we want to compete on room rates at all? This is a
possible scenario: “We decided to aggressively lower our room rates
from $179
to $119 because occupancy was dipping under 60%. We offered the price
incentive
to stimulate demand. The result was discouraging: we gained some
occupancy but
our REVPAR took a nosedive and our hotel attracted a new clientele that
wanted
everything free: parking, WiFi access and buffet breakfast. These new
guests
ordered local take-out instead of eating at our restaurant. They also
complained about anything possible, just to force an apology and a
discount at
checkout. Is this the new normal?” The above is
an imaginary scenario: it never happens at well-run hotels… Right?...
Right.
However, if it sounds vaguely familiar, read on. This article will deal
with
the most pertinent questions and will offer some perspective on our
challenging
times. Why Can’t We Improve
Profits if Lower
Room Rates Lead to Higher Occupancy? It depends
on how much we discount and what clientele we attract as a result.
Let’s look
into the changes both from quantitative and qualitative perspectives. Quantity
of units sold. The
simple answer for quantifiable changes in profit: it’s negative. There
are two
key variables at play: rate and occupancy. It is very difficult to
increase
occupancy enough to generate so much more net room revenue (rate minus
variable
costs) that it covers the net revenue shortfall that results from lower
rates. Our
rate may drop, but the cleaning costs don’t. If it would cost us e.g.
$18
variable cost (labor + laundry + supplies) per occupied room to clean
it, and
we were unhappy with 60% occupancy, the numbers reveal that an
occupancy of
95.6% would be required just to break even, i.e. generate identical net
room
revenue, if our average rate is lowered from $179 to $119. Hotel
revenue
management text books can be consulted to find the simple formula that
calculates identical net room revenue at various room rates. In the
given
scenario: (179-18) / (119-18) multiplied by 60% equals 95.6%. It is up
to our
revenue manager to consider if that high occupancy is realistic to
achieve. The
formula is good to run scenarios: if the average room rate would be
$129 then
87% occupancy would do, for same net room revenue. Sound
research by Cornell University’s Centre for Hospitality Research had
conclusively shown we can expect on average a 1.3% rise in occupancy
after each
10% room rate discount. If we can’t
improve the financial performance of our business, why would we expect
that
discounted rates lead to an increase in profit? The financial
performance of a
hotel will improve only if we are able to gain a significant, double
digit jump
in occupancy at slightly lower rates. Quality
of the clientele:
most of those guests who react for a discounted rate offer are typical
bargain
hunters. They are not brand-loyal but price-loyal, and they go where
the sweetest
deals are to be had. They select their hotel at their chosen
destination based
on room rates. If we lure them away from our competition on occasion,
we may
boost occupancy by stealing market share. When next time someone more
desperate
will undercut our rates, we know where these travelers will choose to
stay. Unfortunately,
there is no protection against undercutting. It can happen any day that
a
competitor is more aggressive than us. In other words: we can’t build
and
retain market share and we can’t hope to expand our customer base. The
war
cannot be won even if can win some pricing battles. Yes, we may attract
a
deal-hunter segment that is neither possible nor worthy retaining. Why
are we
so desperate to impress and attract these potential guests? The Easy Way versus the
Hard Way How resource
intensive can be changing room rates? Well, it depends on how many
mouse clicks
are required to change a BAR (Best Available Rate) from $179 to $119.
That is
the easy way. It is much harder to identify other ways of gaining a
competitive
advantage. We need to elevate our thinking from tactical level
solutions to
strategic thinking. First we
need to develop a solid understanding of our target market’s needs,
wants and
preferences. Then we have to invest time
and resources in finding relevant differentiation and communicate it to
our guests.
CRM (Customer Relationship Management) enters the picture: transactional
information, customer history and customer intelligence can be tied
together
for maximizing the lifetime value of return guests. Bundling may be
considered. Product development could
start: an additional LCD television screen hidden behind the bathroom
mirror? Docking
station for iPods? In-room exercise machine set up on request?
Introducing a new
food service concept? A door lock that can be opened by a smart phone?
The
industry has a plethora of exciting new solutions to select from.
Cost/benefit
analysis, strategic decisions are the hard way. Lastly, we
have to tackle the hottest and fastest-paced strategic issue:
distribution
channel management. Which is the channel that the largest volume of our
booking
comes through? Channel costs and booking volume need to be analyzed. Do
we need
to develop a mobile friendly version of our internet presence? Are we
going to
harness the potential of the social media? Can we leverage our location
to push
quick-response digital coupons to potential guests within a perimeter
and
engage in location-based mobile marketing? There is so much more. It would be
unfair to suggest that discounting room rates is the easy way of
boosting
occupancy for the lazy revenue manager. It needs to be pointed out
however, unlike
dropping room rates, the development of sustainable competitive
advantages will
be the result of hard work and they may not produce overnight results. Room rates should be the last thing to
touch. We have worked too hard to be in the position of charging
e.g. $179
a room night. We have earned market acceptance and had built a
clientele. We have
an image and a reputation to manage. Should all these be thrown out the
window just
because we hit some turbulence? What if we discount PPV (pay-per-view)
movies,
parking fees and the WiFi access but hold our rate for our core
product? Room rates
are too important to play a continuous game of pull/push with. Hotel
brands
that held their rates and didn’t dilute their rate integrity were the
first to
lead ADR recovery after market slumps. Coming down with REVPAR is fast.
Rebuilding
it, after heavy discounting may take years and it will be uphill all
the way. Measure REVPAR or GOPPAR
or ADR? It depends on
what we need to learn. Room rate is a crucial component in all measures
that
are worth tracking and benchmarking. Compering our own REVPAR to past
years can
reveal top-line performance by indicating how well we have played the
hand we
were dealt. It is useful to look beyond it and see if REVPAR changes
were
driven by ADR or occupancy, so we can learn from our own successes or
mistakes.
A REVPAR penetration index within our own comp set can help us, or
interested
investors see how well we lived up to our business potential in
comparison to
our peers. Many hotels
are run by management contract. A REVPAR, however impressive may not be
a sufficient
measure for the owners because their interest is in bottom-line
performance.
That is the reason behind the growing popularity of GOPPAR. Cost
efficient
operators may be identified more accurately through GOPPAR, because
REVPAR
doesn’t reflect cost containment. High or Low Rates -- Guest
Perceptions and Price Sensitivity Businesses
that sell tangible products have a chance to justify price adjustments
upward
or downward with changes that the buyer can touch and feel. More
horsepower or
an extra cup holder in a car; more gigabytes of memory for a computer;
15-ounce
steak vs. 12 ounces and the customer will understand that fast. What
about a
room night at a hotel? What if last
week a hotel charged $119 super saver rates and this week the room rate
is back
to $179? The guest is greeted by the same doorman, checked in by the
same GSA,
sleeps in the same bed, flips through the same set of channels watching
the
same 42” LCD television screen? The guest will certainly understand the
changes
in supply and demand. But guests also like to know what they are paying
for.
They comparison-shop with the click of the mouse and are knowledgeable,
wired
and these days they are also value conscious. They can tell apart what
is low
priced and what is cheap, as they have learned that a low price point
may not
necessarily be cheap at all. Even a $50 rate may be overpriced if the
room is
not clean, the TV-remote’s battery is dead and staff is unwelcoming.
Guests may
be able and willing to accept a higher price point for value drivers: a
prime
location, quality service, superb mattress and a clean, safe hotel.
Room rates
are important but not always the only value driver in the eye of many
hotel
guests. The morale
of the room rate conundrum is that if we choose to use our room rates
as a strategic
weapon, we can only fight problems that are room rate related. Cheaper
room
rates will not make a destination safer or turn tired attractions into
world-class
ones. Destination image problems cannot be cured by room rate
discounts.
Discounting a mediocre product, than heavily promoting it will
successfully
tell now the whole world how mediocre it is, even if we can temporarily
steal
some market share. Driving the guests’ attention to room rates is a
questionable strategy. We can do much better in the long run if we
resist the
temptation of fast and easy downward rate adjustments and try working
harder
but smarter. Reprinted from the Hotel
Business
Review with permission from www.hotelexecutive.com. |
Contact:
Dr. Gabor Forgacs
|
Also See: | Revenue
Management: Tactical Discounting / Dr. Gabor Forgacs / March 2010 |
Strategic Revenue Management / Dr. Gabor Forgacs / February 2010 | |
Revenue Management: Dynamic Pricing / Dr. Gabor Forgacs / January 2010 |