By Dan Skodol, Vice President of Revenue Analytics at Rainmaker, a Cendyn company
Despite reports of a weakening global growth rate through 2020,1 research from IBISWorld shows that the hotels and motels industry has outperformed the broader economy for the past five years, and total industry revenue so far this year has reached $206 billion.2 Globally, there are 100,535 businesses, with a slate of new project openings continuously being added to the lodging landscape. We saw an increase of 669,460 rooms in 2018 in the U.S. alone.3
Whether renovating a building, buying an existing hotel, or building from the ground up, a hotel owner is investing millions of dollars in a new hotel project, and expects to see a strong return on that investment. However, with PwC warning that more than 60 percent of project failures arise during the pre-opening stage,4 it’s clear that successfully managing this phase is vital for launching a hotel’s trajectory of success and revenue-generating ability for years to come.
For a positive return on your real estate investment, you must develop a customized and defined hotel opening plan – one designed to drive both top-line revenue and bottom-line profit from day one.
In the Beginning: Start Early
One of the first steps required in the pre-opening phase is a SWOT analysis.5 SWOT stands for Strengths, Weaknesses, Opportunities, and Threats. Not a new technique, but still a powerful analytical tool for evaluating internal and external circumstances surrounding your new business. Strengths and weaknesses are internal to your business and are typically factors over which you maintain control, like your location, design, brand, and unique attributes such as whether you offer complimentary breakfast for luxury services. Opportunities and threats are external factors which may often be outside of your control. These include trends, competition, economic and environmental factors that may affect performance. Insights derived from a
thorough SWOT analysis will help you develop a strategic business plan that allows you to capitalize on your strengths and opportunities while minimizing weaknesses and diminishing threats.
To ensure that revenue begins rolling in sooner rather than later, you’ll want to launch your website during your pre-opening stage. Fill it with relevant content enhanced with search engine optimization (SEO) that will ultimately drive online bookings.6 Post blog updates that provide exciting details of your new facilities and launch date. Combine this with upfront marketing, PR, and social media strategies to create buzz, and provide opportunities to engage with potential guests prior to your official opening.
Delays Impact Profits
Any delay to your scheduled opening date will negatively impact key financial metrics and hotel profitability.7 For instance, expenses such as staff salaries, hotel utilities, sales and marketing costs must still be budgeted for even if there’s no cash flow. In addition, failing to capitalize on strong pre-opening demand can lead to significant loss in revenue.
An article in the Daily Mail8 perfectly illustrates this point, reporting on a five-star resort in Fiji that was scheduled to open in 2008. The opening was delayed for six years and the hotel lost out on the substantial revenue opportunity presented by the 150,000 registered guests queued up to stay at a price of £9,000 per week.
RM Strategy and Technology Ensures a Strong Start
One way to make certain that your hotel becomes profitable quickly is to put a solid revenue management (RM) strategy and solution in place well in advance. Revenue management serves as your mission control, allowing you to generate a more accurate SWOT analysis, establish pre-opening promotions, and address the challenges that arise throughout the pre-opening process. Ideally you want your RM team in place 12 to 18 months prior to opening to assure that your hotel opens on schedule and hits the ground running to generate revenue.
Comprehensive market segmentation should be an important part of your pre-opening RM strategy. Initially, you’ll start with the broader categories of leisure, business travelers, and groups – determining what percentage of your business each segment will comprise. Later, as more historical data becomes available, your revenue manager will be able to develop targeted action plans based on more granular segment data, incorporating lead times, day of week, length of stay, shopping preferences, booking channel, and more. A modern RM system automates this complex task, efficiently crunching numbers and identifying patterns to ensure
that your segmentation is always optimal for effective yield management and maximum performance.
To reach optimal revenue potential as quickly as possible after opening, you need to plan ahead by creating a demand calendar. You must get comfortable with the fact that although there is no historical data to draw from, some forecast is better than no forecast. When looking outside the booking horizon, your pre-opening forecast will be largely seasonality based, and proxy booking data can be created based on market-level data or perhaps a sister hotel if available. In addition, hotels can incorporate known market events in advance, making educated estimates of their business impact by utilizing data that the hotel can procure ahead of time. Soon after opening – with only a few weeks of booking data under your belt – you can begin building short-term forecasts.
At the genesis of your hotel’s life, when there is no historical data for your property, a thorough and accurate competitive analysis provides invaluable exploitable data. Your competitive set can be utilized for benchmarking purposes, market penetration analysis, and to help you develop your positioning strategy. An advanced RMS helps with comp set analysis and seamlessly integrates with most third-party rate-shopping tools. It collects real-time market intelligence and allows you to view competitors’ current, past, and future rates across all key OTA, GDS, and brand.com sites.
One of the greatest challenges during the pre-opening stage is pricing. Pricing your inventory effectively establishes a foundation for profitability and long-term success, while ineffective pricing strategies can ultimately lead to the dissolution of your business. You can use competitor rates along with market data to inform your forward-looking rate forecast, and to derive profitability estimates for each market segment. Find hotels in your comp set with rooms available for purchase as far in the future as possible to gain the greatest insights on future pricing.
It’s also important to compare your rate forecast to your budget goals to ensure they’re in alignment. You want your goals to be a bit of a stretch, but still achievable. Hotels that myopically set rates based purely on an over-aggressive budget are shooting themselves in the foot and will be in trouble when demand doesn’t materialize at rates that are unrealistic for the market. Their best bet is to take a hit on ADR versus original goal and hope that the revenue will be made up for via occupancy or better optimization of their leisure/business/group mix during constrained periods.
Once you’re up and running, a state-of-the-art RMS produces optimal pricing at segment and room-type levels, accounting for unconstrained demand forecasts, market conditions, hotel positioning, competitive rates, and room upgrade opportunities. The right solution will also further optimize rate recommendations to reflect total guest value – considering revenue from ancillary sources as well as rooms.
Channel Mix Optimization
After identifying your ideal business mix, you should establish an optimal distribution channel mix for your hotel. Do this well in advance of opening because it can take several months to get contracts signed and have your new property loaded into the appropriate systems. An RMS considers the costs associated with each channel, including commissions, transaction fees, future loyalty program costs, as well as property-level or franchisor sales and marketing costs. And once your hotel opens, your customer relationship management (CRM) tool can track and analyze visitor statistics such as demographics, source markets, purpose for visiting, etc. Your RMS can then leverage CRM information on customer value, spending habits, and profitability so that you can plan which higher-value customer segments to target going forward, and through which channels you can best reach them.
Integrate and Evaluate
It’s important to set up your IT infrastructure approximately six to 12 months prior to your hotel’s soft opening and make certain that all your systems – revenue management, property management, and central reservations – are well integrated. This ensures that your hotel will operate efficiently, and all your teams will communicate effectively while working towards the same goal: opening the hotel on schedule and producing a strong ROI from the start. It’s also vital for hoteliers to be flexible, open to reevaluating original assumptions and strategies that were developed during the pre-opening stage, in response to the evolving market conditions of your post-opening reality.
Utilizing the right RMS is important for a successful hotel opening. However, there is such a thing as “over reliance” on an RMS. Looking to your automated system to provide all the answers during the pre-opening stage and taking a “set it and forget it” approach is a surefire path to failure. It’s important to balance the use of an automated RMS with the right amount of ongoing effort from your property team. Every department must work together cross-functionally to procure the right data and develop assumptions that are as accurate as possible given what is known/unknown. And it’s important to continually monitor and update assumptions based on changes in the market.
Opening a new hotel is both a stressful and exciting time. Take advantage of the pre-opening phase to establish a thoughtful and detailed approach that will secure your new hotel’s successful entrance into the marketplace.