Mr. Mourier

Revenue Management

Hotel Revolution and the Hospitality Industry's Business Model Evolution: Steam, Diesel or revPAR?

By Jean Francois Mourier, Founder & CEO, RevPar Guru Inc.

Hospitality is one of the world's largest and oldest industries, with lodging as the most prominent segment. The product, i.e., the service delivered by hotels, motels and resorts, is very easily defined: shelter, a clean room and bed and perhaps a meal. This core concept and basic market demands haven't really changed since the medieval days of roadside inns, and it is this age-old simplicity which has been the hotel industry's greatest asset.

Paradoxically, it is also its greatest barrier to innovation and especially when it comes to pricing, sales and marketing. For years, hotels have employed traditional methods in these operational categories, even as the marketplace changed around them. Historical pricing, excessive reliance on competitive set analysis, 'push' marketing tactics and a reluctance to embrace new media, are all part of the outdated business model still being clung to by many hoteliers across the globe. However, if anything positive has come out of the current state of the economy, it has been to show the lodging industry how ineffective these strategies are compared to newer, more forward-thinking, efficient models being used by leading properties worldwide.

For the rest of us, there is more good news - these initiatives are available and ready for your hotel to implement - all that's needed is a willingness print("code sample")to look beyond the tried and easy methods and to embrace the newest tools available. Are you ready?

Get online, NOW

As you'd expect, these tools are found primarily online. It's been said that the prevailing business models for the hotel and hospitality industry have been evolving over the last decade ONLY because of the rise in internet bookings. So just how important is the online channel?

In 2008, about 44% of the hotel market was online - a substantial jump from 21% in 2002. Experts predict that by 2012, 57% of the hotel market will be online, representing a $65 billion online hotel market.[1] Clearly, such rapid growth over such a short period demands a different way of doing business - and progressive revenue management firms are there to help you.

Most hotels have a web strategy though they generally don't go far enough. They make their inventory available to online travel agencies (Expedia, Orbitz, Hotels.com, etc.) and integrate their reservations systems with their own web portal (the hotel website). Some may even go as far has having an online marketing strategy or developing email databases of repeat guests.

Few hotels, however, invest in the technology to properly and effectively optimize the online channel. Not enough hotels engage in real-time, demand-based pricing across their distribution channels; in fact, with room inventory spread across third party sites, the hotel website, the GDS, the in-house reservation department and the central reservation department (for larger chains), only a few hotels have the capability to effectively update pricing in real time. Isn't this crazy? Hotels often neglect to analyze their online marketing - including their website - in terms of search engine optimization, and those hotels that do endeavor to build lead-generating or revenue-enhancing databases will sometimes not integrate that with an existing loyalty program. Crazy again. Luckily, all of these missed opportunities can be addressed by adopting the newest revenue management solutions available today.

Heads in Beds

The success of a hotel is often very closely tied to its most basic statistic, the occupancy percentage. Hoteliers that place such emphasis on this rate will generally do well in good times. But in a time of declining demand, such as what we're all feeling right now, an over-emphasis on "heads in beds" can lead to destructive tactics, including dramatic 'fire-sale' rate reductions. While there is certainly a time and place for lower rates- and a good case can be made for this being just such a time - research actually shows that discounted ADRs relative to a hotel's competitive set lead to decreases in revenue per available room even as occupancy percentage increases. (2)

Knee-jerk discounting is an obvious corrective to non-dynamic pricing. That is to say, prices that are kept flexible based on demand throughout a given operating period are self-correcting; there is no need for the 'fire sale' if a dynamic rate management system is in place. Historical pricing is on its way out. It is the antithesis of dynamic pricing, static and inherently rooted in the past; though it may adequately anticipate seasonality and align well with the hotel's competitive set, it is ultimately unable to optimize revPAR.

The Competitive Set

Historical rates, however, are not the only impediments to pricing flexibility. Many hotels operating under an antiquated business model rely heavily on their Smith Travel Research Competitive Set analysis. As a tool and gauge, the STR comp set is useful for at-the-moment assessment, but not as the basis for a pricing or marketing strategy. In certain markets with homogeneous competitors (like the super-luxury market in Miami, for instance, or the upscale ski resort market in Aspen) this strategy may work. Yet for most other markets with a diverse range of rate levels, service standards and amenity offerings, hotels are far better served by looking outside of their comp set for sales opportunities, particularly in times of weak demand.

The ability to market (and, of course, sell) rooms outside a hotel's comp set allows that hotel to reach an entirely different segment of customers. Travelers in the current economic environment are putting a premium on value - trends are showing consumers both snatching at upscale bargains and trading down in service level - so by setting a rate well beyond those comparable in the hotel's STR comp set there is access to a new pool of potential guests.

Emerging media, get with the times already!

It is highly unlikely that consumers of lodging will have any concept of the comp set, or access to Smith Travel but they do have an unprecedented amount of information available to them - and they use it. However, only a very small percentage of that information is actually supplied by the hotel itself - often through traditional marketing channels, the website, or a third party. Increasingly, potential guests are turning to user-generated reviews and recommendations to assist in making their travel decisions. TripAdvisor, which distinguished itself from other OTAs primarily through the inclusion of user-generated reviews, is a rising star among third party booking sites and boasts more than 20 million unique reviews. More than 4% of social media users (members of social networking sites like Facebook and MySpace) use those outlets to facilitate their decision making process when it comes to travel.(3) Hotels and other lodging entities must embrace new media channels to create and/or control a greater share of property information that consumers are exposed to.

Of course, this does not mean attempting to manipulate a TripAdvisor score (dedicating 4 front desk staff to clicking on owls would be a dreadful misuse of minimum wage). But it does mean that hotels should be jumping into new media with a sound strategy and gusto. Hotels, or rather GMs or Marketing Directors, can Twitter. It's free and it's quick. They can use their Facebook or LinkedIn profiles to engage with potential clients. They can develop email databases that fully integrate with existing loyalty programs, or start a mobile campaign (Hyatt Hotels recently launched Hyatt Mobile, which allows guests to check in and out, make reservations and locate properties on their mobile phones).(4) Consider it this way - new technology is an opportunity, not a liability, and a sure way to get on board with the new hotel business model.

Enough of retrospect - Here's to increased revPAR and beyond

The new hotel business model is based on transparency and supported by all things digital. Consumers - no longer held captive by the travel agent - expect choice and competitive pricing. Actually, they demand it. Hotels must therefore avoid static and historical pricing, and shed reliance on their comp set to engage in sophisticated revenue management techniques with a strong eye toward maximizing revPAR (not occupancy). Throw into the mix emerging media to help control the brand online (as well as off), and of course, increase bookings, and you have the makings of the hotel industry's next chapter.

So what are you waiting for? Don’t miss the train on the new hotel business model – if you wait too long, it (along with your competition) will be long gone and you’ll be left wistfully gazing as they forge on ahead into a new era.

References:

(1) http://www.eyefortravel.com/news/north-america/%E2%80%9Conline-hotel-distribution-landscape-still-very-immature%E2%80%9D
(2) http://www.hotelschool.cornell.edu/research/chr/news/newsletter/3-20-06.htm
(3) http://www.hotelmarketing.com/index.php/content/article/survey_only_4_percent_use_social_media_to_guide_travel_purchases/
(4) http://www.hyattpressroom.com/DisplayPRasPDF.asp?compID=3673600&ar=

Jean Francois Mourier arrived in South Florida in 2003 after a career in Europe as a trader, financial analyst and director for a number of firms including Merrill Lynch and ING Barings. He joined a small Miami Beach hotel management firm as a financial analyst. he revamped the company’s revenue management methods, with dramatic results. In 2007, along with his colleague Bruno Perez, Mourier founded RevPar Guru to provide the Yield Dynamic Price Engine, an integrated revenue management and pricing solution, to others in the hospitality industry. Mr. Mourier can be contacted at 786-478-3500 or clientservices@revparguru.com Extended Bio...

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