Mr. Kohlmayr

Revenue Management

One Size Doesn’t Fit All: Optimise Your Negotiating Strategies

By Klaus Kohlmayr, Senior Director - IDeaS Consulting, IDeaS Revenue Solutions

For many hoteliers, 2010 will forever go down in history as the one that got away. As the economic downturn bottomed out, hoteliers around the globe received an unexpected boost from international tourism demand which offset some of the implications of financial recession. The United States alone welcomed 1.2 million travellers that year, with long-haul arrivals contributing a 9.5 per cent increase on tourism compared to numbers achieved in 2009(1).

It goes without saying that hoteliers in many locations were ideally placed to make the most of this unexpected return of demand but for a lot of hotel operators it turned out to be a case of right place and right product but wrong time.

For those operating in the leisure and tourism industry, the recession was a frightening experience. Hoteliers sought to safeguard their future with long-term contracts designed to lock in guaranteed income and help weather the storm. However, in a bid to make the contract as attractive as possible to similarly beleaguered businesses, hoteliers found themselves drastically under-pricing their offering before quickly realising that a poorly negotiated deal will take the shine off the contract the moment the going gets good.

The lesson learned is that whilst the recession was felt by industry and individuals alike, it is essential that during periods of economic crisis hoteliers delve deeper to discover the reality of their situation before doing anything reckless. The factors affecting each element of a hotel operator’s offering are so dynamic and diverse that a ‘one size fits all’ approach simply will not cut it, and whilst a high volume of long-term contracts may prove the right way to go at one location, it may be more financially sound to reduce them at others. Equally, it is critical that when entering into a contract, the terms are set at a rate and conditions which are beneficial to all parties. Ultimately, hotels are preparing for a period of anywhere between 12 and 18 months of trading, so if a hotel doesn’t get it right now, it may never have the chance to buy back time and make amends.

Future forecasts are frustratingly mixed. Whilst some financiers are flying the flag for recovery, naysayers continue to cast doubt with cries of a double dip recession. As long as savvy hoteliers are amply prepared with the right intelligence, they will make educated and informed decisions when developing their negotiating strategies for 2012 and enter into the year in a strong position.

Thinking outside the box

A priority for any planning hotelier will be a thorough analysis of the macroeconomic environment. This effectively means understanding anything outside of a hotel's immediate control, whether it is anticipated demand based on expected tourism rates and trends in corporate travel, shifts in client demand or changes to the competition landscape. Keeping a watchful eye on competition in the industry will tell hoteliers how comparable their businesses are and how aggressive they can afford to be with their pricing. Equally, it can uncover a need to move with the times and make some vital adjustments to products and services in order to remain in the game.

Economic trends will usually have a direct influence on the call for demand as well as any significant alterations in what a client comes to expect from a hotelier. By remaining plugged in to what’s happening in the world at large, a hotel operator can see two steps ahead of anyone else, preferably before the competition realises the score and calculates its next move.

Understanding yourself pays dividends

Inward reflection is equally essential when reviewing whether it’s worth keeping on an account. Determining the overall revenue contribution achieved during the most recent contracting period and measuring this against the revenue that has been displaced as a result of taking on the account is absolutely essential in establishing its value.

A good method of measurement for assessing this is to total the revenue from room nights booked during days when hotel occupancy exceeded 95 per cent and estimate a percentage of that as displacing other revenues. With the application of a Revenue Management System this is easily achieved; the alternative is manual evaluation or through data feeds from the Property Management System.

To provide an example of this valuation in practice, Account A has produced $25,000 in revenue for the last 12 months. However, $5,000 of this revenue has materialised on days when the hotel achieved over 95 per cent occupancy. Your analysis has shown that out of $5,000 approximately $3,000 of this revenue displaced other, higher rated business, so the net value was only $22,000. Now let’s assume the hotel achieved $3,000 in revenue from the account but at the same time displaced revenue of $7,500 – leading to a net loss of $4,500 during those nights. Whilst many hotels might presume this calculation only needs to be done for accounts with last room availability, experience shows that the results when completed for all accounts are surprising to many in the industry.

If the hotelier has data and analytical capabilities, profit contribution per account should also be evaluated. Matching revenue streams against overall costs to establish a net profit provides an accurate depiction of an account’s worth.

Realising an account’s potential

Critical to the negotiation process is a full understanding of a client. Matching the estimated revenues from 2011 to next year’s forecast will supply expected figures for demand which can then be measured against overall demand for the hotel. Using figures you already have at your fingertips in a more analytical way will provide you with priceless intelligence that will help you make a more informed decision.

Evaluating the cost of access

With a rise in demand comes a need for the account with whom a hotel holds a contract to guarantee some access to the hotel’s room inventory. This usually takes the form of an insistence that last room availability is included as part of the contract. This higher/guaranteed access should come at an additional cost to the client. An introspective analysis of the amount of revenue the account displaced (as already outlined) will produce an average amount per room per night, which can then be used as the premium charged for the privilege of last room availability.

The price is right

Choosing the most appropriate pricing structure will be the ultimate decider in whether a negotiation strategy will sink or swim. Whilst in the past fixed rate pricing has been the mainstay of the hotels industry, transparent pricing has changed the way prices are negotiated, leading to a shift from static to dynamic pricing. While it has many advantages for both hotels (pricing aligned with demand) and clients (easier RFP process, Last Room availability is no longer an issue and pricing changes quickly with demand), there has been push-back from many companies, especially as dynamic pricing makes it difficult to forecast travel budgets.

The InterContinental Hotels Group expects that almost a quarter of its corporate clients will use “some form of dynamic pricing” in 2012. As a rule, hoteliers and buyers are now finding the middle ground, adopting hybrid programmes that utilise both dynamically priced and fixed priced rate systems. The more flexible hoteliers can be, the more likely they are to succeed.

The purpose of contracting accounts is to create a win-win situation, where both the hotel and the client get clear benefits. For hotels, corporate accounts are an important segment of business that no hotelier can risk to lose. However, the right balance between access to inventory, price and a long-term outlook to growing the share from the most profitable accounts will be crucial to ensure long-term success.

(1) Source: Tourism Commission

Klaus Kohlmayr currently holds the position of Senior Director - IDeaS Consulting for IDeaS Revenue Solutions, the global leader in Hospitality Revenue Optimization. (www.ideas.com) He is responsible for leading and growing the revenue management consulting and advisory division assisting clients in the Hospitality and Travel sector worldwide to develop, implement and enhance best practice revenue optimization, pricing and forecasting strategies and tactics. Mr. Kohlmayr can be contacted at 612-840-3301 or Klaus.Kohlmayr@ideas.com Extended Bio...

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