Ms. Knutson

Sales & Marketing

Value is Your Hotel’s New Metric

By Bonnie Knutson, Professor, The School of Hospitality Business/MSU

From hotels to resorts to bed and breakfasts, the 2008 economic tsunami hit every property in some way. While people typically cut back during downward economic cycles, the suddenness, severity, and future uncertainty of this crisis is going to have a longer and deeper effect on attitudes and behaviors than previous slumps. This marker has left all consumers with a psychological scar. They no longer have a sense of entitlement; conspicuous consumption for consumption’s sake is no longer in vogue, and virtually every purchase has gone from “yes” to “maybe” – including travel. Their prudence in discretionary spending is likely to continue, even after the economy rebounds.

All this has led to a heightened focus on Value, making it your hotel’s new metric. Whether business or leisure travel, people are still willing to buy, but in a more discriminating way. For the last decade, experts have been touting the need for innovation to increase Value. The venerable Harvard Business Review proclaimed the belief that “pursuing incremental improvement while rivals reinvent the industry is like fiddling while Rome burns” while Business Week added that “what’s likely to kill you in the new economy is not somebody doing something better, it’s somebody doing something different.” In fact, Peter Drucker, probably the most notable business guru ever, called innovation the one business competency needed for the future.

More and more properties are now starting to catch on. They are realizing that they must innovate to provide Value. And they are realizing that innovation is more than just getting an idea. It is putting the idea into action. This belief is akin to the old adage that you can have the best product in the world but if you can’t sell it, you still have the best product in the world. Nowhere is this truer than in the lodging industry. As we all know, a room unsold tonight is unsold forever. It is the same for innovative ideas. You can have the greatest idea in the world, but if you can’t or don’t put it into action, you still have it. To provide Value, then, your innovative idea has to be creative and implemented. And to be competitive, it has to take your guest’s Value experience forward.

Just as in the electronic industry, hoteliers are pushing the innovative envelope to enhance guest experience and value. Take, for example, Hotel Costa Verde in Costa Rica where guests can book a suite in a refurbished Boeing 727. Then there is the Hobbit Motel in New Zealand (yes, the Lord of the Rings trilogy was filmed there) where each hobbit hole (room) can comfortably accommodate six people. Or there is the Dog Bark Inn, a little Bed & Breakfast tucked away in Idaho that touts an enormous gift shop that looks like an overgrown beagle sitting on the plains. And, of course, there is the venerable Madonna Inn, a landmark resort hotel on California’s central coast where each of its 110 guest rooms sport a unique theme, ranging from Krazy Dazy to Mount Vernon.

On a “smaller scale,” at Hyatt’s Andaz Liverpool Street in London, hosts meet guests at the door, checking them in with a tablet PC on the way to the room. Tokyo’s Peninsula is rolling out room phones that guests can carry around town as they would their personal cell phone. And if you want to see some beautiful scenery in Silicon Valley or Honolulu, guests staying at the W can take one of two Acura MDXs for a drive – at no cost. And, the first take of gas is on the hotel! Now that is an enhanced guest Experience and a great guest Value!

So just how do you know if you are providing Value to those who stay with you? There is a host of general accounting formulas that have been used to calculate the value of a loyal guest to your hotel’s bottom line. There is, however, no such definitive formula to calculate the value of being a loyal guest. Why? Simply because the value of being your guest is so individualized. What is valuable to this person may not be as valuable to that one. One may value your convenient location; another may prize your award winning service; a third may attach great importance to a funky décor or flexible break out space for meetings. Since time immemorial, one of the biggest challenges managers have had is answering that age-old value-equation question.

As difficult as it might be for you as an owner or manager, it is much easier for people to calculate the value to themselves of staying in your hotel because it can be summed up in one question: What’s in it for me? It’s simply a cost-benefit ratio – to your guest If we formulate it, it would be Value equals the Experience minus the Cost:

As esoteric as this formula sounds, you can use it to measure the value that people place on staying with you. To do this, let’s first agree on the definition of the three terms.

• Value is the result, real or perceived, by a guest as a result of receiving the benefits of staying in your hotel.
• Experience is a complex relationship among their expectations, perceptions of service quality and levels of satisfaction. We can’t necessarily define it, but we all know it when we have a good one, a bad one, or one that is just so-so.
• Cost has two dimensions. First is the actual monetary outlay for the stay – room rate, taxes, food and beverage, extra amenities and services like massages, fitness facilities, and yes, even Wi-Fi if it is an add fee in your property. Historically, this is how people have thought about the value (cost: benefit) of goods or services. It used to be that cost meant dollars. Over the past decade, however, there has been a fundamental shift in how people define the cost of any purchase. As people assume additional roles, become busier and are more pressed for time, the notion of cost has taken on an added dimension – time. It is the old cliché that time is money.

To help you get a clearer picture, then, of just how valuable your hotel is to your guests, you can use two straightforward questions, from which you can compute your hotel’s value to them. It is called the Value Index Score (VIS):

1. If 100 represented the best possible overall Experience of staying with us, and 1 represented the worst possible overall experience, what number (between 1 and 100) best represents your total experience of being our guest?
2. Using the same 1 (low) to 100 (high) scale, what number best represents your total Cost of staying with us? This includes such things as of such as room rate, food and beverages, additional services or amenities, as well as time (convenience), hassle (ease of making reservations, availability of wanted products and services).

When you subtract the Cost from the Experience, you are actually computing your Guest’s Value Index Score -- the difference between the his/her Experience and Cost. The higher the score, the greater the value of being your guest.

While the VIS can provide a snapshot of the value level people staying with you, its real usefulness is that of a benchmark. Remember that an index is simply a statistical indicator than can measure change over time. If you can compute an initial VIS, you can then measure and compute the score over time, with the goal of making the VIS as large as possible. Mathematically, the only way you can increase Value is to either decrease Cost or increase the Experience. With rising operational costs, hotels are not expected to reduce rates in the foreseeable future, you’ll have to look for innovative ways of enhancing the experience. As Alan Kay, renowned computer scientist says, The best way to predict the future is to invent it.

So get those innovative juices flowing. Your REVPAR will thank you!

Bonnie J. Knutson is a professor in The School of Hospitality Business in the Broad College of Business at Michigan State University. She is an authority on emerging lifestyle trends and innovative marketing. Her work has been featured in The Wall Street Journal, USA Today, and on PBS and CNN. She has had numerous articles in industry, business, and academic publications. Bonnie is a frequent speaker for executive education as well as business and industry meetings, workshops, and seminars. Dr. Knutson is also editor of the Journal of Hospitality & Leisure Marketing. Ms. Knutson can be contacted at 517-353-9211 or drbonnie@msu.edu Extended Bio...

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