Hotel Revenues: Profitability by Segmentation
By Jaavid Bharucha Corporate Director of Revenue Management, Arbor Lodging Management | October 20, 2019
I would say segmentation is or should be one of the main discussion topics in any hotel's revenue strategy. It's difficult to understand segments without getting a overview on segmentation and its importance to the hotel. From total revenue on the top line to IBFC (Income before fixed charges) on the bottom decision makes
The total revenue for the property must be broken into sub-segments and approached individually with a plan of action for each segment that impacts the overall success.
First the hotel must set an overall goal for the year example of a goal "lower OTA reservations and book more on brand.com" then the hotels must break down their target markets and channels, approach each area of business they'd like to grow and develop. This can be done by identifying a few key segments that book through brand.com and start from there.
Segmentation is the process of defining and subdividing a large homogenous market into clearly identifiable segments having similar needs, wants, or demand characteristics." Segmentation allows you to tailor your strategy to precisely match the needs of different aspects of your market, to increase bookings, revenue and guest satisfaction.
The segmentation and sub-segmentation analysis can be done on several levels, depending on the end goal at the hotel. Profit by segmentation is the next step to understanding the types of business a property should take keeping in mind net vs. gross profit.
Profit by segment is the process of understanding what each segment is going to cost the hotel in relation to each goal. Incorporate KPI's along the way to ensure progress is being made and conversely address any challenges with the thought process.
Some things to consider with building the strategy:
1. Define the segment – Retail/BAR, Special Corporate/BT, Groups, OTA, Discount
2. Identify the customer – purpose of their travel business or leisure
3. Understand the cost by segment- what do I need to spend to get this traveller
4. Cost of promotion- where am I going to spend my marketing dollars to find this traveller
Segmentation by profit gives the hotel more insight and understanding over their expenses prior to the month end P & L review. Sub- segment discussions and analysis tend to highlight the hidden cost that are not usually accounted for in a displacement analysis scenario.
Hotels generally use CPOR (Cost Per Occupied Room) or a similar baseline calculation to cover estimated cost on an aggregate.
A few KPI's could also be:
Occupancy rate– the number of occupied rental units at a given time, compared to the total number of available rental units at that time.
Occupancy rate = Rooms sold / Room available
Average daily rate (ADR)– this rate is applied to a room's average rental income during a certain period of time. ADR = Rooms revenue earned / Number of rooms sold
Revenue per available room (RevPAR) – a KPI that assess financial and business performance of a hotel. RevPAR measures ability of a property to fill all the rooms and define the best price for them. There are two ways to calculate it:
RevPAR = Rooms revenue / Rooms available, RevPAR = Average daily rate * Occupancy rate
Total revenue per available room (TRevPAR) – a metrics that accesses total revenue, generated by property and based on room cost and money spent on it. This KPI captures a snapshot of overall business performance. TRevPAR is one of the main benchmarking tools for big hotels and resorts. The higher the TRevPAR, – the better the revenue.
TRevPAR = Total revenue / Total number of available rooms
Net revenue per available room (NRevPAR) – a KPI that allows hotel revenue managers to calculate the distribution cost to see how the room revenue is generated. NRevPAR includes spending on marketing and distribution.
NRevPAR = (Room revenue – distribution costs) / Number of available rooms
Gross operating profit per available room (GOPPAR)– measures the profit of a hotel and value of all assets at any given time. GOPPAR measures profit to capacity, including all a hotel's spending and taxes.
GOPPAR = Gross Operating Profit / Number of available rooms
- Knowing who is booking the hotel is key to a segment and profitability strategy:
- Why are the guests coming to your area and choosing your property? Looking at feeder market reports from the Brand is a good place to know where your online traffic originates.
How much revenue does each type of customer generate per booking, and in addition what is their incremental spend at the hotel? Do they buy breakfast or are they planning to spend food and beverage dollars at the restaurant?
Business Type Segmentation and Potential Cost Associated With Each Segment
A family leisure traveller vs a midweek customer travelling on business don't necessarily have the same needs and cost of acquisition.
Here's a look at 5 common business types:
- Transient- generally stays between 1 to 3 nights, these independent guests are not linked to any company, event or agent and will usually book your Best Available Rate or publicly available promotions. This typically is the highest net rate segment in the booking strategy. They are generally brand agnostic and are looking for the best priced deal. They tend to be price conscious with lower incremental spend at the hotel.
- Corporate / Negotiated – most likely staying midweek over a Tuesday and/or Wednesday on a contracted corporate rate, that is exclusive. This segment also has a high incremental spend in the restaurant, Bar, Coffee Shop, Lounge and so on. This is also the subsegment the hotels spend the most to maintain and retain. These are generally road worriers with benefits like brand points, double points and miles, free breakfast, transportation in some cases to mention a few.
- Groups - Guests staying as part of a contracted rate for an event happening at the hotel or in the area. Sports tournaments, weddings or social events generally have pre-arranged meal plans and breakouts. This segment does not typically receive perks like points and miles, double points and so on.
- Wholesale/Frequent Individual Traveller (FIT) - Guests booking through FITs or Tour Operators at a discounted rate not available publicly. These customers are typically part of a tour bus program and on a strict schedule. This is a contracted and discounted rate and this segment also does not receive perks.
- Extended stay- Projects staying for a select period (7 to 14 days, 14 to 21 days, 22 days and more) at a discounted rate. Depending on the duration of their stay the hotel may offer participation in cost savings programs.
Transient segments can be further defined by sub segments, this included BAR, Advance Purchase, AAA, AARP, Consortia to name a few.
Group segments are further defined by sub segments, this includes Corporate, Sports, Entertainment, Social, Governments to name a few.
Channel Segmentation "How Was the Reservation Made":
This ensures that your strategy is optimised to make the most profit from your bookings.
If a channel has a high commission and low booking value, is it worth maintaining rates and availability through this channel? Would it be more beneficial to increase focus for channels with lower commission costs?
I look at these channels:
- Direct Hotel – maintaining a reservation department to answer phone calls and answer emails is an additional expense.
- Direct Website- free to book and has the most updated rates and availability for a given period.
- OTAs- high cost of commission in addition to credit card fees at the hotel.
- Wholesale / FITs- discounted rates and commissions for a lower net rate.
- GDS- cost per transaction and additional GDS promotional/marketing fees.
Hotels should focus on understanding these cost metrics:
- Cost per Acquisition for each channel: commissions & marketing spend
- Spend per customer: Average booking value & incremental send
- Lifetime value of customers: how often do they come back to the hotel?
- Stayed Revenue & Trends: actualised bookings, ex. cancellations
- Booking Lead Time
- Cancellation Rates
- Average Length of Stay
- Midweek vs Weekend
The hotel team should have clear knowledge on what each channel (online & offline) is producing, and how this fit in with your hotel's overall business objectives. This should be reviewed often in conjunction with the marketing strategy.
As part of your budgeting and forecasting process, the hotel should focus on a Channel Specific Strategy. Set specific goals for each channel in relation to your overall goals, e.g. a Book Direct Strategy, with the goal of moving bookings away from OTA channels into your direct channels.
Know the cost of each channel, this can help stakeholders such as the GM, Sales Managers, Revenue managers support and impact a Book Direct Strategy.
Understanding the Strategy
Reporting is a key factor of the strategy execution. The hotel should have confidence in the reporting system and must spend time understanding the information.
Accuracy of data is crucial – the quality of the data pulled in reports is only as good as the data entered in the system.
The purpose of discussing profit by segmentation is to ensure that your business strategy is met and that decisions are well informed, data driven and optimised for each segment and channel.
The fundamental factors of a successful strategy:
- Setting goals based on the objectives
- All stakeholders should buy into the objective
- Driving profitability by sub segment
- Measuring results for ongoing improvement
In conclusion hotels can impact profit by segment, simply knowing the expenses allocated to acquisition is a good start and helps with the displacement analysis. In addition, hotel leadership will have a clear understanding of what to expect prior to the month closing instead of waiting for the P and L at the end of the month.
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