Hotel Sales- Revenue Model
First, it’s an old story, but stop thinking that lowering your rates will sell more rooms and increase room revenue. It may sell a few more rooms, but it rarely sells enough rooms to offset revenue lost due to lowered rates. It’s simple economics; lower rates have not ever, nor, will ever, create room demand. Travelers do not buy rate; they buy value. Don’t reduce rates, add value.
Adding value is the key to increasing room sales. Creating and promoting special packages is a good way to accomplish this. Packaging allows you to mask actual room rates with features which add benefits to staying at your hotel. Don’t forget to promote packages on your website.
The tell-tale sign of a hotel-in-trouble is to see increases in occupancy and decreases in room revenue. Any hotelier, who understands and employs the tactics of revenue management, monitors and adjusts rates in reaction to fluctuations in current and future occupancy demand. Every hotel experiences fluctuations in demand all year long. Knowing when to adjusts rates up or down is a function of understanding demand.
For many hotel owners and managers, reducing rates is the lazy-man’s form of marketing. It’s generally the first thought when sales are low; after-all, it takes very little thought and certainly very little research and/or effort. And, it also ignores the fact that people don’t buy rate, they buy value. Simply lowering rates for everyone ignores the fact that most people are not seeking hotel rooms based upon rate alone. If that were true, the hotel with the lowest rates would be full all the time.
In a vacuum, rates mean little, but no hotel should operate in a vacuum. Low rates, when compared to your competition set, can also devalue your hotel. “You get what you pay for” is still alive and well; when a product is not known, its price will define its quality.
When sales demand is low, look to value-added marketing and position your hotel properly within your marketplace. If your hotel deserves to be in the number one position because of its location, facilities and amenities, make sure it is positioned that way.
Do Your Homework – Stop Working in a Bubble
For a modest amount of money, you can start receiving market share reports from Smith Travel Research. They are not available everywhere, but, if they‘re available in your area, they will provide a tremendous amount of insight into your local market status. It is far better than guessing or “counting cars” in your competition’s parking lot; that brings me back to the seventies, it didn’t work then either.
STR reports will provide you with accurate information comparing your occupancy, ADR, and RevPar with your stated competition. The fairness and accuracy of STR reports will assist you to place your hotel in its proper position among your competitors.
Become Well Informed
I’m constantly surprised to hear from hoteliers who have so many excuses why they don’t stay current by reading any of the many online eNewsletters. Lack of time is often the most used excuse; I guess these are the same people who don’t have time to return phone calls too.
Today, go online and subscribe to at least three free online newsletters. Keep your knowledge base current with the happenings in our industry. You can learn a great deal from the successes and failures of others; the only thing you truly own is what you know.
Use The Power of the Internet
Take a serious look at your hotel’s website; next year, more than 70% of your business will be directly or indirectly influenced by the Internet. Before you look to have another website designed, get an analysis of your current site. A good analysis will give you a clue to what is working or isn’t working very well on your site.
You can then use this analysis to guide the new designer to create a functional website. Remember, search engine optimization must be incorporated into the design of your site; it’s not something that is applied after your site is completed.
It’s an absolute fallacy to think that SEO can be applied to a poorly designed website to increase traffic. If someone suggests that to you, run, don’t walk away quickly. SEO must be incorporated into the design of the site itself.
The number of hotels getting ripped-off by techie-talking web designers is astounding. I read an article the other day, written by a website design company that thinks that a conversion rate of only 2% of site visitors who actually make a reservation, is a good average. Less than 5% indicates that something is wrong.
As I have said many times, web design is not rocket science. Your site needs to be designed to be easily found through organic search and, once found, it needs to have the necessary elements of location, facilities, attractions, and value to persuade its visitors to make a reservation.
Make a Commitment to Revenue Management
Today is the day to finally make a commitment to learn and use revenue management to increase occupancy and average rate. Sure, it takes a little effort to do the necessary research, but the rewards are great.
Revenue management relies upon your ability to look into the near and distant future to view occupancy demand and making rate decisions. Measuring reservation booking pace and being aware of occupancy generators in your area creates smart decisions.
The economy is slowly improving; solidifying your position in the marketplace now will heap great rewards in the future.
SEGMENTING THE MARKETS
Traditionally, hotels segment their guests based on the purpose of their stay.
- Business or corporate
- Tour and travel
This is not a finite list and many hotels have many more categories! Sub-segments
can be built using classifications such as age. The traditional segments of
Business and Leisure can be summarized as follows:
Leisure Travellers Business Travellers
Advance bookings short booking lead times
Quality required varies Tend to require high quality
Destination flexible Destination predetermined
Highly price sensitive relatively less price sensitive
Whereas yield management involves specific actions to generate yield through perishable inventory management, Revenue Management encompasses a wide range of opportunities to increase revenue. A company can utilize these different categories like a series of levers in the sense that all are usually available, but only one or two may drive revenue in a given situation. The primary levers are:
This category of Revenue Management involves redefining pricing strategy and developing disciplined pricing tactics. The key objective of a pricing strategy is anticipating the value created for customers and then setting specific prices to capture that value. A company may decide to price against their competitors or even their own products, but the most value comes from pricing strategies that closely follow market conditions and demand, especially at a segment level. Once a pricing strategy dictates what a company wants to do, pricing tactics determine how a company actually captures the value. Tactics involve creating pricing tools that change dynamically, in order to react to changes and continually capture value and gain revenue. Price Optimization, for example, involves constantly optimizing multiple variables such as price sensitivity, price ratios, and inventory to maximize revenues. A successful pricing strategy, supported by analytically-based pricing tactics, can drastically improve a firm’s profitability.
When focused on controlling inventory, Revenue Management is mainly concerned with how best to price or allocate capacity. First, a company can discount products in order to increase volume. By lowering prices on products, a company can overcome weak demand and gain market share, which ultimately increases revenue so long as each product sells for more than its marginal cost. On the other hand, in situations where demand is strong for a product but the threat of cancellations looms (e.g. hotel rooms or airline seats), firms often overbook in order to maximize revenue from full capacity. Overbooking’s focus is increasing the total volume of sales in the presence of cancellations rather than optimizing customer mix.
Price promotion allow companies to sell higher volumes by temporarily decreasing the price of their products. Revenue Management techniques measure customer responsiveness to promotions in order to strike a balance between volume growth and profitability. An effective promotion helps maximize revenue when there is uncertainty about the distribution of customer willingness to pay. When a company’s products are sold in the form of long-term commitments, such as internet or telephone service, promotions help attract customers who will then commit to contracts and produce revenue over a long time horizon. When this occurs, companies must also strategize their promotion roll-off policies; they must decide when to begin increasing the contract fees and by what magnitude to raise the fees in order to avoid losing customers. Revenue Management optimization proves useful in balancing promotion roll-off variables in order to maximize revenue while minimizing churn.
Revenue Management through channels involves strategically driving revenue through different distribution channels. Different channels may represent customers with different price sensitivities. For example, customers who shop online are usually more price sensitive than customers who shop in a physical store. Different channels often have different costs and margins associated with those channels. When faced with multiple channels to retailers and distributors, Revenue Management techniques can calculate appropriate levels of discounts for companies to offer distributors through opaque channels to push more products without losing integrity with respect to public perception of quality.