Focus on Profit - Knowledge Center - HSMAI
Hospitality Sales and Marketing Association International
Hospitality Sales and Marketing Association International
Hospitality Sales and Marketing Association International
Focus on Profit

Posted: November 23, 2010

By Chris Crenshaw, CRME, Vice President, Market Intelligence, Loews Hotels, and member of the HSMAI Revenue Management Advisory Board

From HSMAI's Revenue Management Advisory Board -- As the hotel industry faces a difficult recovery, revenue management must now reevaluate our measures of success, and broaden our analytics to go beyond top line revenue. Phrases like Flow Through, Over Leveraged, Debt Service, ProfitPAR, and EBITDA, once considered "finance speak," matter to revenue management today.

Go With the Flow
Revenue management's measure of success is no longer market share, or Revenue Per Available Room. Revenue managers must understand how a dollar flows, and how to identify the highest profit guests. This is not as simple as looking at rooms revenue as we have in the past. Revenue managers now must take into account a variety of factors including length of stay vs. rate (discount prices for long LOS?), total spend on the guest folio and off, channel, booking window, long-term value, and repeat potential...just to name a few.

Not all dollars that we see in the STAR Report flow to the bottom line equally. A $200 room sold through a travel agent will require a $20.00 commission payment, while a $190 room sold through a hotel's proprietary website will require a $2.00 booking fee. The $190 room will provide $8.00 more profit than the $200 room. Similarly, profit is impacted by rooms sales differently. Two rooms sold at $300 will yield more rooms profit than three sold at $200. However, the three $200 rooms may be a more profitable scenario in total profit depending on the cost to obtain the reservations, the spend that each room has on property and the propensity of these guests rebooking for another stay in the future.

Channel Surfing
STR forecasts the lodging industry to recover at a rate of 4.3% in 2010. This rate of recovery in RevPAR is being driven by a 4.4% increase in occupancy levels and a loss of 0.1% in average daily rate. This ADR will be, by the end of 2010, equal to where the industry was in 2006. While ADR has been "reset" to a new level, costs continue to grow. Wages, cost of materials, utilities and other expenses are not going down. Hotels have done a very good job reacting to the new normal with increased efficiency and cost savings, but most have reached a point of maximum efficiency or cannot cut more expenses. With slow ADR growth, the ability to grow profit lies largely in the hands of those making strategic decisions about what it sold, and through what channel it is distributed.

Over the past 10 years or so, multiple booking channels have opened, all with different fee or net-rate structures. Understanding what the customer is actually spending, not the price point that the hotel receives, becomes key. Taking that knowledge to the next level in setting strategy will allow the hotel's strategy team to impact profit.

For example, a guest may spend $200 for a room at your hotel. They have many options to book this room. Directly to your website at a cost of $2.00 for a booking fee, direct to your call center for anywhere from $6.00 to $10.00, through a travel agent for a 10% commission ($20), or through an Online Travel Agency (OTA) at a net rate of potentially more than 20%, or $40 plus. Obviously, the most desirable scenario is to push guests to book through your website at a 1% cost of sale (excluding web design, maintenance, etc.). So do we close the call center, pull the plug on the GDS connection, and cancel contracts with the OTAs and other strategic partnerships? Of course not. But being able to identify where we have the ability to drive customers to a profitable channel must be a focus.

Follow the Crowd
One of the largest and most obvious areas of profit impact is ancillary spend. Most revenue management systems (RMS) take some sort of ancillary spend into account, and it is the basis for group displacement when deciding to take group business over transient business.

When was the last time that you analyzed the profit of group spend? Has your hotel been discounting group menus, or developing new menus at lower price points? Has the spend of your group segments changed? Have you updated these values in your RMS, or changed your profit calculations for reviewing group business? This is a critical part of the evaluation process, and needs to be completed many times in the year to ensure that your RMS and your business evaluations have legitimate data. For example, there is a big difference between selling a $50 per person menu at 20% off, and selling a menu designed at a $40 price point.

Discounting food and beverage menus is a 100% discount to profit. For example, if you have a $50 per person menu that includes profit of 30%, or $15, then discounting your menu by 20%, or $10 yields only $5 of profit. A better solution would be to design a $40 menu that maintains the 30% profit ($12). Discount incentives, credits to the master account, and other such discounts affect your business at a 100% level on the profit line and should be avoided if at all possible.

Not only should you track what groups and individuals spend either on the group master account, or on the individual folios, but there should be effort put into determining off folio spending. That is money spent on property where the guests are paying directly, either by cash or credit card at your outlets. This happens frequently at bars and restaurants, and in resorts at pool, beach, spa and golf outlets.

Though it is not possible to determine the exact off folio spend, it is possible to trend out possible spend levels. Analyze outlet sales when there are clear market segment mixes in your hotel. To do this, compare outlet revenues over periods when you have a large occupancy percentage of association groups versus time when you have large occupancy percentages of city-wide business. Does your cover count change over these times? Is there a trend that can be used to further define the profitability of a segment of business?

Something's Better Than Nothing
There are other intangible costs that are difficult to put hard numbers to such as marketing or acquisition dollars. This is the cost of obtaining a new customer, someone who will try your hotel for the first time and will then allow you to create a repeat customer. You are not the only company spending marketing dollars to reach new customers. There are many channels that provide this type of value.

Many hotel industry partners spend multiple millions of dollars on marketing. Everyone recognizes the Expedia Yellow Suitcase, and the Travelocity Gnome. These channels have the ability to put your hotel in front of guests who either do not know who you are, or do not have you top of mind for a stay. The value of this trial guest is very high. It is a value that we rarely take time to define, yet adds to our bottom line -- it is business that does not incur costs in our marketing cost centers.

There is another question you need to ask yourself: Is anything better than $0? An empty room is of no value to your hotel. Opaque sites such as Priceline, Hotwire and others allow you to sell a room to a guest without the guest knowing from whom they are buying until after the completion of the purchase. Identifying and using incremental business channels during need times can be a very successful strategy. But there are two things you must be aware of. The first is that the hotel must be truly opaque. It must not be possible for the customer to know what they are buying before the purchase is made. It pays to spend time on these sites to ensure that you can not determine if it is your hotel being sold. You also want to ensure that you are not winning 100% of the business in these channels -- travel blogs and posting boards help travelers pull back the curtains on some opaque sites and identify the hotel being offered prior to purchase.

Practice Makes Perfect
How are these strategies implemented into your revenue team's routine? Simply integrating the reporting of results and analysis into your strategy meeting is a good start. By bringing the effect of channel or segment to the attention of the group, it will become a focus. Another strategy, in an ideal scenario, is to have the revenue team members' bonus structures tied to profit.

By applying these tactics and thought processes to your daily, weekly, monthly and long term activities, your total hotel will come out ahead, and the financial standing of the hotel will be stronger.

Revenue management is a combination of inventory management, distribution management, strategic segmentation, pricing, business evaluation, profit analysis and much more. Though the discipline is not solely responsible for the profit, it does have a significant impact.

About the Author
Christopher Crenshaw is the Vice President of Marketing Intelligence for Loews Hotels. He oversees all reporting and analytics for the Sales and Marketing division, based out of the new corporate offices in Nashville, Tennessee. Crenshaw is also responsible for providing support in process and training of tools and systems to each of the company's 19 hotels and resorts. He brings more than fourteen years of revenue related hospitality experience.

About the HSMAI Revenue Management Advisory Board
The Revenue Management Advisory Board is responsible for providing leadership for HSMAI's Revenue Management Special Interest Group (SIG). The SIG is advancing the revenue management discipline by being its leading source for education, best practices exchange, thought leadership and networking for revenue management professionals, other sales and marketing professionals, and senior management in the hospitality industry.

2010 Members include:

  • Chair: Warren Jahn, Ph.D., Revenue Management Training Consultant, InterContinental Hotels Group
  • Vice-Chair: Scott Roby, Vice President, Revenue Management, Tarsadia Hotels
  • Immediate Past Chair: Timothy Coleman, CRME, President, The Coleman Company
  • Christopher Crenshaw, CRME, Director of Marketing Intelligence, Loews Hotels
  • Jack Easdale, Corporate Director of Revenue Management, Gaylord Hotels
  • Jon Eliot, CHA, CRME, Director, Revenue Optimization, Carlson Hotels Worldwide
  • Bernard Ellis, CRME, Managing Director-Americas, IDeaS - A SAS COMPANY
  • Tammy Farley, Principal, The Rainmaker Group
  • Fred Heintz, CRME, Director of Group Strategy, Marriott & Renaissance Hotels of New York City
  • Jay Hubbs, Director-Hotel Supplier Relations, Hotwire
  • Burl Hutchison, CRME, Manager of Revenue Optimization, SynXis
  • Dan Kowalewski, Vice President Revenue Management Services, Wyndham Hotel Group
  • Stowe Shoemaker, Associate Dean of Research, University of Houston/Conrad N. Hilton College
  • Miguel Solis, CHA, CRME, VP Sr. Director Revenue Management, Hospitality Resource Group
  • Trevor Stuart-Hill, CRME, President, Revenue Matters
  • Paul Wood, CRME, CHBA, Corp Director of Revenue Management, Richfield Hospitality

Want to Learn More?
This topic will be addressed as part of the 10-part Revenue Management Webinar Series produced by the HSMAI University, HotelNewsNow, and STR. Begun February 23, 2010, and going through December, each month a webinar will cover various aspects of cutting edge revenue management in today's economy in conjunction with articles written by members of the HSMAI Revenue Management Advisory Board. If you're not able to attend a live program or the date has passed, archives are available.

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