Revenue Strategy: An Emerging Discipline for the Digital Market

 

By Cindy Estis Green

Sustainable profit is the name of the game in a marketplace increasingly dominated by large tech companies. With a renewed focus by brands and management companies on delivering value to hotel owners, there is an urgency for a financial discipline and a proactive approach to integrate revenue planning and execution across channels. Revenue strategy offers an extension to the foundation of revenue management to ride the wave of opportunity afforded by the digital market.

Managing Revenue in the Digital Marketplace

Intermediaries are stealing share while new well-funded third parties that are deeply rooted in the consumer market are entering the travel vertical. Consumers are increasingly savvy when seeking value and convenience. Large companies are consolidating merchandising power – both hotel brands and third parties. On a positive note, demand for hotel stays has improved year over year and guest paid revenue has grown as well. However, costs have grown faster, and hotel profitability cannot keep pace, especially in the event of an economic down cycle.

Experts in revenue management react to incoming demand, and once the expected “end game” for any given day is set, the revenue manager uses tools of inventory control, yield management and pricing to shape the flow of demand and achieve that forecast. 

The strategic view calls for proactive business mix planning and decisions about resources deployed, well beyond reacting to what comes over the transom. The insights gleaned from data improve predictability of everything from quality of demand to which products each customer group is likely to purchase. In order to become more agile in leveraging opportunities, hoteliers require deeper cooperation between historically distinct revenue generation functions. That means breaking down silos between disciplines such as call centers, digital, sales, marketing, branding and loyalty. This degree of change may require a new perspective on well-established processes.

Revenue strategy can be a useful concept to catalyze that change, but it is not simply a new name for revenue management. With an eye on costs and multichannel planning, the goal is to improve profit contribution, a metric that resonates with owners whose investment thesis depends on rising asset values. Increased profit contribution can lead to improved investment in staffing, product improvement and new development, which will ultimately benefit consumers and create a healthier lodging ecosystem. While all channels should be considered when planning a hotel’s optimal business mix, increased dependence on third parties is a triple threat to large brands, small brands and independent hotels alike: 

1.) Brand dilution through commoditization of hotel rooms, 

2.) Diminished relationships with customers 

3.) Increased costs with little control, particularly in down cycles.

New Targets of Opportunity

Widening the lens to look at the full array of demand drivers, their associated costs and establishing a hotel’s optimal business mix will require coordination between the revenue functions around the profit contribution goals of the property. When a revenue manager depends only on yield management and pricing tools, it may deliver incremental gains of 2 percent to 5 percent. With an expanded remit to evaluate all demand drivers and associated costs, revenue strategists are hunting for bigger wins. Besides the pricing dial, the revenue strategist will work on channel mix to reduce overall acquisition costs and with sales, digital or other members of the team to grow specific market segments that show the most promise in a given timeframe. At 15 percent to 25 percent of guest-paid revenue, revenue strategists will add new dimensions to the process when they measure and manage customer acquisition costs in a similar manner to labor costs as well as coordinate the game plan to achieve a hotel’s optimal business mix. 

OTAs and Brand.com

The simple drive to a two-channel shift from OTA to Brand.com is from a bygone era. Instead, a broader evaluation of volume and margins by channel and segment will direct the strategist to tradeoffs that put a premium on recurring revenue streams to hit targeted profit and flowthrough. Although a powerful contributor to profit, Brand.com has its own costs driven by the chokehold of auction models in metasearch, while some OTA commissions may decline as they face intense competition from new entrants like Airbnb, Facebook and others.

It will take vigilance to frequently assess the combinations of all channels, by segment, day of week or season, that ultimately yield the most contribution to profit on a daily basis. Performance evaluation on top-line revenue can obscure hefty acquisition costs and blur the ability to accurately choose the best options for improving a hotel’s revenue flowthrough. The goal is for better informed decisions, but the strategist recognizes that market conditions may occasionally modify a pure profit focus (e.g., renovations underway, existing base of business can’t be moved, or unusual circumstances call for a different approach).

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Some Organizational and Technology Disconnects

The well-developed expertise of revenue management is essential, but it is one leg of a stool in a complex and costly marketplace. After all, the rates may be set correctly, but the hotel can still underperform relative to profit contribution due to a suboptimal mix. 

Although comfortable with pricing issues, few revenue managers have experience with or authority over the rest of the sales and marketing mix. In many brands, the regional teams assigned for sales, marketing and revenue management may even support different clusters of hotels, challenging their ability to integrate between key disciplines. Further, while technology can trigger hourly pricing updates, tactical execution tools for targeted, timely and well-coordinated cross-channel merchandising and promotion are not yet in widespread use.

From the finance team’s perspective, how often do they complain about the high cost of third parties and then cut bonus checks to staffers who produce the most revenue from these same accounts? 

The days of depending on a revenue manager to figure it all out are giving way to a revenue strategy team (on property or above property), but the buck still stops at local management who can assure resources are closely aligned with demand and optimized for the profit contribution to their owners. Revenue strategists are the orchestra leaders that assess the opportunities within the context of profit contribution and enable efficient deployment by the appropriate specialist, whether it is sales, digital, loyalty or others. 

Summary

The strong demand of recent years can mask deficiencies in process and execution, and one notable symptom that can be linked directly to this phenomenon is underperformance in hotel rate growth in spite of a rising tide since the last recession. The industry can’t sustain fragmented execution and high customer acquisition costs and remain healthy. Beyond the cost factor, some third-party channels undermine the value of the brand by diverting the consumer away from the hotel as they shop, buy and even when they interact with the hotel on-site. 

Signs of change are on the horizon as evidenced by the availability of new merchandising technologies, an increased appetite to tap data for insights well beyond pricing and a new sense of urgency to break down silos and focus on efficient customer acquisition. Revenue strategy is emerging as a key discipline to optimize the flowthrough to profit and steer the industry to better outcomes for two key constituents: consumers and hotel owners.

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The State of the U.S. Groups and Meetings Market

The U.S. meetings industry generates approximately $30B in hotel room revenue with another $110B estimated in ancillary spend including catered food and beverage, AV, ground transportation and other services

Yet, surprisingly, a relatively small number of hotels can take large groups. In fact, based on analysis of the Kalibri Labs census database, in looking at the U.S. in total, just over 10% of hotels have over 160 rooms and just over 7% have 8,000 sq. ft. of meeting space or more.

While all hotel segments participate in the groups and meetings business, smaller meetings differ in terms of complexity related to meeting space and ancillary services, the way they are booked and serviced may vary considerably from the larger meetings.  Despite the differences, the process to book and execute meetings business has been characterized by many parties involved to be cumbersome and inefficient. The costs associated with this execution have risen dramatically over the last five years with a variety of third parties providing services at various points along the process.  

Although there are a large number of parties involved in the groups and meetings booking process, it hasn’t fundamentally changed in 40 years. It is cumbersome for the meeting planner as well as the hotel or supplier serving the guests. A vendor ecosystem has grown around this static process with various service providers assisting along the way, charging fees and shifting the value around from the traditional legacy model. In the legacy model the host organization paid the venue for all aspects of the meeting whereas now the value of the meeting is now diffused across the many providers of services in the chain and the overall cost to conduct a meeting has risen dramatically.  There are three primary players in the process: (1) the host who decides they want to have a meeting, (2) the meeting planner who runs the process of executing on that meeting and (3) the supplier(s) who provides services in the execution of the meeting such as hotels, CVBs, AV companies, florists and ground operators. Added to the primary players are the secondary ones who have entered to support one of the primary three. It is this secondary market that has been the main source of incremental costs.

While automation has resulted in increased efficiency in many other spaces, it has not substantially improved the ease of groups and meetings booking despite the introduction of technology over the last 5-10 years. There are certainly areas that have been made easier but there are still many aspects that are tedious and cumbersome and because of the many players involved, it may be more difficult to leverage technology across all parties. The meeting host, meeting planner and hotel or event supplier all find the process complicated and labor intensive with many pain points. Ultimately, as the costs have risen within this fragmented ecosystem, so too have questions about ways to streamline the process.

Since the 2008-09 recession, the groups & meetings business has rebounded and there have been many online platforms that have emerged to support this business, as well as offline consultants that assist corporations and associations in their sourcing. In the online platforms, much of the focus has been on identifying and fielding venue options and the offline support has been largely in sourcing and contracting the events. To enable bookings, the platforms would require access to inventory for both guest rooms and function space at a minimum and ideally, they would also offer room rates and catering options to allow some meetings to be contracted entirely online. The complexity involved in this has been the primary reason for delays in the development and adoption of this technology. Traditionally, control of hotel meeting space has been decentralized at the property level and building connectivity to it for external users to gain direct access has only been initiated in the last few years.

While much of the automation for groups and meetings has facilitated parts of the process for meeting planners, it has come at the expense of suppliers and the fragmentation still poses problems for all. For instance, companies provide tools for meeting planners to review venue options by automating the distribution of requests for proposal (RFPs), while this may ease the meeting planner’s job, it can cause hotels to incur high labor costs fielding large volumes of requests with a varied range of lead quality and declining conversion rates. To automate more of the process, some companies like Cvent have indicated an interest in supplementing their current functionality to include completed bookings, and Expedia has tested the use of their platform for individual bookings for small groups that don’t involve meeting space.  There are also many new players like Groupize, BookingTek and HotelPlanner that have gone down the path of offering either white label solutions for a hotel’s branded website to enable online bookings or for independents to make their hotels available in a larger multi-brand platform. The traction in multi-brand booking capability is still limited, likely due to the need for broader access to meeting space that can be offered through a user-friendly interface for consumers.

While some of the concerns in this ecosystem involve control over the meeting space inventory, there is also a high level of concern around the cost of sales brought on by additional vendors.

Many hotels pay traditional offline third-party intermediaries working on behalf of meeting hosts for an estimated 40-50% of their meeting business. In the 1980s and 1990s, corporations and associations had their own internal meeting planners and worked directly with hotels to execute events. Over the last ten years, owing to an accelerated transition to third party meeting planners, many of these associations and corporations were able to reduce their internal meeting planning budgets to a minimal spending level and remove all or most of their head count in the area as the third-party planners took on this task and asked the hotels to pay them for it. In fact, third-party planners share some of the fees they earn with their association or corporate clients to reduce the cost of the meeting. Because of the shift to third-party meeting planners, it can create distance between the meeting hosts and the venue which is in sharp contrast to the direct relationship that was prevalent for many years between the end user corporate or association account and the hotel teams.

This disruption of a previously direct relationship may diminish a hotel’s ability to understand an account’s requirements in order to provide better and more personalized services. There are also costs associated with the third-party economic model that are increasing and are now borne by the hotel, but used to be absorbed by the meeting host organizations.

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With so many parties involved at various stages in the process from sourcing to execution, each asks for a cut of the revenue or added transaction fees. It is estimated that, at a minimum, over 40% of group business is intermediated at the point of sourcing and some at many points before execution. The level of cost rises with more intermediaries participating and with more meetings of different types and sizes subject to commission and other fees. Across the U.S. hotel industry, Kalibri Labs estimates these costs in 2017 will be approximately $3.4B to $4B and as more third parties emerge and more business is subject to intermediation, this cost could potentially double by 2022.

Based on 2017 group rooms revenue of $30B industry-wide, the cost of intermediary commissions alone was estimated at $1.3B. This is based on 43% of group rooms revenue being intermediated at a commission rate of 10%. This does not include all other aspects of the ecosystem that may involve eChannel advertising, group block reservation processing and other technology related costs increasing the total to closer to $3.4-$4B. As group booking intermediation evolves further into a combination of third-party planners and third-party technology the rate of intermediation will grow. In 2022, with an estimated $40B in group room revenue, expectations of two-third intermediation and costs closer to 15-20% of revenue, the potential industry cost could reach closer to $8-10B.

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Implications of the Rising Cost of Customer Acquisition

On a superficial level, the implications of the rising costs of customer acquisition are easily identified. Increased costs lead to a decline in profitability, which results in a loss of asset value. However, like most things, it is never quite that simple.

One of the first areas to consider in this type of analysis is the economic cycle in which the industry is operating. In a strong economy, like the one the United States has been experiencing over the last several years, many revenue strategy sins can be covered up by occupancies that are improving and average room rates that are increasing. Combine these two key performance indicators and all seems well; however, the truth lies beneath the surface. In this kind of environment, any increased costs incurred to acquire the customer can be obscured by the increased level of room revenue. For example, if your hotel-collected RevPAR increased by 5 percent, that may appear to be excellent on the top line, but what might not be so obvious is the additional 1 percent in acquisition costs that are slowly eroding the bottom line.

Additionally, the analysis is made more complex by dynamically changing quantities of rooms booked through the OTA net or merchant models, where vendors keep their commission prior to sending funds to the property, or through wholesalers. In those cases, any incremental customer acquisition costs would be absent from the property P&L.

In contrast, when the costs to acquire the customer are increasing in a declining or recessionary economic environment—for instance, the most recent in 2008 and 2009—there is a much more obvious and dramatic impact on profitability and net asset value. Using the inverse example, if your hotel-collected RevPAR declined 5 percent while the cost of customer acquisition simultaneously increased by 1 percent, the effect on the property’s profit would be more substantial, as the change in both the revenue and cost metrics would be negative and declining.

Since bad behavior in an upcycle is not as apparent, it is easy to fall into bad habits, and one must react quickly once the cycle tide turns for the worse, making it critical to constantly and accurately track customer acquisition costs for your property as well as the industry at large. The U.S. lodging industry’s past behavior in times of economic stress has been to embrace high-cost booking channels; yet taking care to understand and manage these costs even under favorable economic conditions will result in a much better financial outcome when the inevitable economic downturn occurs.

Tracking your net revenue performance based on the contribution to operating profit and expenses (COPE) can be calculated as a percentage of guest-paid room revenue. By tracking both the absolute percentage and its change from a prior time period, one will get a much more transparent indicator of customer acquisition efficiency and the direction in which it is trending.

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The first chart presents the COPE percentage for all U.S. hotels and each of the seven major channels/source-of-business categories for July 2017 YTD. It is evident that there are certain booking channels that are much more profitable to hotels than others. Not surprisingly, brand.com and voice channels, where guests book directly with the hotel, are significantly more cost effective compared to the indirect channels like OTAs and global distribution systems (GDS). The magnitude of the difference can be quite stark, ranging from a revenue capture of around 95 percent for direct channels and about 80 percent for the indirect channels. While not shown on the chart, the COPE percent declined in July year-over-year for five of the seven source-of-business categories and for the industry as a whole.

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Because industry-wide numbers aggregate all property types, another way to look at the acquisition cost efficiency of the industry is to segment performance by property guest-paid ADR. In the second chart, we present the COPE percent by guest-paid room rate. As shown, generally speaking, the lower priced the property, the higher the COPE percent. While this may seem slightly counterintuitive, lower-rated properties tend to be smaller and have lower occupancies. Guests booking those properties tend to have a much shorter booking window, if they pre-book at all, meaning the hotels have a strong reliance on the direct booking channels due to the “walk-in” or “front desk phone reservation” nature of their business.

Understanding and monitoring customer acquisition costs, both at a hotel and industry level, is the first step in helping maximize profitability in strong economic times and better preparing for an economic downturn.

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Accounting for the Gap Between Guest-Paid, Hotel-Collected Revenue and COPE Revenue

Hoteliers have traditionally evaluated performance based on a variety of metrics across the industry, the common denominator being hotel-collected revenue, most similar to P&L revenue. Hotel-collected revenue is not only used to calculate RevPAR and competitive index performance, it also forms the key basis for operator and hotel staff incentives. However, this figure does not capture a fully accurate view of a hotel’s performance. Hotel-collected revenue doesn’t account for what the guest actually paid, i.e., the markups associated with merchant-model OTA, opaque, and wholesale business, nor does it account for the transaction costs paid to acquire customers, i.e., channel costs, loyalty points, and retail commissions.

The growth in both guest-paid revenue and net revenue over the last few years relative to the growth of hotel-collected revenue illustrates this idea that the industry isn’t being shown true performance. Kalibri Labs has established metrics to show two forms of net revenue: COPE (contribution to operating profit and expenses) revenue—which excludes direct commissions and other transaction fees—and net revenue, which additionally excludes sales and marketing expenses.

While in previous years Kalibri has observed higher growth in guest-paid revenue as compared to hotel-collected revenue for the hotel industry in the U.S., in 2016, we saw the highest growth compared to the prior year in hotel-collected revenue. This shift from industry growth in guest-paid to hotel-collected is largely predicated on a shift in OTA payment models and thus reported revenue.

To put that seemingly small percentage (0.07 percent) difference between COPE revenue growth and guest-paid revenue growth into perspective, each 0.1 percent of growth is worth $142.5 million to the hotel industry. If hotels grew COPE revenue at the same rate as guest-paid revenue, they would have retained almost $100 million in additional revenue. That additional COPE revenue is net of transaction-related acquisition costs and is a direct benefit to the bottom line.

Guest-paid revenue accounts for the markup that guests pay when booking net-rated business through a wholesaler, opaque, or a merchant-model OTA. There has been a recurring trend over the past several years of growth in the OTA source in general, but also within it, growth in retail-model business. This reflects the growth in both Booking.com as well as Expedia’s Hotel-Collect or Traveler Preference program. The shift from net-rated or merchant-model OTA business to retail business somewhat artificially inflates traditional ADR growth, because the reported ADR is increasing as relatively fewer net rate bookings are reported, and this is not the same thing as seeing actual hotel rate growth. This belies the true growth in what guests are actually paying to stay at hotels.

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Aside from masking true rate growth, hotel-collected revenue does not account for the costs inherent in acquiring guest bookings. COPE revenue nets out direct customer acquisition costs, including channels costs, loyalty points, and all forms of commissions paid to third parties. What becomes clear in looking at the growth in COPE revenue relative to that of guest-paid and hotel-collected is that the channel shift seen in the industry over the last several years has led to slower growth in revenue flowing through to the bottom line.

An increase in room night share through more costly channels has contributed to the growth gap between hotel-collected revenue and COPE revenue. Hotels are retaining less of the revenue paid by guests than in years past, which is impacting their bottom lines at a time where they’re are seeing record room rates and high occupancies.

Measuring industry and individual hotel performance based on guest-paid and COPE revenue gives a more accurate picture of what guests are willing to pay, as well as what hotels are retaining after paying out customer acquisition costs. The growth in hotel-collected revenue paints a potentially more positive picture than is indicated by the growth in both guest-paid and COPE revenue. The hotel industry remains in a positive business environment with strong revenue growth, but channel shift and increased costs combined with softening rate growth provide cause for attention.

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Striving for optimal: How to maximize revenue performance

By: Ankush Khullar

Hotels traditionally benchmark their performance against the RevPAR of their comp set. Using this method, they are incentivized to strive for an average rather than “optimal” performance. By focusing on top-line revenue, hotels are not maximizing net revenue, or the revenue they keep after deducting costs for guest acquisition.

One way to remedy these issues is to utilize a custom “optimal” target by determining the mix of business the property can realistically achieve in order to maximize their net revenue performance.

Based on actualized statistics, consider an upper upscale hotel located near San Jose, California (the “subject hotel”). The hotel’s comp set consists of the subject hotel and four nearby properties. In 2016, the subject hotel achieved a RevPAR of US$123.56, while its comp set achieved a RevPAR of US$146.28, resulting in a RGI (revenue generation index) of 84.5 for the subject hotel. In order to achieve a RGI of 100, the subject hotel would need to earn an additional US$1.7 million in top-line revenue. After accounting for the subject hotel’s sales, marketing and acquisition costs during 2016, using this method, the subject hotel would target to earn an additional US$1.6 million in net revenue. However, how it would earn the additional revenue is not clear.

Another approach

Now consider that instead of benchmarking against the average performance of its local competitors, the subject hotel benchmarks against a net revenue target based on the best, or optimal, business mix it can achieve with the demand in its market. The optimal business mix (OBM) is based on a combination of factors such as the historical business mix of the subject hotel, the historical business mix of its competitors and the average rates in the market during 2016. Using this method, the subject hotel would target to earn an additional US$4.3 million in net revenue. The OBM method would not only set a target for total revenue but also provide guidance for how to achieve that revenue by increasing or decreasing share of the demand through specific distribution channels.

Based on these results, a hotel can often sell itself short when benchmarking against the average performance of its competitors. In this case, the initial target set is approximately US$2.7 million less than it could be if OBM is utilized as the target as part of the benchmarking process. Although it may seem unrealistic for the subject hotel to earn an additional US$4.3 million in net revenue, the inputs to arrive at the OBM are based on actual rates and demand in its market, by business segment and the acquisition costs specific to the subject hotel. Therefore, although theoretical, the results are based entirely on actualized characteristics of the subject hotel’s market.

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HSMAI Section: When Should a Hotel Take Low Profit Margin Business?


HSMAI Section: When Should a Hotel Take Low Profit Margin Business?

By Cindy Estis Green
 

There is a lot of discussion about the wide ranges of cost between the many sources of business available to most hotels. The reality still exists that a hotel has to fill with many types of business. 

A marketer may be inclined to assume it is best to choose channels in order of cost, but there are other variables to consider.

It is rare that a hotel can sell all room demand volume at top price. Hotels have to layer in their business to try to find the highest-rated demand at any given time. Hotel management needs to identify all the demand available in a market and figure out how much they want from each demand driver and how much they can afford to acquire the share they want. The hotel needs to consider all of its room and rate types and match them with the types of business available at any given time.

There will always be lean times when it is only possible to fill a hotel with business that may be lower profit than a hotel would prefer to take. Therefore, in spite of higher acquisition costs, if the room is being sold at a profit, even a small profit, and there is no business flowing through higher value channels, then it may be worth using the higher cost distribution channel. If there is no profit from a particular type of business, then in most cases, this practice may not be worthwhile. It is management’s role to decide how many rooms should be available through each channel based on daily demand forecasting for each part of the week and each season of the year. If a hotel is obliged to sell through marginal channels during high demand times, in order to gain access to those channels during need periods, a cost/benefit analysis would be in order to assure management that there is a net benefit overall after analyzing the composite of all demand periods.

1. Create a Base for Compression

If low-margin room nights can be laid in early enough to add to a base that creates a higher level of compression in the market in which the hotel is operating, then it can serve as a springboard to yield more bookings from higher rated customers during the peak booking lead time. For example, if there is a way to stimulate low rate paying customers to book in the 21-40 day lead time window, then it can prove valuable to a hotel by enabling higher rates for business booked within two weeks of the arrival date. Many hotels can make the mistake of using low-profit channels without regard for lead time and end up filling in with low rates closer to arrival; this contributes to the impression by consumers in the marketplace that you can get a better rate if you wait until the last minute. This behavior has been reinforced by media messaging where waiting for a lower last-minute rate is the explicit theme.

Traditionally, hotels would be best served by booking their lower rated business further out so they can push rates up closer to arrival when demand is likely to be highest. If a hotel avoids taking lower rated business earlier, and then offers last-minute low rates in the last week or two: (1) the percentage of higher rated business will decline overall and (2) travelers learn that waiting can guarantee lower rates so the consumer is less inclined to book early even when lower rates are available.

2. Bring Business You Can’t Bring Yourselfs

Assuming the rates yield a contribution to profit, low-margin business is worthwhile if the hotel benefits from a valuable market it is not capable of tapping itself, either due to technical issues or access. If it diverts business that would come otherwise through a hotel’s own website or call center, then it may not be worth incurring a higher cost. However, as an example, for those hotels in a market that is attractive to international feeder markets, or to fly-in markets in which air/hotel packaging is a major source of demand, then third-party intermediaries specializing in packaging can be valuable channels of choice, provided there is no feasible alternative to getting that business through a higher margin channel.

3. When Ancillary Spend is High

For hotels with strong potential for ancillary spending beyond the room rate (i.e., revenue centers such as parking, premium internet services, golf), and that ancillary spend carries a high profit margin, the full benefit of that booking should be considered when evaluating the business. Even if the contribution to profit from the room rate is small, if the ancillary spend yields a substantial profit contribution, then low-margin business can be an attractive option for a hotel. However, it should be compared to alternatives to determine if it is still more beneficial than other demand streams available in the same time period.

4. Hit the Threshold

Some hotel brands set threshold occupancy levels that trip a premium in reimbursement to hotels for loyalty point redemption. When a hotel is near that threshold (e.g., 95 percent occupancy), it chooses to top off and hit that mark by taking the lower rated and marginally profitable business, often through the OTA channel, in order to qualify for the much higher reimbursement from the brand loyalty program. Feeling like a game of “whack-a-mole,” where a wide range of demand may pop up in a few channels given a busy period in a particular market, this short-term quick fill may sometimes be a diversion of bookings that would have come through brand.com. Although not ideal, being a quick fix and a reliable way to siphon off any last-minute demand coming into a market by the hotel that wants to hit the threshold, it works.

5. Fill a Hole

When a large group cancels or a citywide event does not fill a hotel as expected, the mass marketing benefit of a third-party intermediary can be highly effective at plugging those holes for a given hotel, especially when they are unexpected and/or offer little lead time to launch other marketing initiatives to a large audience. The third-party sites are adept at share shifting and one needy hotel may turn on the spigot that will direct much of the demand for a comp set to it during these need periods.

6. Cover Cash Flow

If a hotel is in a desperate situation in which it can’t reach its threshold of daily operating expenses, then lower margin business can still serve as “fast cash” to cover cash flow needs. This is not often a sustainable situation, but it is a method that a hotel can use when no other option exists, either because it does not have the internal skills to stimulate other demand sources, or because the market is so economically depressed that there is no other option to shift the limited existing demand. However, it is often a case where one hotel in a comp set gains volume, but due to limited demand, all of them rarely do. The tendency is for the hotel taking the lead in the market to lower rates, followed by the others in the comp set who feel they have to drop rates to avoid loss of market share. In the worst case, when all hotels have lowered rates, the only method to gain the limited demand in the comp set requires continual rate reductions and all hotels have to operate at lower margins; some call this a “race to the bottom.” 

Over time, without adequate business that yields a positive contribution to profit, the owner is likely to have a shortfall precluding the ability to meet debt service, tax obligations, or to have any funds to reinvest. A disproportionate share of low margin business can cause excessive wear and tear on the building and in short order, in a downward spiral, the hotel will not be able to justify high enough rates to deliver a profit even when the economy improves. This situation requires careful consideration by management and tight controls so that as soon as more profitable channels are flowing, the hotel can widen the range of channels from which it fills the hotel. 

Low-profit Business — How Much Should a Hotel Take?

But how much of the mix should the low-profit business be? The hotel has to be cautious about volumes so it does not displace full-rated business by selling too large a base at low rates months before arrival. There is also a question as to whether a hotel can fill the same rooms with other demand that contributes more to net operating income (NOI). If not, when the hotel has achieved its break-even point with a sufficient volume of rates close to a targeted best available rate (BAR), then some contribution can be better than none. Low-value business may become a detriment to the hotel’s achievement of an optimal business mix if it:

. Becomes too large a percentage of the hotel’s overall channel mix. 

. Diverts financial or staff time and resources from seeking higher profit business. 

. Erodes the overall rate strategy of the hotel.

. Feeds a downward price spiral in the comp set that reduces rates for all and does not bring in enough incremental demand to compensate for the reductions in rate.

. Diverts customers who would otherwise book through higher value channels.

. Is promoted close to arrival and trains consumers to wait until the last minute for the best deal, undermining the potential for high rates that may be booked at the same time.

A more granular way to conduct this analysis could be to examine a hotel’s revenue stream by day of week. A comparison of residual profit at different ratios of low and high-value business could help determine the extent to which the hotel would benefit overall from some percentage of low-rated business used to “top off” during the high occupancy days. The danger is consistently taking too much low-profit business as part of the break-even base and undermining the hotel profit.

If a hotel has no last room availability (LRA) commitments, base allocations or conditions connected to low-value business that would be detrimental to revenue during peak times, accepting a wide range of rates to take advantage of the demand in the market may prove beneficial to optimize revenue. However, if there are restrictions on inventory or if a particular type of business demand is not contributing to profit at all, a cost/benefit analysis would be appropriate to factor in the rate erosion during peak times as a deduction from the benefit gained during periods of weak demand.

Cindy Estis Green is the CEO and co-founder of Kalibri Labs, a Big Data company that benchmarks hotel revenue performance net of customer acquisition costs. She can be reached at cindy@kalibrilabs.com.

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The New Metrics: HIPO scoring system provides a deep dive into hotel data in the U.S

By Mark Lomanno

To say that football season is a big deal in the United States is a bit of an understatement. As the 2017- 2018 season kicks off, fans are overwhelmed with a deluge of data. It seems as if the advanced metrics the teams, players and coaches are graded on is ever-evolving and constantly adding to next-gen technology. In fact, workplaces and groups of friends all across America have fantasy football leagues based entirely off of the statistics generated each weekend. This obsession over numerical output isn’t unique to American football, but perhaps the hotel industry could take a page from the football play book and learn to expand our use of industry metrics. As the landscape has changed around us, we haven’t modernized our metrics to keep pace with the new entrants and to keep track of the new costs they present. Monitoring and reacting to hotel health vitals has become of greater importance in the digital age. We must update the collective rubric we use to evaluate success across the industry.

INTRODUCING NEW METRICS

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The Hotel Industry Performance Overview, or HIPO for short, offers a new scoring system for the hotel industry that sheds light on key performance indicators that were once previously unavailable or difficult to obtain at scale. HIPO is generated monthly from the Kalibri Labs database of more than 26,000 hotels from 100 brands, which represents three million rooms, five billion transactions and the cost of customer acquisition for nearly six years of data. Access to this aggregated data allows the industry to supplement hotel collected revenue and basic occupancy metrics with data and insights that paint a much more granular portrait of trends. Because the data is obtained at the individual transaction level before it is aggregated, the cost of acquisition data can be isolated, which we can then derive Net Revenue (Contribution to Operating Profit and Expense [COPE]) and break it down by its source of business.

TOTAL U.S. RESULTS IN 2016

In 2016, The U.S. Hotel Industry saw direct channels lose room night share year-over year, primarily from the significant decline in direct booking.
— Mark Lomanno

In 2016, the U.S. hotel industry saw direct channels lose room night share (2.8 percent) year-over-year (YOY), however, brand.com bookings were up 4.7 percent. The significant decline in direct channel room night share was primarily due to a decrease in property direct bookings (7.7 percent), and also because of a decline in voice bookings (3.7 percent). Demand has continued to shift to indirect sources, increasing considerably (8.7 percent) YOY. The growth in indirect channel demand share primarily stemmed from increased dependency on OTA bookings (15.4 percent) as well as GDS bookings, which were up over 2015 (2.9 percent). Some additional key takeaways from the 2016 data:
» Group business room night demand share was mostly flat to slightly down, year-over-year, but saw a notable increase in guest-paid ADR in the channel up 3.74 percent from 2015.
» While guest-paid ADR showed sluggish growth throughout all sources of business, the OTA channel was the only one where guest-paid ADR declined.
» Loyalty contribution, or the percentage of room nights generated by loyalty members, continues to be higher for weekday stays (52.6 percent), however weekends (43.3 percent) are closing the gap. This is likely because of the growth that loyalty programs have been experiencing (8.34 percent increase YOY).
» Throughout the industry, booking lead time is up from 2015, but length of stay is down. While this may seem counterintuitive, it is certainly a trend to keep an eye on as we progress through 2017.
» While cost of sales increased YOY, it appeared to be a result of the increase in guest-paid ADR and the resulting commissions of that increase because COPE percent, or the percentage of revenue that hotels retain after paying direct customer acquisition costs, was flat YOY (0.1 percent) indicating the industry is keeping the same percentage of the total room revenue generated.

FURTHER SEGMENTATION IN RESULTS

Booking lead time was up in most of the property size and guest-paid ADR segments with the larger, more expensive properties leading all segments with a booking lead time of 42.82 days for hotels with guest-paid ADR of $300+ and 35.80 for hotels with 501 rooms or more. Loyalty contribution was in the 50-60 percent range for all price points and property sizes, with the exception of the smallest and lowest priced segments. Length of stay was down across most segments, with few very minor exceptions.

Prior to HIPO, all these data points were trapped inside the disparate PMS and CMS of different brands. With the data freed, aggregated and then deconstructed across key segments, the fiscal wellbeing of our industry can finally be analyzed at the detailed level it deserves and that the modern-day, stats-driven fantasy football enthusiast has come to expect.

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Which entity owns the hotel customer?

By: Mark Lomanno

It’s a common philosophical question among hoteliers, and of late, it has floated even more to the forefront of the minds of operators and thought leaders across the industry. With the advent of the internet, breadth of search functionality and purchase options available to hotel guests, it’s a question with many nuanced answers and an area that needs to be concretely addressed. The third-party intermediaries have offered an influx of “options” when it comes to transacting, but one must ask whether these options are truly a gateway or gatekeeper to higher guest satisfaction and increased occupancy.

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Before the technological developments in distribution, efforts in creating customer loyalty were focused on the competition between and among hotel properties and companies. Sales and marketing budgets were dedicated to promoting the unique selling propositions of the property and differentiating Hotel ABC from Hotel XYZ. Hotel marketers would highlight the benefits of Hotel ABC’s physical plant versus that of Hotel XYZ, and why this unique combination of space and service provides a superior overall guest experience.

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OTAs Become Early Choice In High OTA-Mix Markets

By: Mark Mazzocco

Common wisdom in the hotel world has been that hotels utilize lower cost channels to fill hotels first, and then fill occupancy gaps as necessary with higher cost channels. However, recent data shows that in U.S. markets with a significant OTA contribution, guests are looking and booking on OTAs at the same timeframe as they are considering brand.com.

In markets with a high OTA mix like New York, Los Angeles, Orlando and Miami, OTA booking lead times have matched or are longer than brand.com. This strongly suggests that to convert more guests into OTA bookers, OTAs have shifted from being a last stop-booking channel into a primary channel for some consumers.

As can be seen in the charts below, for those markets that have moved past the 20% OTA market mix threshold, OTA business appears to be utilized less as a channel to fill last minute unsold rooms, and more as a direct competitor to brand.com filling hotels at the same time as direct channels.

Booking lead-time in each of those markets is roughly equivalent to or longer for OTAs than for direct channels. As the hotel industry continues to experience growth in occupancy, monitoring this trend will be critical for properties and brands as they try to maximize their revenue through channel optimization.

Each hotel and each market will want to consider the way they can make the direct customer booking experience as compelling as possible as they plan their distribution strategy.

  • The OTA contribution to total transient business in 2016 ranged from 15.3% to 24.7% of total transient business in the top 10 U.S. markets
  • Typically, markets with OTA contribution rates of 20% or greater experienced similar booking lead times between OTA and brand.com.
  • Typically markets with OTA contribution rates of less than 20% experienced 3- to 4-day shorter booking lead times for OTAs compared to brand.com

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Loyalty programs directly influence, increase occupancy

By: Mark Lomanno

As booking options in the lodging landscape continue to evolve and expand, hotels have been forced to adapt to changing market conditions. Consumers are increasingly booking online to the tune of 42% of all hotel reservations in 2016 being booked via online distribution channels. In response, hotel brands and operators have been dedicating significant resources to encourage those consumers to book directly with the hotel. The benefits of having consumers book directly are obvious. First, reservations made directly with the hotel are considerably less expensive than those booked through an indirect channel using a third-party intermediary. Second, direct reservations keep the hotel as the single point of contact with the guest, thereby avoiding any third-party intermediary communication, and often confusion, between the hotel and its guests.

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Over the years, much of the OTA marketing message has been centered around positioning the intermediary channel as the go-to resource to strike an opportune deal and receive discounts on hotel rates. Since early 2016, one of the primary efforts embraced by many lodging companies is to rewrite the script in terms of where the ‘best deals’ and ‘best rates’ are available.  These ‘book direct’ campaigns are a mode of industry education to inform consumers about the hotel distribution environment and to drive home the point that loyalty members are held in high regard by the hotel brand and thus will receive the best rate available in the market. To gain access to the book direct promotion featuring the lowest room rate offered, guests are required to either be a current loyalty member or complete the brief loyalty application while in the reservation booking flow. Thus, in addition to driving more direct bookings through the promotion of the loyalty program, it has also had the positive effect of increasing loyalty program membership. As such, in many ways, brand loyalty programs are effectively the new system contribution, a mechanism by which the hotel company’s brand equity can directly influence and increase the occupancy of their properties.

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The Rise of Indirect Bookings

By Mark Lomanno

Prior to the digital age, hotels viewed their competitive landscape in a very traditional manner. Their primary competition was with other hotels, generally those that were in their same general geographic vicinity and price range. There were, of course, exceptions to this rule, but generally a hotel’s competition was pretty easy to pinpoint. At that time, as a hotelier, your job was to use your sales and marketing expertise—along with a superior guest experience—to entice guests to your property.

Hotels today operate in a totally different world than the one that existed just 20 years ago. For both brands and properties, there are now two levels of competitors, rather than the local competition that existed historically. The first level of competition is for the customer’s attention. In this arena, hotels vie for customer attention against large technology companies like Google, Expedia, and Priceline, which are significantly larger than any company in the hotel industry. The second level of competition is with their traditional competitors—other hotel brands and properties.

The Evolution of the Digital Marketplace and Hotel Lodging

By: Cindy Estis Green

The hotel industry traditionally received reservations through calls, walk-ins and travel agencies. But more recently, at annual growth rates of 10-15%, technology aggregators have grown into a considerable force, with two online travel agencies (OTAs) representing a meaningful share of the domestic hotel business, particularly for leisure travelers.

  Kalibri Labs is a next-generation benchmarking platform that helps hotels improve profit contribution by evaluating and predicting revenue performance net of acquisition costs.

Kalibri Labs is a next-generation benchmarking platform that helps hotels improve profit contribution by evaluating and predicting revenue performance net of acquisition costs.

Meanwhile, in the past year, major hotel brands expanded loyalty offerings for booking direct through their websites. Search engines and mobile apps are the emerging models for travel, and it appears the digital experience may be the differentiator in consumer choice when it comes to hotel bookings in the future.

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HB Exclusive: Loyalty Growth Spikes in Upper-Upscale Properties

NATIONAL REPORT—Loyalty member bookings, as a percentage of total rooms, continued to increase across all chain scales in the second half of 2016, with the most recent year marking the strongest gains in loyalty contribution in over three years. This accelerated growth is likely due to the direct booking campaigns implemented by many of the large brands during the first two quarters of the year. These programs effectively incentivized customers to join loyalty programs and book rooms in greater numbers than either of the previous two years, and were particularly effective at driving new loyalty bookings in upper-upscale chain scale hotels.

 

Upper-upscale chain scale properties moved from having only 50% of its business be tied to loyalty bookings in 2014 to over 55% in 2016, shifting it from third to second among chain scales for loyalty contribution. Upscale chain scale properties continue to draw the heaviest loyalty contribution at 60%, and experienced strong growth in 2016. The midscale and economy chain scales had the smallest increases year over year in loyalty bookings in 2016. As brands approach the one year mark of loyalty rate offerings, it will be interesting to see if loyalty growth continues its recent trend of heavy growth or begins to plateau at a saturation point.

• Loyalty growth was extremely strong for the calendar year 2016 in all chain scales, likely due to loyalty rate offerings.

• Upper-upscale chain scale hotels experienced the strongest growth in 2016.

• Economy and midscale chain scale hotels experienced slower loyalty growth rates.

• 2017 is a year to see if brands approach an upper limit of market saturation for loyalty contribution.

—Source: Kalibri Labs

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Skyrocketing Customer Acquisition Costs Impact Asset Value

By Mark Lommano

Hotel owners are interested in all facets of your property’s operation and efficiency, but perhaps the most important area—the one that is always top of mind—is profitability and the way it affects property value. As the hospitality world becomes more entrenched in the constantly evolving digital age, maintaining and improving profitability has become increasingly challenging. This is especially true as the cost of customer acquisition has continued to rise.

Twenty years ago, the overall cost of customer acquisition for the typical hotel was in the 5 percent to 10 percent range of guest-paid revenue. Today, that number is typically in the 16 percent to 18 percent range, with some properties shelling out as much as 40 percent of guest-paid revenue as acquisition cost before the guest even steps in the door. And, at a minimum, most hotels are paying at least three times what they were paying historically for customer acquisition. In other words, the increased operating expenses caused by consumers increasingly embracing higher-cost digital channels has had a detrimental effect on the bottom line of hotels and, therefore, on asset value.

To help shed some light on just how dramatic the effect on asset values has been, let’s look at the revenue capture performance of U.S. hotels. Revenue capture is the percentage of revenue available after all the costs associated with acquiring the customer are subtracted from the amount the guest paid for the reservation. Those acquisition costs can broadly be put into two buckets. First, the costs and fees directly associated with the transaction, such as commissions, transaction fees, loyalty costs, and net-rate markup. Second are sales and marketing expenses that cannot be assigned directly to a specific transaction, but are expenditures made to acquire the customer regardless of the method of booking. Revenue capture is typically presented as a percentage of guest-paid revenue.

Consider the U.S. lodging industry’s revenue capture figures for the 12 months ending in June of 2016 versus the prior 12 months. During that one year period, revenue capture declined from 84.4 percent to 83.9 percent. In terms of incremental revenue that would drop to the bottom line, this decline represents $729 million that U.S. hotels could have retained had their collective revenue capture percentage remained constant.

If that money was just reflected as profit, asset values would have been increased substantially. Using an 8 percent cap rate, this decline in revenue capture reflects a $9 billion erosion in asset values, with each 0.1 percent decline in revenue capture worth about $1.8B in value.

Another way to highlight the effect of revenue capture on hotel asset value is to look at how U.S. hotels were affected by the decline in this measure over the last year.  Net room revenue represents the revenue that remains after all customer acquisition costs are removed.

As shown in the “Guest-paid vs. Net Revenue” graph on page 32 of LODGING‘s March 2017 issue, guest-paid revenue increased 4.6 percent in 2016 to $146.9 billion. However, net revenue only increased 4 percent to $123.3 billion, meaning that during that period, hotels paid $23.6 billion dollars to acquire the customer, a $1.7 billion increase over the prior year. So, of the additional $6.5 billion guests spent buying hotel rooms in the 12 months ending in June of 2016, over 26 percent of that spend went to simply acquiring customers.

Hotels can work to reverse this trend by optimizing their business mix to drive direct consumers through more cost-effective channels, thereby creating a healthier profit and asset value proposition. Even small shifts in channel optimization can result in huge rewards as an overwhelming percentage of the cost savings drop directly to the bottom line.

The “Revenue Capture” table (which can be found here) shows the actual dollar amount spent over the 12 months ending June 2016 compared to the prior 12 months for the three major components that comprise the total cost of customer acquisition: Non-P&L transaction costs; P&L transaction costs; and sales and marketing. P&L transaction costs are the costs associated with a hotel booking and paid directly by the hotel—think retail commissions, channel costs, or loyalty fees. Non-P&L transaction costs occur when a consumer pays a third party for a hotel room and the hotel receives a portion of that room revenue from the third party, but the portion kept by the wholesaler or OTA is not recognized on the hotel P&L as a commission cost.

There were year-over-year increases in all three customer acquisition categories that were about equally split between transaction costs and sales and marketing. These metrics should be something that every owner, GM, and asset manager should be constantly focused on to best manage revenue and flow through to the bottom line.

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The Financial Impact of Changing Booking Behavior

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By Cindy Estis Green and Matt Carrier

Part 2 of the new special report from Kalibri Labs, Demystifying the Digital Marketplace: Spotlight on the Hospitality Industry, dives deeply into the intricacies of digital distribution and provides insights into what drives business today. The report is based on hotel production data ad associated costs for 25,000 hotels 2014-2016 to examine the patterns of performance by hotel type over time and is sponsored by many industry associations, including HFTP. The following excerpt shares key findings from Part 2 of the report.

The analysis looks at three types of revenue or ADR: guest-paid revenue or ADR includes everything paid to a hotel or third-party to account for merchant (NET) rates; hotel-collected revenue or ADR reflects the revenue the hotel collects and shows on the P&L statement; and COPE revenue or ADR (contribution to operating profit and expense) which is a type of net revenue that reflects the guest-paid revenue after moving all direct acquisition costs such as commissions, transaction fees, loyalty expenses and channel costs. At the U.S. aggregate level the study examines net revenue which additionally removes sales and marketing expense.

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A First Look at Part 2 of Kalibri Labs’ Special Report

A first look at Part 2 of Demystifying the Digital Marketplace: Spotlight on the Hospitality Industry

Interview with Cindy Estis Green

To support the industry in addressing digital distribution evolution, Kalibri Labs has continued to track industry undercurrents to help reveal what hotel brands, owners and operators can do to embrace the changes and position their businesses for competitive success.

“Demystifying the Digital Marketplace,” a report that builds on the landmark 2012 study, is unprecedented in scope and scale. The rich insights and data provide a framework for understanding market realities as well as embracing opportunities to manage costs and optimize profit contribution.

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A look at how consumer behavior affects acquisition costs

by Mark Lomanno, Kalibri Labs

With the advent and acceleration of the digital age, consumers continue to adjust their behavior, approaching even hotel booking differently. Whereas in the past most guests tended to book their room reservations directly with the hotel by calling or going to the property directly, now consumers are much more likely to shop for and buy their rooms online or on a mobile device. For a hotelier, the shifting consumer behavior from one booking channel to another can have a dramatic effect on the property’s bottom line, as each booking channel comes with its own associated costs. Understanding the impact of shifting channels is key to managing a hotel’s cost of customer acquisition.

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Book Direct - The Numbers Tell the Story

The Numbers Tell the Story

It's no secret that here has been a flurry of book direct campaigns launched in recent months. This includes IHG and Accor launching campaigns in Europe in 20015 followed by Hilton, Marriott, Hyatt and IHG in the U.S. in 2016. This trend has raised many questions about how these campaigns will affect hotel performance from an owner and operator standpoint. Additionally, concerns have been raised by third-party OTAs and meta search vendors about how it may affect their own growth targets. 


AGGRESSIVE RESPONSES FROM THE OTAS HAVE INCLUDED: letters to hotels claiming the book direct campaigns are not working, de-ranking and “dimming” of hotel listings and removal of participating hotels from preferred listing status. Both the CEO of Expedia and Booking.com have come out in public statements indicating they are not happy about the book direct cam-paigns and intimating that the large chain brands’ attempts will not succeed. The OTAs retaliatory actions convey a message that they sense a serious threat to their business.

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The Digital Marketplace in Europe: Hotels and Third-Party Intermediaries in the New Age of Travel

The Digital Marketplace in Europe: Hotels and Third-Party Intermediaries in the New Age of Travel

The Digital Marketplace in Europe has changed drastically in the past few years. This white paper explains the pushback on last room availability by many hotel companies. How will hotels balance direct initiatives and those deployed through third parties to retain and acquire customers?

Key Topics:

  • The three pillars of the digital market strategy
  • Managing acquisition costs of the marketplace
  • Investment in customer acquisition and retention