Upselling offers one of the most effective, proven ways to increase a hospitality organization’s income by selling to someone who is already your customer.
NB: This is an article from Roomdex, one of our Expert Partners
With hotel profitability becoming more of a challenge, upselling provides the potential to generate additional revenue from every booking. But not all upsell revenue is the same. When it comes to choosing which upsells to offer, hotels should be strategically clever by prioritizing those with the highest potential for profit while maintaining operational efficiency.
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Not all revenue is equal in profitability – and why you should care.
More than 60% of consumers are open to spending more if an additional service complements or enhances their main purchase. One might conclude that a hotel should “upsell at every opportunity.” While it is great to be able to provide guests with a wide array of services, the overhead to provide each service must be taken into consideration. For example, add-on services like in-room dining or minibar items, while convenient for guests, yield lower profit margins due to the cost of inventory and labor involved.
On the other hand, room upgrades are the most profitable type of upsell revenue for hotels. Technically speaking, room inventory has the highest cost of anything sold in a hotel. But when it comes to upselling, that cost becomes zero. Why? The original transaction covers the real estate and operational costs of the room reservation. Any room product that can be sold over the original reservation is nearly 100% profit.
A room product that is often overlooked by hoteliers are stay extensions, i.e. early check-in and late check-out. Historically, these could never be operationally guaranteed in advance of arrival, but with today’s intelligent technology, early check-ins can be guaranteed without raising the ire of the housekeeping staff.
Paid, guaranteed stay extensions have proven to be very popular, especially for business travelers. Guests often pay a premium to have more flexibility with their arrival and departure times. For example, a hotel might charge an additional $50 per night for early check-in or late check-out. Similar to room upgrades, when managed efficiently to ensure smooth room turnover, stay extensions make use of vacant rooms that would have otherwise remained unoccupied until standard check-in times, thus maximizing room revenue without increasing operational costs.
Another source of high-margin revenue that has emerged very recently is room-specific upgrades. For example, guaranteeing a room on a high floor, a room away from the elevator, a room with a particular view, or a room with a feature like a balcony. In the last year, Hilton has generated a lot of press on their ability to guarantee connecting rooms. Soon, you will see the ability to pick a specific room from a floor plan – much like the airline model.
These room-specific upgrades are different from typical room type (or room category) upgrades in that they monetize the differences rooms within a room type may have. Like stay extensions, hoteliers have steered away from anything that may reduce their ability to manage the house on the fly – understandable given the variable nature of hotel operations. But new technology has emerged that is operationally aware, allowing hotels to extract more value from the details of their room product.
The new technology is called Attribute based selling (ABS), though in this case it is ABS-powered Upselling. With an ABS for upselling solution, hotels can identify the attributes of specific rooms, and then the system will automatically price the features based on demand in an upselling interface. Since these room attributes are, by definition, room product, ABS upsells are basically pure profit and pure NOI (net operating income). Furthermore, ABS enhances guest satisfaction by providing a mechanism to personalize their stay, which can lead to repeat business and positive reviews, ultimately benefiting the hotel’s long-term success.
Using the same concept of room product, a hotel should look to maximize the revenue contribution of onsite resources and facilities whose costs are already baked into the costs of the building. For example, pushing ancillary services like pool cabanas, parking, gyms and even laundry can counterbalance the standing real estate costs that hotels incur. Given that a significant portion of a hotel’s operational expenses goes toward maintaining and managing physical infrastructure, leveraging these types of high margin or self-service ancillary services can help optimize the return on investment for the property.
All of these said upsells offer high-margin revenue opportunities for a hotel because they incur nearly zero additional operational costs above the original reservation, making them a source of pure profit. Hotels can easily boost their revenue while maintaining operational efficiency, making them an attractive and high-profit strategy in a very competitive industry.
Ancillary revenue – Identify opportunities with the best cost-to-revenue ratio
Traditionally, hotels focus on selling services such as room service when trying to grab more of the guest wallet. But, if you want to maximize profitability, the key is to focus on and invest in upsells with a favorable cost-to-revenue ratio. Your guests will respond well to these value propositions and your asset manager will respond well to the NOI.
