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What C-Level Executives Need to Know About Total Hotel Profitability

What C-Level Executives Need to Know About Total Hotel Profitability

If attaining guests through loyalty programs, personalization and the provision of choice is the hospitality industry’s Holy Grail, then profitability is the infinite abundance it promises. When it comes to achieving higher degrees of hotel profitability, nothing provides more opportunities for the incorporation of these elements than an intelligent revenue strategy.

NB: This is an article from Paul van Meerendonk, Director of Advisory Services for IDeaS

While a hotel revenue strategy doesn’t lend itself as the panacea to every organizational crossroads, it does provide hotels with a way to profitably navigate through the unpredictability of economical and geopolitical climates, natural disasters and terrorism. This is in addition to finding profitable success in hypercompetitive online environments prone to fluctuating markets and intensifying competition. Strategic revenue management is also recognized as an important component to increasing asset value, attracting investors and improving overall operational efficiency.

Among other things, today’s hoteliers face mounting pressure to increase their hotel profitability. From acquiring brand new customers to driving repeat business and loyalty, making the right operational decisions and running a hotel with optimal efficiency continues to be an ongoing challenge for top hotel executives. However, with increased scrutiny focused on the best ways to drive total hotel profitability, what exactly do the industry’s c-suite executives need to know about revenue strategy and profit optimization?

More specifically, what is this push toward profit optimization and where does it need to begin for the best results? What are the KPIs that paint the most accurate picture of a hotel’s health and performance? How do hotel distribution channel costs impact overall hotel profitability? And, finally, what are the tools that facilitate these critical activities for hoteliers?

What is This Push Towards Profit Optimization?

Revenue management used to be considered a very niche function, and one that was only applied to guestroom strategies without the influence or contributions from other hotel revenue streams. Over the years, however, hotels have recognized its benefits and enthusiastically adopted more scientific and analytical approaches to strategic revenue management – experiencing significant financial rewards in the process.

As these principles became even more popular and widespread, the industry has looked for ways to apply these holistic strategies to other operational areas and increase their overall profitability even further. And with a recent STR Global report indicating both revenue and expenses for rooms, F&B, payroll and other departments are on the rise in between 2015 and 2016 alone, more and more hotels are seeing the benefits of extending the principles of strategic revenue management to their ancillary streams.

The goal of profit optimization is to leverage all hotel functions and maximize their profits in conjunction with one another. It encourages hotels to intelligently decide which business to accept across multiple revenue streams at all times, based on greatest overall value to the asset. This kind of holistic approach to revenue management goes beyond guest room rates and maximizes profits from the strategic management of other revenue streams. Hotels that adopt these principles successfully can drive profit performance to new heights across their entire asset with more competitive positioning, pricing and inventory management.

However, it is very important that today’s hotel executives recognize that a shift towards profit optimization means they may also need to focus on strengthening their internal culture. Moving revenue management past guestrooms into other organizational areas requires having a robust revenue culture in place, something the industry has fundamentally identified as an ideal environment for supporting initiatives that increase total hotel profits.

Today’s hotel executives are tasked with converging the traditional roles of sales, marketing and revenue management with an inclusion of other departments like F&B, banquets and finance. Focusing all departments around identifying and nurturing the most profitable business will result in the most lucrative results. The performance metrics that matter.

The shift from focusing solely on guestroom revenue to the adoption of an organizational culture that applies revenue management throughout various departments has also encouraged hoteliers to broaden the types of metrics they use for performance evaluation. Traditionally, hotels solely relied on KPIs such as occupancy (OCC), average daily rate (ADR) and revenue per available room (RevPAR) to evaluate the revenue and profit performance of their properties. And while these are still important metrics of performance measurement, the industry has begun gravitating toward other standards that represent their wider spectrum of operations.

One area of increased interest for hotel executives is a focused attention on market share, which gives hoteliers a better estimation of their market performance compared to the competition. This is a critical factor when considering today’s often uncertain environments. It also makes identifying the right competitive set extremely important, and one of the most crucial elements in accurately measuring overall performance. By identifying a property’s true competitors, a hotel can benchmark their market penetration index (MPI), average rate index (ARI) and revenue generated index (RGI) with the valuable context they need to make the best strategic decisions.

If a property measures itself and strategizes against an average of hotels that are targeting a vastly different mix of business, or represent a different type of accommodation segment (such as a full service hotel vs. a limited service hotel), it could end up making unprofitable decisions that dilute its brand value and soften its position in the market. There are other opportunities for measurements that the industry should be looking to as well.

Aside from standard rooms-focused metrics, hotels need to shift toward a comprehensive understanding and comparison of total revenue performance metrics. Hotel meetings and events space, onsite restaurants, spa services and other hotel revenue streams all make significant contributions to overall profitability. When these revenue streams are not properly measured and evaluated, the hotel’s big picture view of its overall profitability misses some very critical pieces.

Establishing KPIs that measure areas beyond rooms to meetings and events space (also commonly referred to as function space) is typically the best place for organizations to start. Emerging KPIs in function space revenue management include space utilization, profit per occupied space (ProPost) and profit per available space (ProPast), and are fast becoming the industry standard metric in evaluating function space performance.

Establishing these types of performance metrics within an organization, in addition to having the right technology and processes in place to capture, measure and control these KPIs, will help establish a baseline for hotel teams to work towards improving and optimizing against. And while the industry largely lacks a standard KPI to account for total revenue performance and profitability, it is an area of focus steadily gaining more traction.

Where Distribution Fits in

The role of distribution is one historically intertwined with the strategic function of revenue management. While distribution strategy has a very micro and specific business focus, it is something that has become a hot topic of interest for hotel executives. As another facet of revenue management, we, as an industry, have spent a lot of time over the recent years analyzing and dissecting the opportunities an intelligent distribution strategy can bring hotels.

Most notably, there has been a significant evolution in the role it plays in driving hotel profitability – largely due to emerging industry data sources, channels and various types of technology. Add in the complexity of prices, restrictions, add-ons, channel usage, technology and distribution costs, and many hotel organizations have easily considered this function large enough to split off on its own, increasing job roles that develop, execute and measure their comprehensive and intelligent distribution strategies.

The complexity of distribution and its impact on today’s organizational structure makes it critical for executives to understand how the quality of this role increases their overall hotel profitability. Not accounting for real distribution costs (which include details like basics of percentages, tracking direct costs and monitoring revenue results) can have an extremely unprofitable impact on overall revenue management strategies. Not properly managing or accounting for distribution costs directly affects the net revenue results hotel executives can expect from their property’s distribution channel strategy.

The Tools Driving Increased Profitability

Big data has undoubtedly helped our industry make big moves over the years. One of the profitable ways hotels have capitalized on the influx of big data is by recognizing that most intelligent revenue strategies look past the “big” description and identify “smart” data. For hotels focusing on driving better business through loyalty programs, personalization and a wealth of attractive guest choices, revenue technology that offers them data-driven methods and powerful analytics has become one of the first stepping stones in doing so.

There are many different factors that can influence a hotel purchase decision: online ratings and reviews, competitive pricing, strong loyalty program rewards, location, etc. Hoteliers need to leverage and analyze every one of those factors – and the data sources that drive them – to build guest loyalty, provide a personalized guest experience, boost marketing ROI, attract an optimal business mix and improve their market performance. For a successful data-driven approach to holistic revenue management, it is critical to employ analytical tools and technology that incorporates market intelligence, ancillary revenue data, online reputation sentiments, competitor pricing, and historical data. For today’s hotel executives looking to strategic revenue management for increases in profitability, it’s important to recognize that maximizing revenue is different from maximizing profits.

There is a complexity of revenue management – and the data that it needs to make optimal decisions – that may seem counterintuitive and perplexing at times. However, trusting, investigating and understanding its underlying principles pays off in dividends in the end.

Hotels pairing powerful and analytical technology with the right holistic data sources are finding themselves with the most profitable way to strategically tackle today’s unpredictable climates and fluctuating markets – improving asset values and efficiencies.

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