Parity Rates: How can Hotels Strengthen their Position?

VTO (Value to Owner) vs VTC (Value to Customer)

The challenge between financial goals and commercial strategies continues…

NB: This is an article from Aizhana Curti of Hotelperformance

Working in sales and revenue for so long made me to think how do Sales, Revenue and Marketing successful practices interact with items on the Balance Sheet.

How can I report the results of a commercial strategy, to an owner who measures the value of the company merely on performance, and is only really interested in return on investment…and sometimes stoke his Ego?

Let’s explore VALUE and PERFORMANCE from different prospective and start to think like an OWNER when measuring the production value of a Hotel.

Let’s start by defining Value and Performance (these are how they are defined by the American Heritage College Dictionary):

  • Value – An amount, as of goods, services, or money, considered to be a fair and suitable equivalent for something else; a fair price or return.
  • Performance- accomplish something as promised or expected

Seems little we are looking at some kind of equation of happiness, doesn’t it? But whose parameters are we using for value? And what performance metrics do we have to achieve?

“Every dollar invested in the hotel could have been invested elsewhere, and such its performance is evaluated by the next best alternative…” (cit.)

How can we manage at the same time different goals and objectives of the hotel’s internal (the owner) and external (the customers)?

The solution is to find out what satisfies both, and create the tools to monitor Hotel’s performance and continually access it to understand whether it is meeting its goals.

 In the hotel industry we normally measure the production of Value using KPIs like:

  • ADR
  • Occupancy
  • RevPar
  • Market Share
  • Market penetration Index

All of these help the Owner to generate ROEI (Return on Equity Investment), but this is only half the story as they do not take into account the final customer’s preferences or long term prospective; so what other indicators can determine the creation of Value from a long term prospective?

Every Hotel must identify and understand the proactive process of creating and maintaining a competitive advantage: since its competitors will seek to copy any innovation, the business strategy Sales, Revenue and Marketing team must find ways to sustain a competitive advantage through continual innovation.

It’s up to the team how to prioritize value drivers, delight Customers and satisfy the Owner when it comes to business strategy and tactical processes.

Key strategies may focus on specific measures in order to promote excellence in execution: for instance Sales growth rate by RevPar, Occupancy Rate, ADR ; Operating Profit Margin by flow-through to measure the return of every money unit spent. All of these will help the Owner’s interest on ROI whilst operation efficiency and property appreciation, simply measure a residual income and Working Capital Management (Cash, Inventory, Account receivable)  

Starting from competent planning the priority should be to establish short- and long-term measures of value both from Operations and Owners’ points of view.  

We need to find a way to give the Owner the required return to equity capital employed and assessing the Hotel’s performance using VTO.

Sales (Revenue), growth rate (RevPar, Occupancy, ADR), Operating Profit Margin (flow-through), and Working Capital Investment (Cash, Inventory, A/R) vs Income (NOI, EBIT or, even, Net Income) as example of short-term measures. All could be useful to increase a net cash flow to an owner and help to improve the operating profit (after tax) without tying in more capital investment or changing the risk structure of the business.

To understand if your guest service/quality investments is paying off, you need to start to focus on measure like revenue per available customer, net profit per available customer, or even more, net present value per available customer (NPVPAC). The same assessment could be done for the Revenue Management department, just compare your actual ADR to required ADR and easily understand how profitable to the Owner your Revenue Management Strategy is.

Market Share, ROI Analysis vs Economic Value Added, Market Value could measure your Hotel Value in the long term. In this way both components, Operating Business and Real Estate, are clearly interacting and maintain the value cycle in the Hotel.

It’s up to the management team to choose a source of potential competitive advantage because every environment has its own shape and constrictions.

Of course, the Customer is the only Value creator, whom constantly assess Hotel’s performance, from its own perspective, and confirms the hotel’s capacity to cater for the its needs by paying the hotel’s preferred rates.