A global perspective on revenue management yields the highest possible profit because we understand and apply a bigger view to our business. I think the title and buzz word that has our industry locked on “revenue management” is entirely the wrong way to look at it. It is not revenue we are after, it is profit. Revenue is where we start but it is always profit that we end up with. Understanding what happens to the room revenue and resulting profit from different segments is the starting point to a much more effective outcome.
We essentially have three types of customers in hotels: leisure, contracted individual and groups. Let’s have a look at the profitability profile of each major segment of the rooms business.
“Do not put all your eggs in one basket” – Warren Buffett.
Understanding this lesson and applying it to your hotels “global revenue management” strategy in turn helps you understand your hotel’s DNA. Knowing the DNA and how we can affect it is the highest and best use of the profit maximization strategy.
Leisure, on the surface, is the most desirable customer in most people’s eyes. They normally pay the highest rate and we like to think they spend lots in F&B, parking and the spa. But not so fast on this one. What we need to examine is the cost to get the leisure customer. First, they book through an OTA (online travel agent) or the company website and both are very expensive sources of distribution. Typically, 15-20 per cent of the rate comes back to the operation as a commission or reservation expense. Second, most leisure customers will use the hotel’s facilities, but they also are busy seeing local attractions, including restaurants and bars. Long gone are the days when leisure guests stay put.
Third, it is hit and miss with leisure guests and how they treat their room. If it is a multi-occupancy family stay, the housekeeping department better have lots of supplies and staff for service. This segment as a whole is the hardest to service. We do not know when they will arrive but it is often early. We do not know when they will leave but frequently it is a late checkout and they always pay with a credit card that attracts a nice two-plus points of total spend. The last aspect of leisure we need to be aware of is they are predominantly weekend or seasonal customers. I say the leisure guest is at best tied for second place in my preferred customer profit profile.
Next up is the contracted individual or, as some hotels describe it, corporate individual traveler. In many hotels, the contracted traveler serves as a base for the rooms business. Hotels pop up all over the place and in many instances, they want to plant themselves close to other businesses and offices. This location effect attracts business travelers to the hotel. Business travelers are a desirable element for hotels to nurture as they have several positive attributes. Generally, they use the hotel throughout the year, less holidays. They typically arrive late, after 6pm, and leave early, before 9am.
Housekeepers love the corporate guest because usually it is just one customer and he or she uses the room very lightly. The use of the room cannot be overlooked. With renovations needed as early as 5-6 years in some properties, a good mix of corporate business can push the renovation out a year or more.
On the distribution side, there are costs but almost always fewer than leisure because there is ability to negotiate the distribution. Corporate customers are normally hotel breakfast customers and quite often you will see them in the hotel bar having a beverage after the business day is over.
Another very positive aspect of the corporate customer is he or she has the potential to bring other corporate customers, as well as small to bigger meetings, to your hotel. So, nurture your relationship with these repeat customers. Let’s just say the corporate customers are easy. Overall the preferred customer rating I would assign the corporate individual traveler is tied for second. In this case, like baseball, the tie goes to the runner and the runner is the corporate individual traveler.
The big cohune in most hotels is groups.
At first glance at your rates, you might conclude that the group average rate is low. Do not stop looking there. When you look at the sheer economics, groups often win the top prize.
First, take the distribution costs. If the hotel is well run the group is booked through a rooming list or another low-cost reservation method. No OTAs or central reservations need be used. In effect, this adds 15-20 percent to the group rate. The group may come with a commission from a third party, but many do not, especially if you have your own sales team.
Second, consider the group movement. The group arrives, moves in-house and they leave together. This is very desirable from a labor and efficiency perspective. On third base is F&B. Groups meet, eat and drink together at the same time. This effect is the most powerful profit combination. A good group with breakfast, coffee breaks, cocktail receptions and dinner are the perfect profit combination. In demand situations, hotels can place groups perfectly in their need periods. In addition to the room and F&B revenue, groups almost always need AV, display space, drayage and best of all meeting room rental.
Third, the cherry on top of the group cake is they almost always pay their invoice with a check. Groups business is the number one desired customer in my book.
How does a hotel measure these different sources of business and decide which way to go? The easy answer is you need all of them to be Uber successful. Like Warren said, “Do not put all of your eggs in one basket.” Having a diversified customer segmentation means you can better manage when one or more segments faces headwinds. If you were running a hotel in the last financial crisis, you know what I mean by customer segment diversification.
Knowing what each piece of business is likely to spend and where is key. Most hotels have tools to analyze the spending and the profit to come from that revenue. Global hotel revenue managers are looking at the profitability of each piece of business, weighing the operational challenges with the economic benefits.
By David Lund
David Lund is The Hotel Financial Coach and an international hospitality financial leadership pioneer. He has held positions as a Regional Financial Controller, Corporate Director and Hotel Manager with Fairmont Hotels for over 30 years. He authored an award-winning workshop on Hospitality Financial Leadership and has delivered it to hundreds of hotel managers and leaders. David coaches hospitality executives and delivers his Financial Leadership workshops throughout the world, helping hotels, owners and brands increase profits and build financially engaged leadership teams. David speaks at hospitality company meetings, associations and he has had several financial leadership articles published in hotel trade magazines, and he is the author of two books on hospitality financial leadership. David is a certified hotel accounting executive through HFTP and a certified professional coach with CTI.