Hotel rooms and airline seats are equally perishable items, losing 100% of their daily value when they sit empty. In many cases, the hotel industry has implemented Revenue Management programs that enable individual hotels to plan for highs and lows in their markets, thereby maximizing revenues by pricing competitively low to drive occupancy during times of low demand and pricing competitively high to drive rate during times of high demand.
On occasion, some hotel companies or individual hotels attempt to implement revenue management strategies without fully understanding the complexities of the overall concept, which in the case of hotels is, ultimately, to drive RevPAR (revenue per available room). Some hotel companies focus on parts of the revenue management picture, typically ADR (average daily rate), under the mistaken belief that simply driving a higher ADR equates to successful revenue management.
In these situations, the companies in question tend not to fully understand the meaning of the change in RevPAR Index versus competitive set as indicated in weekly DaySTAR and monthly STAR reports (STR, Smith Travel Report) and the fact it offers more valuable information about success in stealing share from the competition than simply focusing on either ADR or occupancy.
A perfect example of this ADR mindset is an experience I encountered several years ago when a hotel balked at accepting a piece of group business because the rate was considered too low. While the rate was $20 lower than ADR, the rate was well above the cost of renting a room, meaning the group would be profitable for the hotel and would help drive occupancy and RevPAR. The only argument from management against taking the business was based on the fact the group would hurt the hotel’s ADR. In the end, the hotel accepted the group’s business. ADR was negatively impacted by approximately $7 for that night, but RevPAR was positively impacted by almost $15. Because the company in question set bonus structures based on ADR performance instead of RevPAR performance, the additional revenue was considered detrimental to the hotel.
Inflexibility with rates can also lead to sacrificing relationships with existing and/or potential clients that could assist a hotel with occupancy on shoulder nights. For example, clients might be denied negotiated rates and standard discounts on peak nights in order for the hotel to maximize revenues on those peak nights. The concept of setting minimum night stays in order to sell discounted rates through peak nights, thereby building or maintaining higher occupancy on weaker adjacent nights, is not implemented. The result is a hotel with strong peak nights and lackluster performance on non-peak nights.
By Mark Feggeler