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HSMAI Special Section: Next-generation Revenue Performance Benchmarking for the Digital Economy

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March 01, 2016
HSMAI
Cindy Estis Green

As a sneak preview of the new Demystifying Distribution in the Digital Marketplace study, due for release in Q2 2016 by Kalibri Labs and AH&LA, this article will give a glimpse into some of the new metrics that will be shared in the forthcoming book.

THE HOSPITALITY DISTRIBUTION WORLD
THE HOSPITALITY DISTRIBUTION WORLD as we know it is in a near constant state of change. This has never been more true than in the past several years. Expedia acquired Travelocity, Orbitz and then HomeAway. Booking.com, a massive distribution platform, is now offering technology solutions, such as PMS and revenue management, to independent hotels. Metasearch platforms are expanding instant booking offerings to keep customers on their sites. Booking Brands, such as OTAs and metasearch, have become gatekeepers for online travel shopping causing the Stay Brands, traditional hotel companies, to pay much more for access to customers. The cost of sales in the 1990s of about 5 percent to 10 percent of room revenue has shot up to 15 percent to 25 percent and continues to rise.
How does a hotel manage this challenging new environment? What are the metrics it should track to sustain profitability and thrive? The traditional RevPAR metric doesn't account for this new and substantial cost of sales and therefore often doesn't reflect a hotel’s profit contribution. This new world of skyrocketing acquisition costs, calls for a next generation set of benchmark metrics to evaluate hotel revenue performance.
In preparation for the release of the new book and in cooperation with hundreds of hotel brands and owners, Kalibri Labs has gathered data from almost 30,000 U.S. hotels. This data runs from 2011 through 2015 with an ongoing process in place to receive updates on a monthly basis going forward. The data includes revenue, room nights and channel, segment and rate code information for every transaction in those hotels, along with information on the cost to acquire that revenue. These details come together to form a series of net revenue metrics and to provide a profile of each major U.S. market.
Many progressive hotel brands, owners and operators have recognized the need to change the way they manage revenue generation. These parties are now planning and monitoring net revenue performance in a monthly cadence as they deploy channel-shifting techniques to improve profit contribution. Some of the new metrics in use include:

DIRECT-TO-INDIRECT TRANSIENT CHANNEL SHARE REVENUE CAPTURE CONTRIBUTION TO OPERATING PROFITS AND EXPENSES (COPE %) SALES AND MARKETING EFFICIENCY NET REVPAR
The Kalibri database has been valuable not only for creating metrics at a hotel, region, brand or ownership group level but also for looking at trends for third parties both nationally and in specific markets. Knowing which business models are on the rise and which are on the decline can help a hotel choose an optimal channel mix. Looking at whether an individual hotel or brand over- or under-indexes for a particular vendor or a specific business model (e.g. retail, merchant model, opaque) can provide insights into what might be available in a market and can help a hotel determine if its tactics with a vendor (or vendor type) have paid off.
The example below looks at OTA business models nationally and shows the growth of the retail model since 2011. This has come alongside the advent of Expedia’s “Pay Later” model as well as the rapid ascent of Booking.com. This growth appears to be at the expense of opaque business and surprisingly, the merchant model (net rate) has maintained its position at well over 50 percent of all U.S. hotel bookings. This varies widely based on demand drivers in a given metro area and is valuable information along with details for other third party intermediaries.
Another analysis that can be done with this data is an examination of “direct” business relative to indirect business. Direct business includes brand.com, voice and property direct room nights while indirect business includes OTA, FIT/wholesale and GDS/travel agency.
The U.S. direct-to-indirect ratio tells a hotel how much business it gets directly compared to the amount booked through third parties. This 40 percent decline in this statistic (from 4.3 to 2.5) for the U.S. overall is a clear indicator of the rise in commission levels.

REVENUE CAPTURE AND HOTEL VALUATION
Revenue capture is a metric that indicates how much money the hotel keeps after accounting for all customer acquisition costs including commissions, transaction fees as well as sales and marketing expenses. In other words, net revenue divided by guest-paid revenue. Kalibri Labs data revealed that for the U.S., hotels retained 84.9 percent of room revenue paid by guests in 2015 compared to 85.1 percent in 2014.
If the hotels had merely retained revenue at the same rate in 2015 as the previous year, the industry collectively would have kept another $406 million in net revenue. Though 0.3 percent seems like a small difference, this amount would contribute to free cash flow for many hotels. Look at the impact on real estate valuation. If you apply a conservative valuation multiple (cap rate) of 8 percent, you see that the $406 million loss equals a potential $5 billion in real estate value erosion. That would mean that each tenth of a point reduction in revenue capture lowers the value of the U.S. hotel real estate by some $1.7 billion. This isn't an inconsequential issue when you consider the impact of rising cost of sales on the industry.
Individual hotels can measure their own revenue capture on a monthly basis to help establish realistic targets and improve revenue retention efforts.

NET REVPAR
Net revenue per available room, revPAR, is the ultimate measure of revenue performance because it takes into account guest-paid revenue (whether he paid it to a hotel or a third party) and removes all direct and indirect costs (commissions, transaction fees and sales and marketing spend) to acquire that revenue.
From 2014 to 2015, U.S. hotels had approximately 5.5 percent growth in traditional revPAR but their net revPAR only grew by 5.1 percent. While the national average shows net revPAR performance growth underperformed traditional revPAR by 10 percent, many hotels in the Kalibri database actually posted a better performance in net revPAR when compared to the traditional metric. Most hotel owners and operators would prefer improvement in net revPAR as it reflects a more accurate evaluation of a hotel’s performance.
Learning about the trends in revenue acquisition along with the associated costs can go a long way to helping a hotel manage its revenue performance. The upcoming, Q2 2016, publication of "Demystifying the Digital Marketplace" by Kalibri Labs and AH&LA will provide the industry with benchmarks to enable closer management of revenue and costs by channel.

CINDY ESTIS GREEN is the CEO and co-founder of Kalibri Labs. She is also the chief consultant to the AH&LA Consumer Innovation Forum, a research group examining distribution issues. Contact Kalibri Labs to be notified when the first section is released.

©2016 Hospitality Upgrade
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