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Happy Trumps Hurdle: Does Your Presidential Suite Ever Go Down Vacant?

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March 01, 2015
Revenue Management
Michael Schubach - Michaelschubach@me.com

Unconventional business ideas and practices, by definition, originate “outside the box.” Once they gain some credibility, traction and general use, they become the new box – they are enshrined as conventional wisdom, self-evident truths, or perhaps even iconic platitudes. What all those boxlike concepts have in common is that they are extremely resistant to change. Never having been someone who lets that sort of thinking stand in my way, I would like to share some thoughts on selling hospitality’s most precious commodity: the room night. As the old industry saying goes, a room night is precious because it can only be sold once before it disappears forever. With that thought in mind, are there perhaps more effective ways to sell it?

To begin this process, let’s agree to synchronize vocabulary, starting with an old standard: rack rate. Classically defined, rack is the absolute top dollar for which a given room sells. I’ve heard operators tell me that in periods of extremely high demand they can actually exceed their rack rates, and I – being a classicist – would say that their rack rate tables need updating. Rack is the top, no matter how high the top or how it may have been reached. 

The next term is hurdle rate. What is the hurdle? Again, classically defined, it is the price at which the operator is better off declining to sell a given room and leaving it vacant because occupancy at a lower-than-hurdle rate actually constitutes a loss.  Again, this is not always true: pretend you have two identical rooms at a nice two-room hotel in Switzerland. The first room has a breathtaking view of the Alps, where happy-go-lucky locals are dressed in their Tyrolean finery and shod in hand-carved wooden clogs. They sing, clap, dance and frolic amongst giant wheels of cheese. Guys in lederhosen toot oversized Riccola horns, and, just for good measure, a nearby contented cow expresses both regular and chocolate milk.
The second room is on the opposite side of the hallway and has a view of a very efficient Swiss trash compactor. Since the only difference between the rooms is what’s outside them, their hurdle rate – their loss point – would be identical. But the room with the alpine view typically carries a higher hurdle rate because we perceive a greater market value in the first room. My point: so long as the guest meets the operational hurdle, the profitability of accommodating that guest in the hotel is satisfied. 

These two terms – hurdle and rack – define the minimum and maximum prices for that room that night, ranging from the very least an operator will accept to the very most the operator can expect. Most operator’s out there are used to hearing another term in the popular lexicon of rate jargon: Best Available Rate or BAR. The BAR, besides being the place to get a drink, is also the prevailing rate category for that night. When demand is light the deeply discounted rates are available; when demand is up and supply dwindles, BAR floats upward until it hits rack.
Everything that lies between hurdle and rack represents the operator’s attempt to deal with the reality of supply and demand. Be they corporate discounts, government contracts, group negotiated rates, goodwill gestures or just momentary lapses in sanity, they occupy the gap between what we want and what we absolutely need to get. Dreams and desires aside, a hurdle cleared is a profit on a room rental, representing increased stakeholder value because the hotel has taken a highly perishable commodity – a room night – and sold it at a profit before it disappears forever.

So let’s head back to Switzerland for a moment. Our mythical two-room hotel is going to run a 50 percent occupancy tonight – you, the desk clerk, have one reservation for “Das zimmer du machine automatique de garbage.” (Many languages are spoken in Switzerland. This particular room category title translates into English as  “premium deluxe.”) Tonight, with mathematical and statistical certainty, “Heidi’s Delight” is going down vacant.  The rate on the trash room reservation meets that room’s hurdle but is nowhere near what the hotel asks as a minimum rate on the alpine suite. The guest arrives and is offered an upgrade special – the better accommodation is available for just 25 euros more. You, the hotel clerk, receive a polite decline, so you, the hotel clerk, know tonight’s total room revenue and can hand the guest a key to either room.  Which is the better choice? 

I would argue that the hotel is better served, and could plan to be more profitable, by giving that guest the better accommodation – and the hurdle be damned. I would argue that in periods of less-than-maximum occupancy – which, for most hotels is still most of the time – the rooms that go down vacant should be the worst in the house, never the best. I would argue that in the age of social media, good word of mouth from appreciative guests adds back the marketing dollars (or euros) that weren’t achieved in room revenue.  I would argue that there are different kinds of profit, and you have to give to get. I would argue that I have a tendency to be argumentative.  

Under my theory (or pearl of prudence if you prefer), profitability is the key to the reservation booking. Every opportunity to improve on that initial sale is fair game, but once the basic financial objectives are met – or as met as they’re going to get – then guest satisfaction becomes the driving force that actually matters. In my opinion, the master practitioners of this theory and art are your friends at the cruise lines.

So let’s pretend that we’re no longer making choices for a small, land-locked nation but rather a large, ocean-going vessel. We’re in charge of the SS Hope Floats, which is both a name and a mission statement all in one. Our ship has a variety of accommodation styles and price points; as a rule the higher the deck, the higher the price. Of course, there are dozens of price variables like room types, seasons, specific dates, direction, ports of call and ships of choice. I am equally sure the advent of big data and more sophisticated data models have streamlined shipboard booking, but let’s keep things simple, let’s look at a pretend voyage with five major price categories that cover the ship from the super-deluxe suites at the top right down to the cargo hold. Selling cruise space is something of a science since once that ship sails, the prospect for a walk-in is extremely limited.   

So what goes on when ship shoppers shop? Appreciably the same thing that happens when hotel shoppers shop – see how much of this seems familiar.  First, for those for whom price is no object, we have deluxe accommodations with even more deluxe price tags. The Hope Floats is thrilled to accommodate the members of the one percent who enjoy cruising in style and haven’t yet purchased their own ship. Alternatively, for those for whom price is the only object, we have the seagoing equivalent of the trash compactor rooms: small, windowless, converted utility closets are available for those just pretending to cruise.

What’s in the middle?  Exactly what you expect – a variety of mid-range accommodations: lower middle, mid-middle and the upper middle classes that typically sell from the bottom up.  In the hotel industry, we’d sell out and close the lower priced tier and progress up the chain. Unless unconstrained demand is your very good friend, selling each successive price tier becomes more challenging. It’s a harrowing journey to 64.2 percent, the projected national average hotel occupancy rate for the U.S. in 2015.  

But Hope Floats on the 14th, and you need to fill every cabin before you sail.  Aware that the lower rate tiers are the most likely to sell before the deadline, the cruise industry uses a tactic that makes perfect sense to me. They upgrade the reservations already on the books and sell the best sellers again. It’s not a complete upgrade free-for-all; the cruise lines know that those in the very bottom tier aren’t likely to part with any more incremental revenue. They abandoned all hope and asked for the ninth circle of hell so that’s where they will spend what will just seem like the rest of eternity. At the other end of the spectrum are the members of the upper class. Remember, price was no object so upgrades aren’t truly motivational. But let’s face facts – nothing pleases the ultra-wealthy more than the idea that they’re making money while they’re parting with it. Giving them something for nothing makes you look stupid and them feel smart, so they’ll love you for it… until the cruise where you don’t give them a free upgrade and then they’ll pretend they’ve never heard of you.  But what the hell, they paid for the diesel fuel for the whole trip when they anted up for their ultra-premium accommodations at rack rate in the first place. Who’s laughing now, Mr. Trump?  

The result is that everyone wins:  rooms sell over or way over the hurdle – the cruise line loves that. More occupied rooms mean way more incremental revenue; the cabin rate itself represents a moderate fraction of what you’ll spend before you again hit dry land. Savvy cruisers who plan early and commit promptly have better vacations and give great word of mouth. Loyalty club membership increases their odds of success in upgrade roulette and increases their commitment to a brand that tries hard to accommodate them.

Why wouldn’t a hotel want to adopt this idea? I once explained the program to the executive committee at one property where I worked and the CFO looked at me as if I’d participated in an experimental drug program at HITEC. You mean give something for nothing? Better rooms for free? Are you crazy? It’s easy to fall deeply in love with the price schedule and get married to an idea. It takes some bravery to bet that night’s ranch on less tangible benefits.
But again I ask, why wouldn’t you?  The truth is that the actual operational cost of occupying one room type over another isn’t wildly different in the typical hotel, unless, of course, an upgraded guest who is overcome by unexpected luxury runs amok and spends his entire night in a four-bedroom suite sleeping in each of the different beds. Yes, there’s the wear and tear on the premium facilities, but when a hotel’s biggest complaint is the cost of replacing well-worn guestroom carpets, I say congratulations, keep up the good work and make sure those refurbishment accruals are being bumped up as you continue to make money hand over fist. 

Are you afraid that a hotel room night will become a commodity like an airline seat?  Of course you are – we all are – but to a great extent that ship has already sailed. (Get it?) Hotels are continually being shopped by the young and old, the loyal and the indifferent. But don’t look at guest satisfaction as the tip of the iceberg or edge of the slippery slope. Remember that Heidi’s Delight will never be a commodity and that the trash suite will never be anything but.  Remember that somewhere in your 64.2 percent is someone who is deserving of your presidential suite, and will never forget the experience or the recognition he or she received. 

I say happy trumps hurdle any day of the week. We’ve become enamored with performance measurements as distinct from performance itself. To borrow several operational clichés, we are here to “surprise and delight” and I can’t think of anything that would more do both than a brand that distinguishes itself by seeming to put guest comfort ahead of pure profits.  (I say “seeming” because I think once you cast that bread upon the waters, you’ll get far more than soggy sandwiches back.)  And since we love empowering the staff let them use their judgment to reward the tired, the poor, the loyal, the deserving… and maybe just the nice. Talk about job satisfaction.

Michael Schubach is a regular contributor to Hospitality Upgrade. He can be reached at Michaelschubach@me.com.

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The first half of 2014 saw...
>> Mobile bookings on travel websites grew faster than desktop, at 20 percent vs. 2 percent.
>> Smartphones and tablets account for 21 percent of hotel bookings.
>> In-app bookings account for 12 percent of total mobile bookings made on travel websites.
>> There are currently more than 6.5 billion smartphones in the world and most people travel with up to three devices.
– Criteo’s Travel Flash Report

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