Winning the RevPAR Game Peak Performance in the Digital Market

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November 07, 2019
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Cindy E. Green - cindy@kalibrilabs.com

When you evaluate your hotel’s performance, you want to accurately compare yourself to a reasonable benchmark. The spate of mergers and acquisitions in the hotel market creates antitrust challenges around too many hotels from one company in a comp set. Furthermore, thinking that the fi ve or six hotels in your comp set reflects who you compete with is rarely accurate. 


HOW HELPFUL IS THE REVPAR INDEX?
The RevPAR index summarizes a hotel’s position by averaging ADR and occupancy within a fixed group of competitors. Thinking you’re competing with a short list of hotels is misleading. In fact, you’re competing for business that’s distributed across many hotels in a market – as many as 20 or 25 properties. Certainly, some of the business you want is in the hands of those five to six hotels in your comp set, but few hotels’ market demand is so limited in the scope. Also, your goal is to be the best, not strive to be average compared to a benchmark, so why limit your pool of opportunity?

Kalibri Labs has examined booking data from 35,000 hotels and run the statistics on thousands of hotels in the U.S. market with a matching algorithm. This lets us identify the businesses that mirror any subject hotels (i.e., similar rates, arrival/ departure days, weeks of the month or month of the year). This analysis shows that competitive business in a given market is usually widely distributed. This is even more pronounced when you examine weekends versus weekdays. And it isn’t a surprise to most hoteliers. Intuitively, everyone knows that. Still, hoteliers obsess over the five or six hotels in their comp set, even though potentially valuable business is going to another 15 or 20 hotels that are only identified through the addition of a secondary or tertiary comp set. And even then, it’s only calculated at a highly aggregated level (occupancy and ADR only), never by market segment.

The key question for any hotel to compete effectively is this: Which chunks of demand spread across 20 to 25 hotels in your market are a good match for you and worth going after?

WHAT BUSINESS IS WORTH PURSUING?
Knowing there are thousands of room nights coming to a market inspires a reaction by property and above property teams to go after all of it. But it isn’t equally valuable and acquirable. No one can afford to go after everything. The time-honored sales and marketing process is fairly siloed: The group sales team goes after all the group sales demand it can find, BT sales goes after all the BT sources, digital pursues all demand coming through Web channels with the hope that more Rack/BAR means less OTA so ADR can rise with a lower acquisition cost. It sounds logical, but the limitation to such an approach is this: A hotel that ignores the concept of targeting an optimal business mix will apply equal effort to all segments and channels. Or it’ll be biased toward those its management has experience with, like group sales and BT sales, rather than where the greater opportunity lies. This approach often leads to overspending on some segment/channel combinations and underspending on others.

The old adage, you can only manage what you measure resonates for hotels in the digital market. Hoteliers improve their RevPAR by calculating results net of acquisition costs and surgically targeting the optimal business mix. This lets them successfully deliver higher profit margins for their hotels. 

Q&A Interview between Geneva Rinehart and Cindy Estis Green

Geneva Rinehart: How would a hotel determine ROI on customer acquisition spending?

Cindy Estis Green: Each channel and market segment combination has its own economics. The hotel has to understand all the inputs to cost and has to look at ADR and revenue, net of booking costs – per channel and per rate category. More important, a hotel has to understand the market’s business mix. What’s available? What’s best for my hotel after costs are removed? What combinations yield the highest profi t contribution?

Geneva Rinehart: Does the hotel industry gather consistent and useful data around customer acquisition costs?

Cindy Estis Green: For fi ve years, Kalibri Labs has collected this data for almost 35,000 hotels on a daily basis. It’s the only industry resource of its kind. It’s validated down to individual days of each guest stay.

Geneva Rinehart: When top line revenue growth declines, how important is customer acquisition cost? How meaningful is it compared to other costs, like labor?

Cindy Estis Green: Labor may be the largest cost. The tools to manage it have been refi ned over many years. Cost of customer acquisition represents 15 percent to 25 percent of guest paid revenue. Previously, acquisition costs haven’t been easy to identify and track. All major brands, owners and many management companies are expanding their focus on net revenue now that they realize there’s a way to manage this emerging, fast rising cost. In a world where profi t contribution is fl at or declining, the ability to track and manage customer acquisition costs is a new tool at the hotel’s disposal. It’s going to be a critical part of the operation as more third parties add to increasing acquisition costs.

Geneva Rinehart: What distribution costs should be tracked beyond just OTA commissions?

Cindy Estis Green: Customer acquisition costs include all channel booking costs, as well as all sales and marketing costs such as:
• All retail commissions (traditional TA and Booking.com)
• Transaction fees (like direct connects to OTAs or GDS)
• Channel costs (GDS or web fees)
• Loyalty costs
• Amenity costs (for luxury hotels only)
• Wholesale commissions for traditional wholesalers (not just OTA)
• Sales and marketing costs beyond those related to bookings

Geneva Rinehart: How realistic is it for a hotel to manage these costs? For the most part, OTA or GDS negotiation is done at the brand or reservation provider level. What can a property level or above property team really do?

Cindy Estis Green: Many hoteliers think of commissions and channel costs as a cost of doing business and not manageable, like labor costs. The hotel or above property support team certainly isn’t going to negotiate with the GDS or OTA or Google. However, they do manage the hotel’s business mix. Shifting business from an expensive third-party channel to a lower cost direct channel can yield a dual benefi t – lower booking costs and potentially higher rates if the direct channel tends to bring in higher rated business. Business mix changes have the potential to result in a 15 percent to 20 percent lift in revenue net of booking costs. Hotels have the power to improve their profi t contribution by shifting business mix, proactively targeting more desirable business and reducing the rest.

Geneva Rinehart: How could the big emerging technology platforms (Google, Facebook, Amazon) impact the hotel marketplace?

Cindy Estis Green: Not all will enable consumer transactions. Some may only off er advertising options. But at some point, the big tech titans may touch and potentially infl uence 60 percent to 80 percent of consumer traffi c. This contrasts with OTAs, which ended 2018 at 15 percent of U.S. demand. If these gatekeepers achieve this level of consumer infl uence, the concern for hotels is twofold: (1) that the tech giants may use their vast data stores on guest preferences and behavior to create a market bias for one hotel over another, removing some degree of control on the hotel’s part and (2) the fees hotels will have to pay for a presence in this marketplace may dwarf the fees paid to OTAs or travel agencies today.

Geneva Rinehart: Did direct booking campaigns launched by large brands really make a diff erence? How eff ective have they been?

Cindy Estis Green: The Kalibri Labs 2018 study of 80 million brand transactions indicates that although there was a cost to direct bookings, the average rates (net of booking costs including loyalty fees) paid by loyalty members booking through Brand.com was 9 percent higher than the net ADR coming through OTAs. Further, while it’s somewhat of a horse race, Brand.com demand (23 percent) compared to OTA (15 percent) is still about 50 percent higher. The cost of loyalty programs rose slightly faster than guest-paid revenue growth, but the cost of OTA commissions, in spite of lower commission rates, grew twice as much as guest-paid revenue.

Geneva Rinehart: Is there more benefi t to reducing acquisition costs or just focusing on fi nding guests who’ll pay higher rates?

Cindy Estis Green: No one should look at acquisition costs in isolation. You aren’t just looking for the highest paying guests. The market isn’t that simple anymore. It’s no longer a binary issue. It’s all about your optimal business mix – fi nding the right combination of the most profi table business by rate category and channel. It’s a new approach that requires the property to know more about its market than in years past. How much business exists, what’s the value net of acquisition costs, when is it coming in, at what rate and what channel is it coming through? 


       

Summary of Learnings

1. The pool of capturable demand (total realistic demand)
2. Which market segments hold the highest opportunity
3. Which hotels get the business now
4. Which days of the week, which weeks of the month, which months of the year
5. The rate being paid to others (you have to know if you’re on target or have been over- or underpricing for each
     segment/channel combination in any given time period)
6. Quantified each market segment to set priorities for deploying acquisition costs




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