02 Sep The impact of poor revenue management (Part 1 – Special Offers)
Okay, so there will be no studies to back me up, and there will no doubt be people who disagree and those who agree with what I have to say on this subject…
Let me begin by stating very clearly that I am not a revenue specialist, and I have not spent years as a revenue manager or similar, but having spent the majority of my working career in front of house, I can assure you that the impact of incorrect rate and revenue strategies is catastrophic, not only to business but also to staff and customer loyalty. There are many things that impact on all three of these things, and here is why they impact and how you can prevent it:
Staff Impact: It is often too quickly that a sales or revenue manager jumps into a special offer but even the longest planned out can fall foul of one thing – telling the people it affects. Often a special deal will occur, and in my experience, front of house usually end up being the last to know – it is a common downfall of many a hotel employee where it is assumed that because you know about it, everyone else will. This can be extraordinarily de-motivational to a member of staff and your management. I will be honest and wear my heart on my sleeve here and say that when this happens, I get very annoyed inside – not only because I have had no time to prepare my staff for this, I have had no information to enable my team to deal with queries; I have no chance to double check open and closed dates for rates and ensure these are allocated and retained; I have had no chance to check my rate code allocations or accommodation revenue allocation (you could be giving me an average accommodation revenue of 1 pence a night for all I know!); I have had no chance to review and implement upsell strategies (which are HUGELY important for increasing revenue); but most importantly, by dumping this on me at the last minute, you have just made it impossible for me to relay all this information in enough time to ensure the entire guest experience is still amazing – if you tell me at 3pm that a deal launched at 9am that day, I could have a member of my team dealing with queries all day and giving a “sorry, I don’t know” response to everyone – that is just what a prospective guest does NOT want to hear!
Revenue Impact: The other issue with special offers is that often they concentrate on a ‘bums on beds’ philosophy, where it is assumed that higher occupancy will result in higher profit. As a duty manager and Front of House manager, I am usually in one of the best positions for seeing just how much revenue is passing through the computerised systems. When this falls behind budget questions are asked, yet everyone tends to deem a special offer a success because it got people in to the hotel. This is wrong. Point blank! A special offer has not worked if you have filled your hotel bedrooms with people on rates that hardly make a profit to you, and people that have no incidental spend. Let’s take an example of two commonly used special offers:
Room Only: This is a common style of rate used by hotels across the world on a standard day to day basis, the premise being that breakfast is something that if you can be charged for it, then you will be (see my post on charging for extras). Many special offers also use this on the premise that if you pay a cheap enough rate for your room, then you will be will have extra ‘spare’ money to spend in the bar, coffee shop and other areas. However there is also something else at work here that many people forget – the actual clientele you attract! Now, having a specially reduced room only rate will generally attract a proportion of bargain-hunters and savvy-shoppers; the downfall to this is that these are generally the clientele that will not spend money in your hotel. This is particularly prevalent in hotels that are located close to airports, ferry ports and train stations as generally these hotels will be used for one-night stopovers and the guests on the cheap rates have generally chosen that cheap rate because they will only be in the room for a few hours. The other main advantage of these types of rates is that you get ample upsell opportunities…. If they are controlled correctly! Having a hotel full of room only rates is fine; having a hotel full of special offer room only rates is not fine….ever! filling with special discounted rates only proves one of two things; either that your hotel is not worth the standard rate to any of the guests staying with you, or your room and rate allocation is screwed up – generally I would accept the latter of these two as being correct, after all you get people book on higher rates throughout the year! There is also the consideration of room only rates having to generally be in combination with special rates in other areas of the hotel, such as Food and Beverage, to entice people in to these areas of the hotel to spend money as having received a discount on the room rate, it is human nature to feel slightly aggrieved at paying full price in other areas of the hotel, particularly when you have enticed them in with a discount and sting them with what are generally seen as overinflated rates for food and drink (an unfortunate view by many is that hotel are much more expensive than anywhere else for food and drink, whereas in reality the opposite can often be true).
Dinner Bed and Breakfast: Another of the typical rates offered to entice people in; usually around £70 to £100 dependant on the style of hotel and the luxury of the hotel itself along with the location. But these are probably the most dangerous rates to run for several reasons. Firstly you are not just discounting your accommodation, but you are also discounting your food and restaurant takings – the profit of two departments can then suffer quite drastically and the revenue returns will often be less than expected – for example, you could have 100 dinner bed and breakfast rates in at £69 a night. Now let’s say that out of that £69 we have a nice even split of £23 for dinner, £23 for breakfast and £23 for accommodation. This is a health gross rate, but when you remove the VAT (UK only but everywhere has a similar tax on all products and services that needs to be deducted from your gross takings) at 20% you are left with £19.17 per room per area. Now look at the per person on this – £9.59. That is £9.59 per person that has to break a profit on their dinner, which may cost £10 per person to make leaving a loss of 41p, the room that may cost £5 per person to service and replenish leaving a profit of £4.59, and the breakfast which may cost £4 per person leaving a profit of £5.59. So for typicality’s sake we have a profit of around £9.77 per person which by anyone’s standards is fairly healthy– your profit may be reduced even further if you have a leisure club that your guests are accessing free of charge. But this is almost the only profit to be made. You have included almost everything that you sell and are unlikely to get any additional purchases except maybe some water or wine during dinner, a profit of merely a couple of pounds if you are lucky. So let’s say we made a profit out of every of these rooms as outlined above – a total of £1954 (£977 x 2) profit – which is fairly poor for a 100 room hotel full of these deals as you may well have additional staffing costs, complaint refunds or other costs unaccounted for here. But think about all those room only rates at the same price that would have netted you a £67 profit per room equalling £6700 profit. I think my point here is fairly clear when I say that by simply throwing everything in, you are restricting your incremental spend potential for guests and therefore removing your additional profit opportunities.[box style=”light-yellow warning shadow” ]I am in no doubt that there will be someone who tries to destroy the pricing model and rate analysis set out above, however there is not really that much different to the above model and basic common sense, hence why it was used – yes it is simplified, and yes, yield per person increases as occupancy increases, but to be honest, I have neither the time nor the inclination to example all of that out! For the naysayers to the above – work a similar figure out based on REVPAR and TREVPAR as above and see if you get anything different to me – as you provide less, your gross revenue increases! [/box]
Customer Loyalty: A lot of revenue managers forget that this concept even exists, concentrating on getting that next big client or contract, and leaving those old clients to waste away and rot in the background because there is no way they could produce that next big thing. How wrong those types of revenue manager are. Your loyal customers are by far your biggest asset, and your most lucrative lead, along with being the greatest networking opportunity you may have. As a Front of House Manager, it is my obligation to know all my regular guests and to build relationships with them. I know where they work, when they are booked in for, what rates they are paying, when their next big work contract ends, where they live, who their partner or similar is and what their room and dining preferences are. This knowledge enables me to anticipate the needs of future arriving guests with a similar profile and provide a much better experience that suits their requirements. But a poorly managed rate strategy can ruin all of that in one foul swoop.
This is because any corporate clients book on a corporate rate that is negotiated once a year (stupid to only negotiate once a year if you ask me; it should be reviewed quarterly at least to maintain competitively priced contracted rates). The issue with the corporate rates is this: people are happy to pay corporate rates as long as there is nothing blatantly better priced for them out there. Then they receive an email from an un-checked and un-filtered mailing list (which should have been stripped of all the corporate rate clients), which promotes bedroom rates at less than half the price of their corporate rate. Your loyalty has just been blown out of the water and chances are the next time they phone to book and find the cheaper rate is available, they will just book that instead of the corporate rate, and if you don’t allow them to, they simply won’t book. In one click of a ‘send’ button you have created a lose-lose situation for the hotel.
The other aspect of the cheap room rate offer is that it generally creates no real additional customer loyalty. You have a one-shot customer – working a reception desk for a few days on check-out will tell you this as you continually hear ‘when you do an offer like that again, we might come back’ or ‘let me know when you do this again as my sister might be interested’ – it will be very rare for you to hear ‘I want to come back here next week, what rate can you do?’ To demonstrate this point, have a look at all the people who stayed with you on a promotional offer and in particular look at how many returned within 6 or 12 months. Out of those that returned, how many are regular guests that would have stayed with you anyway and how many are ‘new’ returning and loyal guests? I can guarantee you that the number of new loyal guests is probably not even hitting double figures, despite how many people have been through the doors. Hotel loyalty schemes can help increase return visits, but special offers need to be utilised correctly to avoid all the pitfalls above.
Okay, so I have ranted long enough on this now, and it is practically turning in to a novel, and this is only part 1! My point here is that special offers need as much analysis and impact management as anything else; in fact they probably need much closer monitoring and the use of historical data to actually assess the impact, profitability and overall customer loyalty impact – if in doubt, ask the people that matter!* There is no point trying to manage revenue by short-term achievements – running 100 metres will not win you a marathon! You need to strategise long-term and make sure you consider everything that does not get logged in a spreadsheet – a hotel is not built upon and run by a computer program, nor is it a series of digits in a little box at the bottom of a column, it is a living breathing industry that reacts, flexes and is as fickle as anything else – treat it as such or you will be doomed to poor profit, unhappy staff and unhappy guests.
*For those unaware, I am referring to your staff and your guests as the people that matter!