A very interesting article was recently released by Bloomberg News, about the trends in hotel development that we are currently experiencing. The report said that US hotel developers are investing less in luxury properties, as the cost of providing high-end amenities rises and profit margins shrink. According to STR, the RevPAR at luxury properties was $202 in 2012, down from the 2007 high of $213.

According to the report, only six luxury hotels are expected to open their doors in 2013. That number is consistent with the results seen in 2012, as a total of six properties opened that year. Unlike 2012 and 2013, development in the luxury market during 2011 was high with 23 hotels opened during the year. These declining numbers demonstrate an ongoing trend away from investment in the luxury market, and the growth of upscale properties. In 2012, the upscale market in the US increased by 49% (131 hotels).

This trend reflects the changes in consumer behavior post-recession. Before the recession, consumers were willing to pay high prices for a five-star luxury experience, but since the financial fallout, most consumers have a maximum room rate in mind, that they won¹t exceed, no matter how luxurious the property.

Now, you’re probably thinking: “All of this info is interesting but how will it affect me? As a revenue manager, I have nothing to do with investments or hotel developments.”

In actuality, this news will have a significant effect on all three-, four- and five-star properties in the US. Because the five-star, luxury properties are being forced to decrease their room rates (to suit consumers¹ new booking habits), three- and four-star properties will find that they must compete against a more superior product at a more affordable price (than in the past).

Five-Star Properties

Luxury has always been defined by excess, but today’s consumers are mostly looking for value. A significant amount of these consumers won¹t see the value in paying a higher room rate to have fresh flowers in their room or be greeted personally and escorted to the pool. Of course, excess means excess expenditures so five-star properties are in a tough spot, as their amenities and costs are already fixed.

Revenue managers at five-star properties should be decreasing their room rates to the lower end of the five-star price point, in order to compete on a financial level that will attract more customers. By decreasing their rates (and competing with the four-star properties on the high-end of their price point), five-star properties can offer a great deal of value: five-star amenities at a four-star price, dropping them into the upscale category, further increasing the supply in the four-star marketing and compressing rates.

Four-Star Properties

The decreased demand for luxury hotels will force some five-star properties to discontinue offering certain amenities, which may drop them into the upscale market, further increasing the supply of four-star rooms available and compressing rates. Some of the four-star properties will benefit from taking market share from the luxury hotels, while others may find themselves lowering rates to steal market share from the lower class. I would suggest the latter, as this strategy provides the customer with greater value and will encourage the consumer to pick your property over a similarly priced three-star property (that does have the amenities that you are able to offer).

As consumers are looking primarily for value, four-star properties can also consider offering dynamic packages. For example, hotels can include free champagne and strawberries for the Honeymoon Package or free theatre tickets for the Broadway Package. Often these packages will actually cost the hotel less money than the perceived cost by the customer, so this strategy is a highly effective one for hotels who don¹t want to rely solely on deep discounting to gain market share.

Another easy fix for four-star properties is to enhance the ‘cool’ factor of their property. By making a small investment in some contemporary enhancements, such as updating the paint color, or adding new linens or décor items, a hotel can change its image drastically (in a customer¹s mind). In many cases, these small modern touches will incentivize customers to book with your property instead of a luxury property with old-fashioned décor.

Finally, four-star properties should consider offering room upgrades whenever possible. The standard room in a five-star property could be very similar to a suite at a four-star property, so this can be a great way to entice customers to book with you instead of paying full-price for the actual five-star experience. An added perk to this strategy is that it is very low-cost for the hotel to offer free upgrades, but has a very high perceived value among consumers.

Three-Star Properties

While three-star properties will never be able to compete with five-star properties (without a drastic renovation), they can offer very stiff competition for four-star properties. As four-star properties will have decreased their room rates to the low-end of their price point, it brings them closer in price to a higher-end three-star property.

A very important (and cost-effective) way for three-star properties to stand out is to update all of your marketing materials, in order to portray your property in the best possible light. Of course, I’m not suggesting hotels should mislead customers about what the property offers; instead, consider hiring a professional photographer to find the best lighting and angles to capture your property’s unique features; update the wording and font on your website to be more modern; and minimize the emphasis on being a ‘budget hotel’. Make sure that your OTA listings, website and marketing collateral are offering the best possible first impression to potential customers. While you may not have the budget or the amenities to match, three-star properties need to remember that they are ­ now more than ever ­ competing with the ‘big boys’ and they need to re-act accordingly.

Three-star properties should not be discounting in order to compete, because eventually, it becomes a race to the bottom. Today’s consumers want value so if you can offer a good price for a good (three-star) room, as well as a value-added service (like free breakfast or free parking), your property will be able to compete more effectively with four-star properties.

Finally, like four-star properties, a little updating can go a long way towards making your property more desirable to potential guests. It’s a very low-cost, quick fix that could have major impact on your revenues.

Overall, five-, four- and three-star properties will all need to take note of this new trend and how it affects consumers’ booking patterns. While prices will be compressed throughout the upscale category, hotels should also be focusing on adding more value and better services for the price, as that will be the key in attracting new customers in this new market.

Hoteliers, how will you react? Post your comments below and share with others in the industry your personal insight. 

When most hoteliers think about the factors that have an effect on their revenue management strategy, they think of RevPAR, ADR and occupancy. They think about historical and current local demand. Most hoteliers don’t think about star ratings, beyond when they initially start working with an OTA and are creating their profile.

But that doesn’t make good business sense. What many hoteliers sometimes forget is that the star rating is a hugely important factor, both in marketing your property and in determining the best price for your rooms on a given day.

First, let’s look at the importance of star ratings in a property’s operations and financial performance.

A three-star, a typical 100-room hotel in the United States earns $110 of RevPAR per room, per day. But if that same property went up to a three and half-star rating, their RevPAR would increase by $42 per room, per day. If you extrapolate those numbers, the property can increase their annual revenues by approx. $1.5million, simply by increasing their star rating by one half-star (from three-stars to three-and-half-stars)!

Impressive numbers right? Star ratings DO have a direct impact on your property’s bottom line!

Some hoteliers even believe that if their property bumps up their star rating, potential customers will have much greater expectations about their property that they may not be able to meet. They operate under the belief that it is better (both financially and for customer satisfaction rates) to be the best hotel in a lower star rating, rather than one of many in the higher rating. That is not necessarily the case.

From a consumer standpoint, a higher rating is perceived to be a “better” property but it is very subjective. Not all travelers use the same criteria for judgement. Some customers would perceive a hotel with better amenities to be a four-star property, whereas others would have different expectations, like perhaps simply a clean hotel. The point being, you can’t always please every single customer but by having a higher star rating, you’re more likely to secure more, higher priced bookings.

So are you convinced? Perhaps you’re looking at your own revenue management strategy to see if your star rating needs updating? Keep in mind though, like every other aspect of the online channels, chaos reigns supreme. Many properties will likely have different star ratings on different OTAs, because each site uses different criteria to determine their ratings.

So what now? Focus on optimizing your actual star rating on the most popular, top-performing OTAs in your region (i.e. Expedia in the North America, Booking.com in Europe, Agoda in Asia, etc.). Since this is the site that brings you the majority of your OTA business, the effort you put into increasing your star rating (on this site) will be a worthwhile investment. Additionally, you want to make sure you review your comp set’s star rating so that you can know if your property has an advantage (making it more valuable to the customer) or a disadvantage (which would entice customers to book elsewhere).

And of course, my recommendation is to use a sophisticated revenue management system to make the whole process easier and less time-consuming. A sophisticated RMS will be able to monitor your property’s and your competitors’ star rating on the important channels – as well as the performance of your competitors and market conditions – on an ongoing basis, and then adjust your pricing accordingly. It is constantly collecting and analyzing data, and will adapt to increase your property’s revenues without you lifting a single finger (to push the buttons on your calculator). See, isn’t that so much easier?!

The hotel industry is constantly changing, and evolving as technology evolves. That means that our pricing strategies, operations and overall business goals need to change as well. But because it can be tough to stay on top of what’s new, I have put together this quick overview of the top three new online sites that will have a big effect on hotels’ revenue management strategy and revenues.

BackBid
According to their website, Backbid is a “hotel booking website that revolutionizes how travelers book hotel rooms. BackBid empowers you, the traveler, to find the best possible hotel room, for the best price, with no elaborate or time-consuming searches necessary. By posting your existing hotel reservation to BackBid, hotels are able to see your travel plans and offer bids for your business, offering either discounts or value-added services, like upgraded rooms, free parking or breakfast.”

In plain ol’ English, what does this mean? After booking a hotel stay with another property through the customer’s channel of choice, they post their reservation details to the site (including star rating, price, room type, special needs, etc.). Hotel members can then see which BackBid users are coming to their area (based on the reservation that they already have) and can create a customized offer to entice the traveler to cancel their current reservation and rebook with them. BackBid bookings are done directly through the site, but cancellations must be handled directly by the traveler.

What does this mean for you, the hotelier?
The industry is divided on their opinions about the site. Some hoteliers believe that the site is creating a race to the bottom (in terms of price) and will create opportunities for hotels to steal other property’s business. On the flip side, some hoteliers find the site useful for selling rooms in slow periods or during the last minute booking window. Unlike other OTAs, BackBid allows the hotel to take control over the number of bookings they receive, and therefore, greater control over their revenues.

We tend to agree with the second set of hoteliers because, if BackBid is used properly, it can offer valuable benefits for a hotel. The most beneficial feature of the site is that hotels can choose to offer value-added services, instead of discounting (which removes the race to the bottom concern). This allows a property to entice new customers for less money than a straight discount. Overall, we don’t believe that BackBid should be the entire basis of a property’s pricing strategy, but it has the potential to be a great tool for selling unsold inventory on a case-by-case basis.

Airbnb
According to the website, Airbnb is “a trusted community marketplace for people to list, discover, and book unique accommodations around the world  – online or from a mobile phone. Whether an apartment for a night, a castle for a week, or a villa for a month, Airbnb connects people to unique travel experiences, at any price point, in more than 33,000 cities and 192 countries.”

The site is essentially a Craigslist for hotels. Individuals or vacation rental companies can list their room, apartment, boat, castle, etc. for rent. Travelers can book and pay online and will be vetted to ensure that they are trustworthy. Unlike the OTAs, Airbnb does not require rate parity so the owners can list the property at any rate they choose and can offer discounts on a case-by-case basis to incentivize bookings.

What does this mean for you, the hotelier?
This site poses a big threat to hotels’ revenues. As there is much less overhead for an individual who is renting out their space (than a hotel), the prices available through Airbnb are often drastically lower than the average hotel price in a given destination. In peak times, hotels often sell out, but Airbnd will often still have inventory available because of the sheer number (of properties) and the many different types of accommodations available through the site.

While AirBnB caters to a different demographic than most hotels, the website has gained a lot of traction since its launch in 2008. If it becomes popular enough, it could potentially expand its content to offer hotels and resorts, adding a new source of revenue to their existing electronic sales segment.

Tingo
The site’s website says that “Tingo is the only site that automatically rebooks you at the lower rate if your hotel drops its price and then automatically refunds the difference to your credit card. All without you lifting a finger!”

Basically, a traveler can book their trip through the site and if the price drops at any time before departure, the site automatically rebooks the traveler at the same property for the lower price (and it will continue to do so, as long as the rate decreases).

What does this mean for you, the hotelier?
This site will have a drastic effect on hoteliers because it will automatically refund the difference if the room rate changes. In recent years, hoteliers have gotten used to lowering their rates at the last minute to clear inventory. But Tingo will further reduce the effectiveness of this strategy and will result in your property losing money. Instead of following traditional pricing strategies, Tingo forces hotels to offer the best price in advance and yield rates as the stay period approaches.

One thing is for sure. The online marketplace is constantly changing, with every year bringing more competition through many new channels. That also means that your revenue management strategy has to continue to evolve as the marketplace (and as consumer booking habits) change, and the only way to do that is a sophisticated, online revenue management system.

There is a great deal of confusion around the plethora of revenue management-related technologies available on the market today. It’s hard to remember which technology calculates rates, which one manages inventory or if they do both. Some systems update rates in real-time, some only update once daily. Talk about technology overload!

Never fear, REVPAR GURU is here to help you determine which revenue management technology will be most useful for your property. Let’s compare two very important solutions: revenue management systems (RMS) versus channel management systems (also known as ‘channel managers’).

What are they?

RMS will analyze reams of data, suggest a specific room rates, forecast demand levels, monitor booking pace and factor in multitude of market segments. A sophisticated system will be a turnkey, all-in-one system, which would handle all aspects of the revenue management process, automatically, from start to finish.

In contrast, channel managers are only able to distribute room rates to the various OTAs used by the property. It is a very helpful tool because the revenue manager doesn’t have to manually update each OTA individually, making it an important piece of the revenue management puzzle – but it is only one individual component.

Rates

Sophisticated revenue management systems analyze the market, historical data, booking patterns, booking pace, room availability, etc. in real-time to determine the best rate at the right time to secure the maximum number of bookings. The goal of the RMS is to accurately assess the level of demand in the market and produce a rate that will not only drive the bookings for a given period but also one that will help the hotel maximize the revenue opportunities.

Channel managers don’t help calculating, changing, optimizing or yielding rates. It doesn’t suggest when to raise/lower your rates, or suggest specific dates to monitor. They take the rates (that were calculated manually, or through an RMS or just chosen at random) and distribute the rates to all OTAs. It’s not automated, and it must be manually updated (ugh, data entry).

Inventory

A big problem for hotels is overselling. Whether it’s because of human error or incorrect yielding, it is not a good thing for business. Additionally, allocating rooms to different OTAs and replenishing inventory can become a huge headache. While not all RMS will manage your inventory across all channels, an optimal system will ensure that your inventory is adjusted automatically and in real-time. This will prevent overbooking and ensure that your rooms are available for sale on all distribution points.

Channel managers don’t offer any protection against overselling because they don’t offer built-in automated inventory control. With only a channel manager, each time a room is sold, the property’s inventory must be updated manually for all affected dates.

Integration

A key factor in the successful implementation of a technology product is whether or not it integrates into the technology that is already being used at the property. All systems should be integrated because it removes the ‘middle man’ and allows the technologies to communicate directly. Integration between all hotel management systems (whether by choosing one single system that does it all or whether you combine multiple technologies) makes the technology more effective, more efficient and will create better results.

Channel managers will distribute rates, eliminate (some) errors and labor costs due to manual data entry, but let’s face it, they will not help you increase revenue.

Hotels face important decisions regarding what to sell, when to sell, to whom to sell and for how much. At the end of the day, both channel managers and revenue management systems are important tools, but have very distinctive advantages/disadvantages. Instead of choosing a stand-alone channel manager, why not invest in an all-in-one revenue management system to help you reach optimal results and really increase revenue?