There are two main ways to raise profit margins, reduce costs or increase your rates. A hotel that drives a higher average daily rate (ADR) will see profits rise if they manage their costs appropriately.
But, as the marketplace is becoming more competitive, boosting revenue through a higher ADR is easier said than done. Increasing room rates for bigger margins might be doable during high season, but during the low season, high rates will drive customers away.
As a hotel operator big or small, you need to be flexible in your pricing approach to be able to manage the twists and turns of customer demand, seasonality and other environmental factors such as a downward trend in the economy. There are so many variables nowadays that can affect market conditions, some are under your control, but many are not.
Managing your rates and seeing the bigger picture
While reducing your rates is a common knee jerk reaction to low demand seasonality, it can be a short-term boost for a few more room nights. As a revenue strategy, it does not necessarily create extra demand; it may just temporarily shift price-sensitive customers chasing the lowest rate.
In the longer-term discounting can harm your pricing integrity, leading to resistance in any rate increases when conditions change, and you are looking to grow revenue through higher rates.
A more effective option is to focus on adding value, explore different market segments and grow the proportion of direct bookings that you take.
A direct booking does normally deliver a higher profit margin – you get to know your customers and their booking habits better, you can engage directly with them and start some relationship building.
Today, hoteliers need to consider how to maximise revenue for each and every guest, delegate, diner and passer-by that enters your property.
Consider the total spend of each guest, their lengths of stay and spend on ancillary services such as food & beverage. For hotels that offer more than just rooms there could be other profit centers to develop such as meetings and events, spa and leisure stays.
Analysing your channels of distribution and how your guests book a room will go some way to helping you to understand their booking behaviour and how to set your rates.
You’ll need to understand their “booking window” if you place it too far in advance they may not be actually thinking about it and leave it too late and they may have already made alternative arrangements. These kinds of insights will help you to manage your room inventory and how to position your rates depending on your mix of business.
The key is to use your data to understand your different customer segments and their sensitivity to pricing and combine that information with historic data and seasonal demand to get the best revenue yield for your property.
Adopting a rate strategy
Each customer has different motives on why they buy, their experience expectations, what their needs are and a level of willingness to pay at a certain price point for what they consider to be a great experience.
By properly segmenting how you target certain customer groups, as a hotel operator you can be more effective with your pricing strategy and adopt a different approach for each segment. Placing a focus on optimising your business mix will help you drive the most profit.
There are a number of factors that need to be considered when setting your room rates such as; the level of customer demand, seasonality, business cycle (boom and slump), channel shift, the competitor environment, your business mix, your property’s product positioning, and the costs of doing business.
A rate strategy lays out your plan on how to yield each customer segment, distribution channel and room type that you have. Choosing a clear price positioning strategy for your base rate will strengthen your value perception.
You can always benchmark against your competitor set to assess your performance, but you have to be clear on what your unique selling points are to base your pricing strategy on to avoid being just a follower in the market.
Options to help keep guests happy and support for a higher ADR
Up-sell
Once a guest checks-in, see if they are willing to spend a little more by proposing some extra amenities or last-minute offers such as a dining package or ask if the guest would like to upgrade their room.
Upselling is one of the easiest ways to generate more revenue from existing products and to grow ancillary revenue, but it has to be applied consistently and trained in for staff to know how to do it in a passive way without it feeling too pressured on guests checking in.
Find partners in your local network
More than ever, leisure guests are looking for a unique experience and want to take advantage of your local expertise and insights.
Maybe you don’t have restaurant dining facilities or spa treatments or sports facilities, but you can help your guests have an unforgettable experience by recommending other local businesses that do.
Partnerships help you connect your hotel more closely to the local community, develop a network and keep guests happy and loyal.
Improve guest satisfaction and online reviews
Selling a room night isn’t the end of a hotel’s relationship with its customers, you are only as good as the last point of contact that you shared with your guest, so make sure it is a positive one. A satisfied guest is a happy one, contributing to a positive “word-of-mouth” marketing through social media.
It is important to always have the guest front of mind in all the actions that you take, and when it comes to training staff the guest’s satisfaction needs to be the primary focus.
Staff need to be given training on the scope of their decision making, so that a guest is not left at the front desk fuming if your team say that even for the smallest of issues it is an issue that “management” need to deal with – delegate to your team the ability to make decisions based on their own assessment of a situation. Give them a range of options and clear guidelines.
Promoting local events and activities
If you are located in an area bursting with creativity then why not showcase local talent, provide facilities for different classes or workshops, and may be even offer unused areas as an open co-working space.
By opening your doors to both guests and locals, your property can become a popular meeting point and more integrated with the local community - who are not only your neighbours but also potential customers and an audience who may be tapped for recommendations.
Asses and prioritise your channels of distribution
Each channel that brings reservations to your hotel will probably have a different cost structure related to providing that booking. So, you need to analyse and understand these channels. Assess each channel in turn, looking at the room rates you achieve, the number of bookings, their costs and the overall value that they contribute to your property.
Online Travel Agents (OTAs) tend to be the “go to” online distribution channel for most hotels, small or large. They can help you reach markets that you don’t typically have access to and they have a far larger audience that they can get your hotel in front of.
OTAs are a great channel for building brand recognition and incremental revenue and need to be thought of as a part of your distribution mix rather than as the only channel to rely on.
Business from an OTA should where possible be introduced to the benefits of booking directly with your property. By developing your own direct relationship with this segment of guests it will help you to build your own customer data base.
Plus, often the booking value of a direct reservation can be higher than that of an OTA booking as the profile of the guest may be somebody who is less price sensitive.
Technology – booking direct
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Our guest blogger is John Kennedy. John is a hospitality consultant, dedicated to helping increase profits through marketing, revenue management and efficient operationsand can be found at https://kennedy.marketing/
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