How Hotel Managers Can Generate Profits Above and Beyond Owner’s Expectations

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by Mark Starkov | hebsdigital.com
June 2018

The hospitality industry is enjoying its longest expansion and healthiest growth in decades, yet, are the owners happy?

Background:

The economic collapse of nearly ten years ago brought not only havoc to the hospitality industry, but also created a new type of hotel owner: the activist owner. These owners are knowledgeable, curious, involved, and demanding.

There is a lot happening in 2018 that hotel owners should be happy about. After the best Q1 on record earlier this year, it is shaping up to be another stellar year in hospitality with demand (2.4%) outweighing supply (2%); occupancy increasing by 0.4%; ADRs growing by 2.6%; and RevPAR increasing by 3% (STR, PWC).

The hospitality industry is enjoying its longest expansion and healthiest growth in decades, yet, are the owners happy?

For one, in spite of record-breaking industry benchmarks, profitability is falling and net room revenue—i.e., revenue that remains with the hotel after accounting for distribution costs (OTA commissions, traditional agency commissions, and other distribution expenses)—has been declining steadily over the past several years. In 2017 U.S. hotels earned roughly $155.2 billion in guest-paid revenue but paid an estimated $25.2 billion to acquire guests in the form of OTA commissions and other distribution costs, retaining significantly lower net room revenue of $130 billion (Kalibri Labs). Revenue capture—i.e., net room revenue that remained with the hotels—declined from 84.9% in 2015 to an estimated 83.5% in 2018 (Kalibri Labs).

As far as falling profitability is concerned, 2018 is shaping up to be a repetition of 2017. The overall growth in room revenue, occupancy, and RevPAR that many hoteliers have been enjoying in recent years cannot possibly compensate for “the loss of wealth” in the form of steadily increasing distribution costs via the OTA.

So what should hotel management companies (HMC) do to increase profitability for owners and fulfill their fiduciary obligations as responsible managers? Naturally, any good and responsible HMC can do a lot to improve the bottom line for their hotel owners.

However, here we will focus only on increased profitability as a result of smarter distribution and digital marketing strategy.

1. Lower the Distribution Costs

Hotel managers understand that distribution cost is one of the very few cost drivers they can proactively influence to reduce overall expenses. Why? Except for distribution costs, hotel operators have difficulties controlling the other main cost drivers in hotel operations:


Distribution cost, as a cost driver, has been rising steadily over the last seven years due to OTAs increasing market share versus hotel direct bookings. A few years back, a study by Kalibri Labs, “Demystifying the Digital Marketplace,” provided concrete evidence that this dramatic shift exceeded 40%.

Direct online bookings are by far the most lucrative and cost-efficient bookings at any hotel, resort, or casino. As a point of reference, across the HEBS Digital hotel client portfolio, the average direct channel distribution costs (bookings via the property website or directly attributable to the digital marketing efforts) are 4.5%, compared to the hefty OTA commissions of 15%-25%.

Hotel managers should make it their priority to increase direct bookings, which come at 3-5 times lower cost compared to the OTAs, and improve their overall direct versus OTA distribution ratio, which will improve profitability to ownership.

For owners, any dollar “saved” from distribution adds directly to the bottom line (Net Operating Income, or NOI) and the investment return. In this sense, the more inexpensive direct bookings, the better. The fewer expensive OTA bookings, the better.

2. Adopt a Portfolio-Focused Approach

We see time and again HMCs utilizing myriad vendors that do not talk to each other, and in many cases do not even know each other. This may include different website design vendors and digital marketing agencies for the different properties of the managed portfolio, or even different vendors for the same managed property: one for CRM, a second for the property website, a third for SEO, a fourth for SEM, a fifth for online media, and so on. Recently we encountered an HMC with a portfolio of dozen hotels that was using 28 different vendors for their digital marketing!

Any HMC can benefit immensely from adopting a portfolio-focused (versus property-focused) approach by hiring a single “Agency of Record” to handle website design and digital marketing for the whole portfolio of managed properties, thus reaping significant savings from economies of scale.

Here are just a few of the benefits and cost savings from the portfolio-focused approach:

 

Case Study: Portfolio-Focused Approach for an HMC

A Hotel Management Company (HMC) with a mixed portfolio of franchised, soft-branded, and independent properties, needed to streamline operations, reduce “vendor fatigue,” and save guest acquisition costs, all while increasing revenue and profitability.

The HMC partnered with HEBS Digital as a portfolio “Agency of Record” to handle direct booking strategy, website design and development, and full-service digital marketing.

HEBS Digital assigned a dedicated team of digital strategy and marketing experts to the HMC account, backed by project managers, SEO, SEM, Content Marketing, Online Media, Social Media and Analytics specialists. The dedicated team took a “deep dive” into the HMC portfolio,  identified unique product attributes for each of the properties, their feeder markets and key market segments; analyzed their comp sets; dissected the properties’ current and past marketing efforts, including what worked and what hadn’t; and developed a comprehensive digital marketing strategy and budget  for the portfolio and each property. HEBS Digital developed HMC-specific custom master website designs for each of their category of hotels, and then applied it to the respective properties, adhering to each property’s unique attributes and brand requirements.

The results: Within a year from the start of the engagement, this portfolio-focused approach generated HMC-wide cost savings of over 30% while increasing website revenues by over 40% and generating thousands of corporate online RFPs, weddings, social events and SMERF group requests.

3. Increase incremental revenues

Whether the HMC manages only branded hotels, independent hotels or a mix of branded and independent hotels, there are clear ways for increasing profitability and maximizing room revenue. For branded hotels the focus should be on generating incremental revenues above and beyond the contribution by the major hotel chain; for independents the focus should be on maximizing both core and incremental revenue opportunities.

Branded Hotels in the HMS Portfolio:

What are these incremental revenue opportunities? As the major hotel chains became bigger—organically and through consolidation—they have become more distant and removed from the local environment and concrete occupancy needs of their managed and franchised hotels. This leaves tremendous incremental revenue opportunities on the table from key market segments and in slow seasons:

This can be achieved by a two-pronged approach:

For the branded hotel, the main objective of the vanity website and property-specific marketing campaigns is to generate incremental revenues above and beyond what brand.com provides. When the above best practices are taken into consideration and the correct property-specific digital marketing strategy put into place, the property vanity website will reap significant rewards for the branded hotel. Many of HEBS Digital’s branded hotel clients have enjoyed significant incremental customer engagements and incremental revenues from their vanity websites, in many cases similar or exceeding the revenue generated by brand.com for the property.

The HMC needs to convince ownership to invest in the branded properties’ own digital presence above and beyond the brand to generate incremental revenues and improve profitability.

Independent Hotels in the HMC Portfolio:

There are tremendous incremental revenue opportunities for the independent hotels in the HMC managed portfolio. Working with the Agency of Record the HMC can now focus not only on the property’s core market segments (leisure, weekend, transient corporate travelers, small and mid-size corporate groups, social events and weddings, SMERFs, etc.) but also on destination-level limited-time offer and multichannel promotions for the cluster of properties, as well as campaigns targeting foreign travelers, drive-in business, staycations, convention goers, and more.

Fortunately, with independents, the HMC and the Agency of Record have a clean slate and only the sky is the limit as far as creativity in the revenue-generation initiatives:

4. Negotiate Direct Booking Incentives with Ownership

Currently, hotel managers are not incentivized enough in their management contracts with ownership to generate more direct bookings versus the more expensive OTA bookings. This shouldn’t be a hard sale since the owners are the sole losers from this scenario: As illustrated above, OTA commissions are destroying profitability and directly affecting the bottom line.

Owners should wake up and incentivize management companies by rewarding them for generating more direct bookings. The management contracts should include special direct booking provisions to incentivize the operator to achieve more direct bookings, easily covered by a fraction of the OTA commission savings.

These direct booking provisions and incentives could be:

5. Ask Owners to Invest in Book Direct Initiatives

Endemic under-investing in direct online booking-generating technology and digital marketing is one of the main reasons why hospitality has allowed the OTAs to continuously gain market share over the past years.

Hotel owners must realize that increasing profitability means boosting direct bookings, maximizing incremental revenue opportunities, lessening dependence on the OTAs and investing adequately in website technology and digital marketing to engage past, present, and future guests and drive direct bookings throughout the entire path to purchase.

Ask ownership the following questions:

 

HEBS Digital has a very comprehensive whitepaper on the subject: The Smart Hotelier’s Guide to 2018 Digital Marketing & Technology Budget Planning is available for download. It provides HMCs with a concrete mobile-first roadmap to jumpstart their managed properties’ direct bookings and guide its digital marketing and distribution strategy throughout the year and beyond. With so many moving pieces in branded and independent hotels’ digital marketing budgets, from enhancing the property website to revenue-generating technology, it’s important to create a strong plan of action that is realistic and aligned with your business goals.

Conclusion:

The main objective for any HMC is to increase profitability and return on investment from the managed properties. As witnessed by many of HEBS Digital’s HMC clients, by applying a portfolio-focused approach and working with a single Agency of Record and its dedicated team of direct booking optimization consultants, account managers, digital marketing, website design and technology experts, the HMC can generate significant economies of scale, maximize incremental revenue opportunities, boost profitability to owners, and fulfill their fiduciary obligations as responsible managers via smarter distribution and digital marketing strategy.