• Bg Careers

Strong Revenue Management, Not Cost Cutting, Leads to Profitability

by Ed Watkins, Contributing Editor |

A recent report from CRBE Hotels’ Americas Research contains both good and disturbing news for the hotel industry. The glass-half-full side of the story was that in 2016, despite flat occupancies and an anemic 2.5% rise in average daily rates, gross operating profits for the hotel industry rose a healthy 3.7%. Sounds good, right?

The bad news, from my perspective, is that hotel operators were able to achieve those levels of profitability not by boosting rates and demand but by limiting growth in operating expenses to 1.6%. While that shows discipline and expertise by operators, and would be commended by many people, it’s not a viable long-term path to continued profitability. It’s an old maxim, but a true one: no one in business ever saved his or her way to prosperity.

Rather, a boost in profitability for a hotel comes by attracting more customers (that’s called marketing) and by offering pricing that entices them to book while maximizing profits for the hotel (that’s revenue management).

Flattening demand? Avoid temptations of cost cutting #revenuestrategy Click To Tweet

According to the authors of the report, many operators foresaw flattening of levels of occupancy ahead, prompting them to reign in expenses in many areas of their operations, even ones critical to the guest experience. For example, labor costs rose 2.8% despite a 4% average rise in hourly compensation for hotel workers. This could mean better labor scheduling techniques, or it could be removing critical opportunities for guest-facing contact.

While it’s incumbent for hotel GMs and department heads to always be looking for reasonable avenues of cost reductions, their main goals should be developing and implementing strategies that please guests, even if they incrementally drive up expenses.

No one really knows what’s ahead for the hotel industry—continued prosperity, a gradual flattening and slowdown or a dive off a cliff. In a flat or down market environment, the winners will be hotels that are able to steal share from competitors. Eliminating services, cutting employees and, above all, indiscriminately slashing rates to boost demand aren’t the answers. They never were and never will be.

RELATED ARTICLE

How Successful Revenue Management Boosts Hotel Profitability

New monthly data from TravelClick points to the possibility of choppy times ahead. In its April North American Hospitality Review, the company points to slower demand and occupancy during the next two-quarters coupled with marginally higher rates. The forecasts differ by segments: transient bookings are sluggish, group demand is down, and leisure business looks strong.

Another factor to consider is the apparent rise in new construction in the industry, especially in certain markets and segments. One truism in the hotel industry is that new generally beats old, but thoughtful, data-based revenue strategies can help hoteliers overcome the attractiveness of new product to consumers.

A lot of deep thinkers in the industry believe the path to success for hotels will be through personalization, including personalized rates that match the right price with the right guest at the right time, a core function of computer-based revenue management systems.

All these factors—choppy demand, supply pressures, new guest requirements—require hotel operators to use their guile, experience and technical expertise to create their own success. A major component of that effort at most hotels will be the revenue management function.

RELATED ARTICLES: 

Ed Watkins, Contributing Editor

Ed Watkins, Contributing Editor

Contributing editor at Duetto
Ed has been covering the hotel industry for more than 40 years. He was editor-in-chief of Lodging Hospitality from 1980 to 2012. He then joined Hotel News Now as an Editor at Large, until his retirement at the end of 2014. Ed still contributes to several publications and is a member of the advisory boards for the hotels schools at Michigan State and Penn State.
Ed Watkins, Contributing Editor
Email this to someoneShare on FacebookShare on Google+Tweet about this on TwitterShare on LinkedIn

Ed Watkins, Contributing Editor

Ed has been covering the hotel industry for more than 40 years. He was editor-in-chief of Lodging Hospitality from 1980 to 2012. He then joined Hotel News Now as an Editor at Large, until his retirement at the end of 2014. Ed still contributes to several publications and is a member of the advisory boards for the hotels schools at Michigan State and Penn State.