A good hotel is a full hotel, right? Not always. If the room rates are too low, a full hotel may not be as profitable as a hotel running at 70% occupancy.
A 2016 study by STR reported that the optimum occupancy for hotels to hit peak gross operating profit was between 75% and 85%. Beyond 85%, increased operational costs start to have a negative impact on profit.
Your management team needs to understand the point of achieving peak gross operating profit. This will be higher for upscale hotels, due to the cost of product, and lower for budget and midscale properties, which provide a more limited service.Successful Revenue Management Boosts Hotel Profitability. Click To Tweet
Understanding this profit tipping point can help hotel executives decide on how to price, when to push promotions, when to pull back on offers or discounts, and when to close out less cost-effective distribution channels.
Missing this tipping point can have costly implications.
Revenue Declines Devalue Hotel Assets
A recent report by Kalibri Labs calculated that, in 2015, hotels in the U.S. saw a 0.4% decline in revenue capture (the percentage of guest paid revenue that is retained after all customer acquisition costs are paid). It might not sound like a lot, but a drop in revenue capture from 83.2% in 2014 to 82.8% in 2015 represented $600 million in lost revenue.
Kalibri calculated that, using an 8% capitalisation rate, this $600 million reduced the asset value of the overall U.S. hotel industry by $7.5 billion, or $1.7 billion in real estate asset erosion for every tenth of a point lost in revenue capture. It’s a huge loss, and the number one reason why hotel owners should be more concerned about revenue management at their properties.
Increases to your top line price – even small ones – will filter down to an increase in bottom line profitability. As an owner, increased hotel profitability also creates additional value in your asset.
Predict Accurately, Price Well
The most cost-effective way to maximize on hotel profit doesn’t involve multimillion-dollar on-property investment. It involves investment in data. Using a predictive analytics platform such as Duetto’s can help hotel management predict demand, map out consumer patterns and maximize on revenue.
Sophisticated algorithms take consumer-centric insights, property data and market intelligence to predict demand and provide specific pricing recommendations in real time to help hotels maximize revenue and guest loyalty. Much like the stock market, the price of a hotel room can be constantly changing – up or down – depending on market sentiment.
As the Kalibri Labs data highlights, small percentage changes can have a big impact – for the good or bad.
By taking a more surgical approach to pricing, using data sets to guide an Open Pricing approach, you will see profit grow.
Hotels using the Duetto platform have seen their RevPAR Index increase by as much as 10 points – that’s a sizable increase that will make a huge, positive impact to your bottom line.
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Latest posts by Michael McCartan, Managing Director, EMEA (see all)
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Tags: data, Duetto, forward looking data, hotel demand, Hotel InterContinental Berlin, hotel profitability, hotel profits, Hotel Revenue Management, hotel revenue strategy, IHIF, International Hotel Investment Forum, Kalibri Labs, loyalty, Michael McCartan, open pricing, predictive analytics, recession, STR