The total cost implications of third-party bookings is being lost on many asset managers who focus on average daily rate, as opposed to net rate.
An asset manager’s primary objective on behalf of owners is to maximize hotel asset value.
Over the past few years, this has been easy to do given the prevailing economic conditions and the strong top line growth experienced by the hotel industry, coupled with growing demand, rising room rates, higher spend on ancillary revenues and low inflation that helps keep expenses in check.
But as the hospitality industry moves into a decelerating growth environment in terms of demand and pricing, and upward pressure increases on major expense categories such as labor and acquisition costs, an asset manager’s ability to continue increasing the most profitable part of the hotel operation—rooms revenue—is being challenged and could lead to lower asset values.
The reality is the cost of customer acquisition has been growing as a percent of the room rate charged for some time now. Third-party disruptors and interceptors have continued to insert themselves in between the hotel and its customers at an alarming rate. No segment of demand seems to be off limits to interlopers such as Expedia, booking.com, Helms Briscoe and Cvent. And when it seems room revenue management and rate integrity cannot get any more difficult, new mobile apps like TripBam are introduced to alert customers the instant a room rates change—up or down. Since the hotel industry still has easy cancellation policies, the customer can bail on their booked reservation and rebook for a lower price at no charge to them.
The net result is these disruptors, along with the entities that handle the electronic transactions, are taking large chunks of the room rate out of a hotel’s revenue stream, sometimes before it even hits the financial statement. Room yield rate is also affected. For example, online travel agencies such as Expedia give the guest the option to pay for their room at time of booking (to the OTA) or upon arrival (to the hotel). If the guest chooses to pay the OTA, in most cases, the OTA takes its 15% to 25% cut of the booking and sends the “net” to the hotel. In this case, most hotels do not even account for the cost that the OTA charged it for handling the reservation. Moreover, there are costs associated with the actual transaction of sending that booking through cyberspace so that the hotel receives it and has it when the guest checks in or calls to ask about it.
These “transaction” costs can be pennies on the dollar for a branded hotel, but more sizeable for an independent hotel, and are most often buried in another line item within the financial statement. Furthermore, the transaction fees are incurred every single time the reservation is electronically touched. For example, if a guest makes an initial reservation, cancels it, rebooks it again and then changes the room type or arrival date, the hotel is charged four transactions fees.
Meanwhile, the brands and many independent operators are doing what they can to minimize these costs by enticing customers to book direct through their channels. But early results show it is only slowing the rate of growth of the third parties and not decreasing their usage by guests.
More concerning is many operators are unaware of the total cost implications to the hotel financial statement and the impact on profitability from these costs because they are not aggregated and viewed holistically, while some do not even show up on profit and loss statements.
As budget season 2017 gets underway, operators should focus on “net rate” as opposed to average daily rate. Net rate deducts all of the various acquisition costs from the rooms revenue and shows the net rate, or that amount that the hotel actually earns before having to pay all the other operating expenses of servicing the guest and sleeping room.
By focusing on net rate, the operator is forced to take a holistic view of the source of historical and budgeted accommodated demand and how it is being booked at the property and whether or not it is accretive or detrimental to the hotel’s profitability. If it’s the latter, then a channel contribution management strategy can be developed by the hotel’s management team to try and influence the way customers are booking their rooms.
Further, this net rate should be calculated over the last few years so that management can determine whether it has been increasing at an acceptable level. And make sure when comparing to STR data that it is apples to apples, since the competitive set may be under a false positive, as well. This is of more interest if the hotel has experienced shifts in demand segmentation or channel contribution over the past few years as these changes directly will impact the net rate, but not necessarily the average rate.
The following table illustrates how a focus on net rate can change the reality of a hotel’s historical ADR performance, which in this case is a difference of 7%. The difference in net rate calculation is almost 2%.
In a decelerating growth cycle, 160 basis points can mean 50% to 100% of the growth factor in next year’s budget. If this is the case, then a good asset management team can develop strategies to more directly influence how customers book at the hotel.
Accordingly, if the team is not focused on “net rate,” then a budget may be approved that reduces profitability in this department. So, focus on “net rate” moving into budget season and make sure the team is aware of the true and total cost of customer acquisition.
Richard Pastorino, ISHC, is CEO and principal of RevPAR International. Pastorino has 30+ years of hospitality industry experience related to new development and acquisition, economic valuation, workouts, branding, asset management, deal structuring, financial and operational analyses, and market and financial due diligence. Rick holds an MBA in Finance from Virginia Tech University and a BSBA from the School of Hotel and Restaurant Management at the University of Denver. He also holds various memberships, including the ISHC, HAMA, and ULI.
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