Hotel fees, surcharges ‘uniquely profitable’
 
Hotel fees, surcharges ‘uniquely profitable’
20 AUGUST 2012 8:51 AM

The U.S. hotel industry during 2012 is on pace to collect approximately $1.95 billion in fees and surcharges—an extremely profitable source of revenue that could run a cost against guest satisfaction, hoteliers said.

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REPORT FROM THE U.S.—When the Phoenix hotel industry was experiencing double-digit performance declines during the depths of recession, The Clarendon Hotel took a risky maneuver that threatened to draw the ire of the market’s dwindling base of demand.

It introduced a $25 “hotel service fee.”

“It had to be implemented during the recession in order for us to keep our doors open,” said GM and owner Ben Bethel. “We would not be here today if we had not implemented that fee.”

Bethel was not alone in his actions. The U.S. hotel industry collected approximately $1.55 billion in fees and surcharges during 2009, according to research from Bjorn Hanson, divisional dean of the Preston Robert Tisch Center for Hospitality, Tourism, and Sports Management at New York University.

The “uniquely profitable” revenue source has increased ever since, Hanson said. Fees and surcharges—which cover everything from resorts, amenities, Internet, parking, early departure, reservation cancellations, room service delivery and mini-bar restocking—tallied approximately $1.7 billion during 2010 and $1.85 billion during 2011.

During 2012, Hanson projects the amount of fees and surcharges collected by U.S. hotels to increase to $1.95 billion.

The increase reflects a combination of 3.5% more occupied hotel rooms this year compared to 2011, plus higher fees and surcharge amounts at many hotels, especially resorts. Fewer hotels will have newly introduced fees and surcharges.

“The industry is being conservative in adding new fees or substantial increase in the dollar amounts collected for fees and surcharges,” Hanson said. “I think it’s in part because of research being done by the major chains indicates how unfavorable consumers view the airlines fees and surcharges.”

While the airline industry provides some cover to the hotel industry, hoteliers are likely to hold fees relatively stable through 2014, Hanson added.

Catching guests by surprise
When Bethel introduced the service fee at The Clarendon, he was careful to address two points.

The first dealt with value.

“Its’ OK to charge fees as long as you’re always giving the guest value that’s perceived to be higher than the fee,” he said. “That’s completely understandable.”

The Clarendon’s service fee, which was reduced to $17 as of 1 August, includes the following: breakfast ($10 voucher per reserved guest), parking, Internet, long-distance calls, unlimited bottled water, free snacks and drinks available at the front desk, in-room Keurig coffee machines, morning newspaper, access to the fitness facility, access to UltraFit Boot Camp classes, rooftop yoga sessions on Sundays, Flamenco dance lessons on Wednesdays and four pool passes. 

 

Ben Bethel
GM at the Clarendon Hotel in Phoenix

 

Bjorn Hanson
Preston Robert Tisch Center for Hospitality, Tourism, and Sports Management

 

The second point was transparency. While Bethel said consumers have been trained to expect certain fees and surcharges for nearly every transaction, adding too much to the final bill can lead to dissatisfaction.

 

“What seems to create the greatest dissatisfaction is the surprise or ambush factor,” Hanson said.

This is especially true among brands, where fees and surcharges at one property can vary from another nearby property within the same brand portfolio, he said, adding the decision to implement fees is typically decided by GMs and operators at each hotel.

The problem extends beyond individual brands, said Steven P. André, GM of the 248-room luxury Hutton Hotel in Nashville, Tennessee. If one hotelier charges a bevy of fees and his competitor across the street charges none, that inconsistency can drive dissatisfaction and shift demand.

“You have to be competitive within your market. It becomes much easier to have fees when everyone else has fee. … That’s one of the reasons why you have such pushback for the Internet is that it’s very different. Some hotels charge, some hotels don’t,” he said.

While transparency can help curtail the “ambush” factor, André said he was hesitant to outline each and every cost before a guest books a room, which most certainly would turn off some guests.

“There is a difference between being super upfront and having the information available to guests,” he said. “Making sure the information is accessible and you’re having full disclosure on your rate structure and fees is very important.”

Profit drivers
While the total percent of overall revenue fees make up at each hotel might be small, they are especially viable profit drivers because nearly all of the expense already has been built in, Hanson said.

Most hotels always have held luggage for guests or allowed on-the-go travelers to check out early, he offered as examples. Charging fees for those services provides an added layer of revenue.

“It is a paramount source of revenue for the (hotel) industry,” Hanson said.

And when additional value-adds do present extra costs, Bethel said the redemption rate is still low enough to drive a profit.

The Clarendon, for instance, offers free international calls, and yet most of its guests opt to use Skype. The property also offers complimentary breakfast, and yet most guests either wake up too late to take advantage or are in such a hurry in the morning that they bypass the opportunity altogether.

“We’re offering a lot of things, but most of that money is being retained by the business,” Bethel said.

More than 20% of total room revenue at The Clarendon during the past 12 months is attributable directly to the hotel service fee, he said.

The Hutton’s André was a bit less transparent: “They’re usually pretty nice profit areas,” he said.

5 Comments

  • RobertKCole August 20, 2012 6:54 AM

    A few points: First, regarding the Clarendon: a) Looking at the property website and online booking process, the room selection page for a one night stay clearly states "Total Room Price (Taxes not Included) $139.00." There is no mention of a Resort Fee. b)The room description states "Included in hotel service fee: free parking, free internet, free international calls, free bottled water/minibar snacks/drinks." As this is listed in the hotel description, most consumers would reasonably conclude that the hotel service fee is simply referring to the hotel room rate, not an additional Resort Fee. c) There is no mention of the $17.00 Resort Fee until the next page when credit card information and the reservation confirmed. However, it is listed below the fold in a scrolling Booking Terms box - requiring the guest to scroll down to see the fee disclosure. It is disingenuous to call this form of resort fee disclosure transparent. Mixing terms, An independent hotel might be able to get away with this, but a hotel chain employing the same methods would be a prime candidate for a class action lawsuit - with a high probability of losing. Further, to Mr. Bethel's comments, it is great to charge fees "as long as you’re always giving the guest value that’s perceived to be higher than the fee.” Unfortunately, when the redemption rate is low, banking the profit from breakage does not equate to providing guest value. Airlines that charge passengers those highly maligned bag fees only assess them to customers checking luggage. If airlines charged every traveler a bag fee, there would be public outrage - especially if most people did not check bags. One key aspect that deserves attention is the ability to opt-out of these fees. If the fees are mandatory, with a policy that they are not to be waived upon request, then it can be argued that they should be included as part of the room rate. The Hutton in Nashville takes a different approach by quoting all hotel room categories as packages. The lowest rates offered on the Hutton's website was the "Pawsitively Purrrfect Package" that included Guest room on our pet friendly floors, breakfast for 2 in 1808 grille, waive pet fee, complimentary self parking, and 1 complimentary dog walking service. Every other rate plan also includes bundled amenities or services in the price. While some guests might ask if there is a room available that is not on a pet friendly floor (allergies, etc.) for a lower rate, the hotel can clearly communicate the price, the inclusions and let the guest decide. No advanced mathematics, website scouring or consultations with legal counsel required. The package pricing may appeal to everyone, but there is full transparency - and no reason for guests to enter into conversations about fees with the desk clerk. With budget-challenged local tax jurisdictions seeking higher revenues by charging OTAs room occupancy tax on the margin between the net and retail pricing, it is inevitable that mandatory fees will also come under the same level of scrutiny. Bjorn is right, ancillary fees should be explored by hotels as a key source of revenue and bottom line profit. However, in this age of social media, you do not control your brand and the court of public opinion can be swift and unforgiving. If your guests decide you are crossing the creepy-line, it may already be too late by the time you find out about it... In the case of the Clarendon highlighted above, the wrath of their guests would be well deserved. The hotel industry does need to consider creative methods to grow ancillary revenues, but not at the cost of undermining its business ethics.

  • Zan August 21, 2012 5:55 AM

    The most serious pet peeve of the business traveler is surprise nickel and dime charges, seconded closely by charges for internet usage. This is a barely disclosed, therefore hidden from the busy business traveler, nickel and dime charge. I don't go back to hotels that tag me with surprise charges.

  • danmo August 21, 2012 6:26 AM

    previous comment about sums it up. I love that the hotel loves that nobody used the "free" breakfast included in the fee, money "stays with the hotel." Why not simply raise the rate? Because that would decrease internet bookings for those shopping on value. A ripoff no matter how you try to spin this.

  • Anonymous August 21, 2012 6:46 AM

    It really rankles me when deviousness is labeled creativity or innovation. If the hotel in question wouldn't have survived the early recession without nickel and diming its guests, perhaps it shouldn't have survived. I have spent a career in the hospitality industry and have witnessed too much 'cleverness', such as choosing the correct perspective for, and touching up pictures of properties that, on arrival, come no where near to living up to the promise of the photo. Mr. Bethel's apparent sense of relief about keeping the bulk of the breakage 'revenue' (how can receipts be considered to be revenue when nothing was done to earn it)sounds all too much like Wall Street justifications, or W.C. Fields' 'there's a sucker...'
    How about simply doing a demonstrably better job than the competition, trumpeting that, and for sure, charging fees for legitimate and creative, differentiating incremental services. Great reputations and profitable operations have been built that way.
    I agree with a previous writer, I wouldn't return to Mr. Bethel's nickel and dime operation. He could only ever keep my 'free' money if he could stand the fuss I would make when I found out what was really going on.

  • benbethel August 23, 2012 7:16 AM

    I'd like to chime in a bit more on this.... we would never have wanted to do this originally, but had to implement this fee at a time when other hotels in the area were doing things that we thought were not giving value to the guest. Other hotels were going into the market with low rates so that they would display higher on online booking sites, but when the guests checked out were including "safe fees" of $3/day, "energy surcharges" of $5/day, internet of $22.95/day, parking up to $45/day, etc., etc... so if we kept our rates the same but didn't collect these fees, we would not be in business today. I don't like the fact that fees are becoming standard with hotels, and in fact we've added value recently with a cooked-to-order breakfast made in the kitchen, using ingredients from local dairies, farms, ranches, etc. rather than a "buffet from a bag" from who-knows-where, made by the front desk attendant or laundry attendant when they first come into the hotel in the morning. I think there's a line you don't want to cross, and that's to not surprise the guest at the end of their stay with egregious charges that gave them no value. We're up front with this, and when guests check in, they are usually pleasantly surprise at what the fee includes, and at the end of the stay, say it was well worth it and that they've really enjoyed their stay and will be back. We don't want to become the Allegiant Airlines of the hotel industry, where you're charged for carry on bags, gate checking your bags, anything but a middle seat, priority boarding, etc., etc., etc... we see this happening with almost every hotel in downtown Phoenix, with the surprise $8 bottle of water that cost the hotel $0.11 that's conveniently placed next to your head that should be the first sign that a hotel is not just providing you a wonderful place to sleep, but is trying to rob you blind. Not only can you have as much water as you want, but you can have as many minibar snacks as you want too!

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