The Transformation of the Hotel Industry from Art to ScienceBy Robert A. Rauch, CHA - President of RAR Hospitality
The venerable institution of hospitality has been turning around over the past two decades. The combined impact of shifting demographics and new technologies are the primary catalysts for this metamorphosis. The Internet provides consumers an opportunity to think of the hotels as commodities. Hotels had been lowering prices to gain a competitive advantage from 2009 to 2013 but are now raising prices as quickly as possible, hoping that the music won't stop soon. The many changes occurring today are proof positive that this industry is no longer limited to being an "art." We have officially moved into the John Naisbitt coined "hi tech, hi touch" world. Led by revenue management but now including distribution channel management, social media marketing, Web 2.0 or 3.0, call it what you like and more, this industry has been transformed.
A Quick Summary of Hotel Pricing
Revenue management is the set of techniques that determine which reservation requests to accept and which to reject to optimize revenue. The principles of revenue management had their origin in the airline industry back in the 1970s, but the concepts are equally applicable to hotels, restaurants, attractions and recreation venues.
The airlines used mergers and supply constraints to avoid commoditization. They simply owned the routes they wanted and pulled aircraft off the runways, which in turn filled flights. Hotel brands, led by Marriott and Hilton in the 1980s and 1990s, delivered a myriad of new brands such as Homewood Suites by Hilton, Hilton Garden Inn, Residence Inn by Marriott and Courtyard by Marriott. By the 21st century, every major hotel company had a verticality of brands from budget to full-service hotels. Online Travel Agencies, (OTAs) began to sell hotel product at deep discounts and this led the brands to negotiate fees with the OTAs.
Today, it is time for the industry to price based on value perception and not just price relative to a competitor. Understanding the true demand in a marketplace is quite scientific.
Know your Customers' Behavior and Decision Process
Packaging is the answer to the commoditization conundrum. The large amount of demographic and psychographic information available about the make-up of today's traveler requires analytical skills and creativity to correctly respond to the marketplace. Product choices by consumers are influenced by a model of the consumer decision process. There are two risks that hotel executives must overcome to achieve success in the marketplace:
- Performance Risk – the chance that the product may not satisfy the consumer
- Financial Risk – the monetary loss from a wrong decision
As for performance risk, loyalty to a chain is a major factor in product choice by consumers. Hotels allow guests to accumulate points that may be exchanged for guest stays and upgrades. The consumer's perception of the hospitality company and what it stands for is paramount to the success of the venture. Product quality must be exceptional, service must be at the level of "wow" and there must be a compelling value proposition for the consumer to choose your business.
As for financial risk, loss of market share is difficult to regain. Desertion Management may be the single most important marketing strategy in today's market. Consistent staff services and attitude make a significant difference in competitive advantage in every market segment. Hotels that can train and motivate their team members will have a much better chance of getting repeat business. We will further dissect desertion management later in this article.
Sample Formulas for Success
My father, Richard A. Rauch, Ph.D. created a multivariate model of consumer behavior that applies here in part. As such, I am borrowing key facets of this model from his work in the field of retailing in the 1990s:
A = B x W x N
A= Attitude toward the business
B= Belief of a consumer that the business possesses a particular desirable attribute
W= Weight of importance of the attribute to the consumer
N= Number of attributes important to consumers
Knowing the millennial traveler, understanding that international travelers represent the single largest growth market in terms of lodging demand and leading your team with strategies that incorporate the trends occurring today is the recipe for success. There are a few key trends that must be monitored and engaged. These include reputation management, innovative technology (think smart phones for both mobile web access and guest check-in) and the sharing economy. Airbnb is becoming a real player in the lodging demand mix.
The Science of Marketing
Digital Marketing is required to both acquire and retain guests. And believe it or not, only a real quality revolution gives you the competitive edge, because as mentioned above, brand loyalty is very limited in today's millennial dominant hospitality market. Since hospitality businesses do not hold customers captive, the only way we can prevent "desertion" is to continually outperform the competition. In addition, by soliciting feedback from the "deserters" or former customers, we can dig out the weaknesses that really matter. As Bill Gates says to his executive team, "tell me about the problems, not our successes."
The growth of mobile is a game changer in that the amount of time between looking, booking and staying is reduced. And everyone has a phone that doubles as a camera for instant social media "Kodak" moments. Customer experience or "CX" today allows us to drive a CX-friendly culture through interconnection and innovation. Anyone attending a conference today will be exposed to the trends of personalization, big data, omni-channel/multichannel campaign management, marketing automation and location-based services. Measurement of all of these will dictate what gets utilized.
Real time marketing and providing content on an ongoing basis will dominate the industry. Although it would be unwise to discount the impact of traditional marketing, real time marketing must take place on a regular basis and incorporate guest-generated content, especially via social media. This must be a crucial component of the marketing mix. In addition, Facebook pages need to take advantage of custom apps that can highlight a hotel's unique features, characteristics, and charm. Whether it is Facebook or another social media outlet, guests should be able to contact the hotel with an expectation that they will receive a response in a timely manner.
Video campaigns on social media, when done properly, are proving to be successful for hoteliers looking to generate guest engagement. We are anticipating the use of video campaigns this year and have already introduced the use of Flip.to to engage future guests in social media conversations. Flip.to allows for hotels to connect with guests from the moment they make a reservation and to create a unique experience upon arrival. By connecting with the hotel, guests are able to share with their friends and family about their upcoming trip. Flip.to then creates a custom experience for their social media connections that can help lead to future bookings.
The Science of Hospitality Permeates All Areas of Operations
Millennials have become the fastest growing customer segment within the hospitality industry. Lobby bars and hotel restaurants are wide open with combination work, play and eat/drink spaces designed with this millennial customer in mind, one who is a "party of one" but "hanging out together." Millennials also have no problems speaking up. If what they are seeking is not handled to their liking, they will turn to Twitter, Facebook, Yelp or TripAdvisor to voice their complaints.
Moreover, millennial travelers do not exhibit the same loyalty to brands as their parents do. This opens the doors for independents and makes it even more difficult to keep that guest returning. Choosing partners from the attraction or transportation side can make lots of sense, especially if the guest perception of the partner is both in sync with your values and of a perceived high quality. Most importantly, the formula above must be adjusted for each psychographic market segment.
Customer service must include enabling guests to be self-sufficient. As an example, if a guest wants to find information using his/her smart phone, providing an app or mobile website that accommodates that information will appeal to many. The rise of this digital traveler requires the hotel industry to balance the expectation of personalization while enhancing the need to remain independent. Customer service must also be genuine and provide great, high quality recommendations delivered by a truly caring team member. "WOW" customer service is the only way to ensure repeat business.
International visitors have been talked about for two years but these travelers are here now. International leisure travel has increased markedly due to the visa waiver program introduced in 2012 and this is moving more international tourists to travel to the United States. With the new "10 year visa" agreement between the U.S. and China signed recently, we will be getting more than our fair share of Chinese travelers. Considering the average Chinese traveler spends a week in the U.S., huge incremental demand is created. These Chinese travelers average spending over $1,000 per day when traveling abroad, excluding accommodations.
Booking more profitable business is critical as more revenues result from strong increases in occupancy levels, average rates and revenue per available room (RevPAR). This may suggest more profits, but the growth in distribution costs as well as other operating costs such as health care and the minimum wage increases can stunt profit growth. While the revenues are coming first and foremost from RevPAR growth, there are additional ways to increase both revenue and net income.
One way to improve net income is by less reliance on the online travel agencies (OTAs). By directing guests to your hotel's website and telephones, the savings are abundant. The digital distribution costs are soaring and the number of players entering the market to compete with OTAs is rapidly rising (think Google, Facebook, Apple, TripAdvisor, Amazon and more). The key is to negotiate with your distribution team (yes, the OTAs can be an integral part of your team) and reduce your commissions. Then make certain that you have a strategy in place to earn the repeat business of every single guest...and get them to book direct next time. Think incentives!
Innovative technology, mobile check-in, and seamless connectivity across platforms and devices are no longer the future, they are the present. Today, mobile apps are being used as everything from a digital concierge to accessing big data. Geo-location can make it easy to sell guests something that is literally right in front of them. In a recent survey by Software Advice, guests desired local restaurant and hotel restaurant discounts when looking for deals as well as maps with coupons for other deals. Most importantly, when looking at the face of a changing consumer today, technology innovation is paramount. As most have heard, Starwood and Hilton will be having guests check in via mobile phone later in 2015.
The sharing economy is a new reality hoteliers are still grasping to embrace. Over the past few months we have seen jurisdictions attempt to regulate this reality as evidenced by the San Francisco City Council implementing new legislation providing a legal avenue for Airbnb.
The classic model of competitive advantage is Michael Porter's Five Forces shown below. This is still a useful model for the hotel industry. The most interesting part of this is the "substitute" portion of the grid…this is what Airbnb is all about and they will have had a huge impact on our industry by the time most people wake up to it.
While the Santa Monica City Council has decided to enact new regulations to ban rental sites that offer short-term vacation rentals in the city and other jurisdictions are aggressively looking to manage this phenomenon, Airbnb is a powerful force.
Where To Go From Here
The transition from art to science in hospitality has caught many by surprise and unfortunately, these are the people that are falling behind. It is crucial that you understand the hospitality industry as it is today because if you continue to only focus on the art, you will be missing out on capturing more business and increasing your profitability.
Robert A. Rauch, CHA
Robert Rauch, CHA, is a nationally recognized hotelier and President of R. A. Rauch & Associates, Inc., a leading hospitality management and consulting firm. Rauch has over 35 years of hospitality- related management experience in all facets of the industry. Widely recognized as the 'hotel guru', Mr. Rauch maintains a blog where he expounds upon insights and trends in the hospitality industry at www.hotelguru.com. Along with the blog, he also publishes Hospitality Innsights, an electronic newsletter that is distributed monthly. Mr. Rauch held nearly every position in the hotel business including General Manager of full-service Four Diamond hotels for Hilton and Embassy Suites. His education includes a bachelor’s degree in Hotel Administration from Western International University and a master’s degree in Tourism Administration from Arizona State University. He is a Certified Hotel Administrator and has served as chairman of numerous tourism organizations nationally and in the western U.S. He has been directly involved in developing several leading brand hotels, some of which the firm still owns and manages. R. A. Rauch & Associates, Inc. currently operates hotels in California, Arizona and Colorado with several under development.Revenue ManagementEducation & Professional DevelopmentGlobal