‘Don’t Be Afraid To Take Risk’ on Hotel Rates

NASHVILLE, Tennessee — Hotel revenue management experts are coping with increased prices for goods and labor by adjusting strategies to balance costs, demand and profitability.

Many US hotel owners and operators are raising average daily rates as one way to relieve pressure. US hotel industry data from STR, CoStar’s hospitality analytics firm, shows record-high monthly room rates on a nominal basis for July.

Speaking during a panel at the recent Data Conference Hotel titled “Exchanging occupancy for ADR? Understanding cost and profitability,” McKibbon Hospitality Vice President of Revenue Management Jihad Lotfi said at the end of the day, operators must let the customer decide what they are willing to pay.

“None of us can decide what the customer will pay. It’s kind of like the car industry right now. You’re seeing cars being marked up $10,000-$15,000 and people are still buying them,” he said. “You don’t know what the ceiling is. I tell my team, ‘If it’s not broken, don’t fix it.’ Don’t be afraid to take a risk.”

Lotfi said if a hotel is not seeing enough pick up on the room rate, then it’s priced too high. If customers are willing to pay the rate, it is possible to charge more.

Lotfi gave the example of a 10-year old TownePlace Suites in a market that had never sold a room for more than $600. A new revenue manager came in and priced rooms at $1,500 before a college football game, and the hotel ended up selling a handful of rooms at that price.

“Again, you never know until you try,” he said.

Alex Cisneros, senior vice president of revenue generation at Red Roof, said franchisees have become more open to new strategies today, compared to previous recessions.

“We have been focusing quite a bit on which hotels have operating challenges, which hotels aren’t recovering as fast in the economy segment of the industry and where we can solve COVID-specific problems,” he said. “Some of them are related to labor, others being able to improve the distribution mix. We have been tailoring the strategies for the needs of the franchisee.”

Cisneros added that Red Roof’s franchisees for the most part are making more money with less occupancy. Red Roof is now providing more data to franchisees to educate and get them comfortable commanding higher rates.

Panelists were asked: Would you rather sell five rooms for $100 or four rooms for $120? All agreed they’d prefer the higher ADR for fewer rooms.

“For now, I would go with the higher ADR. But not all costs are equal. So, the cost of customer acquisition is something we’re paying more attention [to]. How much money did it cost you to get that customer? Sometimes that third-party booking may be more efficient,” Cisneros said.

“For me, it’s four for $120,” Lotfi said. “I think one of the positives from COVID and what we’ve seen is selling a higher ADR … there’s a lot of benefits.”

Cisneros added that it’s been a process to get all stakeholders — revenue managers, operations, franchisees — to shift focus from revenue to profit.

“Not everybody has the financial background to be able to educate the franchisee,” he said. “At a high level, our franchisees are sophisticated enough to understand what’s the sweet spot [and] at what point [do they] need to bring somebody in to clean the extra rooms.”

Tess McGoldrick, vice president of travel and hospitality at software company Revenue Analytics, said as the data changes, plans must be revisited. She said she helps her hotel clients think about which data points are most important for each individual property.

“If you’re by the airport and there’s cancellations or you’re in a strong market where there’s good products out there for forward-looking comp set data, what are those things that are important drivers to your forecast? Challenge yourselves to figure out how to incorporate that into your systems,” she said.

Lotfi said “none of us have a Magic 8 Ball; we really don’t know what next year is going to look like.”

His approach at McKibbon includes honing in on the segmentation mix and diving into the data that’s available.

Dropping rates last minute to drive up occupancy isn’t always the best strategy, he said.

“It comes down to math. If you’re sitting at 60% occupancy and you need to drop your rate $30, $40, $50, is that loss [worth it?]” Lotfi said. “Now, if you’re sitting at 80% and you only need to sell a few more rooms, absolutely that makes sense.”

Cisneros said Red Roof aims to avoid last-minute rate drops.

“We have learned from past mistakes and we are not being as aggressive on rate reductions as we have done in the past,” he added. “We have better tools, we have systems in place where we are no longer making mistakes.

“I think we are still willing to see what competition and the market are doing … but now we spend a lot of time making it easier for the organization’s franchisees and revenue managers to have all the data in one place and they can make decisions faster. It won’t happen that frequently that we have to drop the rates like that,” he said.

Lotfi asked a rhetorical question: “Does it matter if ADR is going to be sustainable or not?”

“The reason I say that is we’re so focused on something we can’t control. If we only focused on something we can’t control, we’re going to bang our heads on the table. Let the customer tell you what they’re willing to pay. They’re the ones that have the purchasing power,” he said.

Lotfi said he helps his team cut through the noise by eliminating what they can’t control. I advised: “If you’re picking up rooms and you’re ahead of pace,” experiment with increasing the rate.

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