Just when you thought you’d learned all about what revenue managers are thinking when your RFPs land on their desks, along comes an article titled “Sea Change” in the September issue of Hotels magazine that turns the topic on its head.
Hotel ownership groups, the article states, “are dissatisfied with seeing more revenue but less profit as customer acquisition costs have increased at a higher rate than revenue.” A major contributor to customer acquisition costs are commissions, both wholesale (those paid to online travel agencies) and retail (those paid to travel agents or third-party intermediaries).
The challenge for revenue managers is that their traditional target metric, revenue per available room (), does not take acquisition costs into account. Metrics that would come closer are ProPAR, or profit per available room, or Net RevPAR, which is Revenue minus (commissions plus total sales and marketing) divided by available rooms. To get even more granular, there is also ProPOR, or profit per occupied room.
With industry observers calling for new revenue metrics that take acquisition costs into account, could we finally be entering the era where planners can say they actually do get better rates by going direct and cutting out commissionable middlemen?
It’s possible, considering how high and fast commission spending has risen. One hospitality executive quoted in the Hotels article—Scott Dahl, vice president of technology at Hersha Hospitality Management—goes so far as to say it’s “sort of a joke” that the RevPAR metric “treats a room we sell directly to a customer and one sold through an intermediary with a 20 percent margin, each at the same price, as having the same value.”
In addition to commissions, other acquisition costs at the brand level include marketing, advertising, major promotions, national and global sales offices, and loyalty programs. Marketing programs and sales staff at the local level are also part of a hotel’s customer acquisition expense line.
Interestingly, part of the chatter about these costs echoes what the meeting planning profession went through in the mid-1990s: The realization that there were meeting costs spread throughout a company’s departments and budgets. Thus the move toward meeting planning consolidation (and ultimately). In the end, some meetings departments got moved under the procurement umbrella as a result of the focus on costs.
Similarly, hotels’ attempts to manage customer acquisition costs could see the movement of sales and marketing teams under the revenue management umbrella.
Commissions Race Ahead of Rates
The Hospitality Asset Managers Association recently released a major report showing guest and acquisition expenses rising at a far faster rate then revenue increases. In particular, between 2009 and 2012, retail commissions rose 34 percent while room revenue rose 23 percent (among 104 upper upscale and luxury managed properties with brand affiliations). Brand-level acquisition costs rose even more—37 percent. That meant local sales and marketing budgets took a hit, rising only 7 percent during the four-year period.
Of course, there may be nothing new under the sun. In an interview with the U.K.–based Web site Eye for Travel back in 2010, revenue management expert Steve Pinchuk said, “Revenue management should be tasked with profit optimization [and] needs to yield based on profitability and not revenues.”
– article Meetings Net
It is true that RevPAR is a great quick calculation to determine that revenue is growing or declining year on year however today it reflects less the profitability as the mix of business has shifted largely through online channels and hence the cost of acquisition is higher. Growing RevPAR and Revenue does not always reflect growing profits.
It would be difficult on a daily basis to have on hand the acquisition costs for any given day when conducting analysis so RevPAR measurement and accurate forecasting of channels will give the property a good guide of how profit is heading.
If we are loading channel rates in as net rates and the system derives the net value then the basic RevPAR calculation would reflect less revenue at the top however you would need to look at how the system them optimises this lower value as you may end up limiting access to rates for the main booking channel of your property. Also the demand for these rates is at the gross market value, the customer does not take into account behind the scene agreed payouts they are generating demand based on a market price point of $189 even though the net to the property may be 20% less.
Ideally Revenue Managers always work towards growing profit and being able to have acquisition costs on hand so they can track an adjusted RevPAR figure would certainly be helpful in being able to quickly see how profits are trending and what strategies can be put in place to improve the situation.