Determining a competitive set is something those in the hospitality industry do routinely, however, these selections can have lasting effects on market positioning and performance and ultimately, asset value. The three most common reasons for competitive set selections include pro forma development, market positioning and performance benchmarking. Selecting an appropriate competitive set and evaluating this selection over time as market conditions change is a worthwhile undertaking. It is one exercise that shouldn’t be taken lightly, but it is often more difficult than it appears to be at first glance.
Competitive set selection should be based on several factors – all of which can be considered to varying degrees, depending on the specifics of any given situation. While numerous studies have been conducted related to this topic and sophisticated analysis can be applied, most hospitality professionals face both time and resource constraints and are more likely to approach the challenge of competitive set selection using information that is generally available to them through the normal course of business.
What follows is a practical guide to selecting a competitive set for purposes of performance benchmarking.
Properties are either purpose-built to cater to a given customer segment, or have gravitated over time towards serving one or more customer segments that constitute the majority of business for a given property. Understanding the business mix of each competitor will help practitioners to better understand which properties are similar to their own. For those in an acquisitions or development role, this exercise will also help identify where upside potential may exist.
While it is true that during low demand periods, properties may think of every other property as a “close” competitor, it is important to consider the natural segment that each property serves best. In the case of convention center property, the most relevant competitors may be in another city or even another region.
Tip: In cases where two or more customer segments are prevalent, it is quite appropriate to consider two or more competitive sets. Think through what reports are readily available that may further assist you. For example, when selecting a group competitive set, rely on lost business reports to narrow your selection. When selecting a corporate transient set, use a resource like Agency360 or speak with travel managers from your top accounts to understand the relative share that other properties in your market may enjoy. Be aware that certain restrictions may be imposed upon you when selecting multiple sets in order to protect anonymity.
Number of Competitors
It is important to consider the number of competitors you want to include in your set. Smith Travel Research (STR) provides parameters relating to what constitutes an eligible set for benchmarking purposes. One of those requirements is a minimum number of competitors for purposes of anonymity, but it is important to consider that it is also possible to have too many competitors. It is highly unlikely that most properties would find results meaningful if they include more than 5 or 6 properties in their competitive set. One-of-a-kind properties may be an exception to this rule. While every property is unique in its own right, there are very few one-of-a-kind properties in the world.
For price positioning analysis, it may be appropriate to track more than just direct competitors. By doing so, properties are able to better understand market trends and, when appropriate, take action to either mitigate or leverage those trends to their own advantage.
Tip: When given a choice, narrow your competitive set selection to a representative sampling of your closest competitors based on your primary market segmentation. In the event you have two or more primary target audiences, consider subscribing to a second or even third competitive set. You can also request a reverse competitive set report from Smith Travel Research, to tell you which properties consider you as one of their benchmarked competitors.
Physical location is one factor that likely receives too much emphasis in today’s environment. In street-corner businesses such as coffee shops, convenience stores, fast food or gas stations, competition is still centered on such elements as price, convenience (location) and in some cases, brand recognition and/or relationship factors. Banking may have once belonged squarely in this category, however, with the advent of online banking, it is quite easy to understand how the influence of location has been diminished.
In the case of lodging, factors such as convenience and proximity to demand generators is still vital for certain customer segments, however, consumer access to information available via the Internet has enabled potential guests with the ability to broaden their search to identify and book reasonable substitutes. Other considerations such as reputation, esthetics, recognition, amenities, services and comfort (to name a few) also conspire to lessen the impact that mere location will have on guest selection.
Tip: Think about competitors further afield than those in your immediate area. Look over the shoulder of a friend or family member as they go online to look for accommodations or event space and observe what properties (or alternative options) they may consider in their search.
Reference Price Ranges
The theory behind using price ranges to group competitors is based on the understanding that certain types of guests are willing to pay an amount for accommodations within a certain target range. Most guests have a reference price range that includes both a ceiling price, above which they won’t pay if there is a reasonable substitute, and a floor price, below which the quality of guest experience may be called into question. This reference range may apply to a given property based on past stays at that property, but most often it is based on past experience across a multitude of stays in various locations. This consumer reference range can change over time as economic circumstances and/or tastes evolve. Of course, brand recognition, star rating and consumer ratings also play a part in influencing whether or not a particular price point is acceptable.
The technique of using average daily rate (ADR) bands to group similar properties relies heavily on the incorrect assumption that ADR is a direct reflection of a property’s price positioning strategies.
ADR is primarily a by-product of channel contribution, room type utilization and management plus mix of sales vs. purely one of price positioning. With the caveat that properties in a given market are not likely to be homogeneous with respect to their size, segmentation contribution, channel mix, product type, room mix, sales approach, price positioning, price structures and management effectiveness, understanding ADR performance is a necessary and reasonable proxy, given the lack of visibility into the specific factors listed above.
This would explain why a midscale property’s ADR might consistently outperform that of a full-service property in the same market.
Tip: Augment ADR analysis with shops of publically available rates (including promotions) of select competitors. Shop various seasons, week parts and length of stays in order to better understand the competitive environment.
Physical Visits to Competitors
It is surprising how little sales professionals, revenue management practitioners and operational leaders truly know about their competitors. In many cases, they may network with counterparts at other properties in their market and may even occasionally attend an event at a property other than their own, but they avoid doing a complete competitive set site visit for years.
Most annual business plans require some form of SWOT analysis to be performed. In many cases, the one created the year prior is heavily relied upon when drafting a current version. Things can and do change. Inevitably, competitor’s physical attributes, amenities and location are overstated and service levels are understated, relative to the subject property. A brand’s halo effect is also something to watch out for. Starting a competitive analysis without bias relative to competitor’s attributes is worthwhile. You may find that a given property is no longer a true competitor, whereas another should be added to the list.
Tip: When conducting a site visit at a competitor within your set, put yourself in the mindset of a specific customer type. This will force you to see competitors through the “fresh” eyes of your target customer. Capture your observations immediately following the property tour. Better yet, stay as a guest and observe both what your competitor does well and where they can improve. Bring that learning back to your property.
Online Consumer Sentiment
Online consumer reviews are a very valuable source of information. Taking the time to read the reviews posted on popular OTA and meta-search sites will provide insights into the type of guests that are staying at various properties. It will also reveal what those guests are saying about their experiences – both positive and negative.
While searching online, pay particular attention to those properties that consistently rotate amongst the top of the natural display order on various sites. Potential guests are more likely to have viewed one or more of these properties and use them as a source of comparison when viewing other properties that appear further down on the sort order.
Tip: Speak with the market managers of several OTA’s that cover your market. They are likely to be aware of developing new trends and can also give you their opinions on which properties they consider to be close competitors.
Assessment of Competitive Leverage
Just because a given competitor appears to be stronger than another, as it relates to any given attribute, doesn’t mean that they can effectively leverage that attribute to their full advantage.
For example, it may be well known that one property in the market has an absolutely fantastic business center. The speed of the Internet connection is lighting fast, the list of refreshments is limitless and the design elements are very conducive to stimulating creativity. Unfortunately, this property is located 3 miles away from the headquarters building of a large corporate account, whereas another property with a small and dated business center is located across the plaza from this same account. Consequently, it is not likely that the first property will pose a serious threat to the second by stealing share from this large customer.
Tip: When assessing competitive attributes, place them in context by weighting them in relation to the impact they may have in attracting and retaining certain customer segments. By doing so, you will be better able to eliminate or include properties for consideration as you select your primary competitive set,
100 Index Fallacy
Many have been taught to believe that a Revenue Generated Index (RGI) of 100 is the right benchmark target. After all, why shouldn’t a property get 100% of its fair share? In the case of a completely homogeneous competitive environment, this result may be possible (although, it is hard to imagine a single owner that would be satisfied with this level of performance).
In reality, competitive environments are dynamic. For example, it may be very appropriate for a property to perform above a 100 index in occupancy and below 100 in ADR, or vice versa, based on the stated strategies and the make-up of the competitive landscape. This also may vary by season. A more relevant metric to track over time is change in RGI Index, since this measures improvements in performance relative to the competitive set, despite market fluctuations.
Ultimately, even if the competitive set selection isn’t perfect (and it probably won’t be), using change in RGI Index will have an equalizing effect. It will allow you to benchmark relative performance over time. It will serve to provide you with an early warning system for underlying challenges and will help to validate that certain actions are positively contributing to your intended business objectives. It will also free you to chart your own course as opposed to reacting to every move your competitors make. Ultimately, this will enable you to discover an uncontested market space, which will positively impact long-term asset value.
Selecting a competitive set isn’t easy; however, there are some steps you can take to objectively make choices that will provide an appropriate context for your property’s performance.