When is the Right Time to Re-think Your Hotel’s Business Model?

By.  Ahmed Mahmoud 25th Mar 2015

Nowadays many hoteliers are stuck in a commodity mindset, as they find it very difficult to come up with new ways to increase hotel revenue without losing guest satisfaction. You hear them saying things like, “All customers want is the lowest price.” or “This is a mature market.” or “Our owners need higher revenue no matter how.”

Whether you’re a small independent hotel, a startup, or a large multinational hotel chain, it’s easy to adopt the prevailing assumptions. Often they’re industry assumptions. Sometimes they are company assumptions (“we don’t have the capability to pull that off”). And sometimes, they are personal assumptions (“I’m not creative” or “An individual like me can’t impact an organization as big as ours”).

When hoteliers don’t respond to business model challenges (i.e. not achieving the revenue goals or too many guest complaints about services..etc), it’s usually because of internally generated problems like the lack of incentives or not enough concern for the customer. I would encourage managers to think about what internal issues they should be tackling right now. When everything is fine and your model is chugging along and you’re doing your day job, it’s easy to ignore these issues.

In looking to the most effective models consider the following:

1. How are products and services pricing doing?

Nothing has a bigger impact on your business’s sales, revenue, and bottom line than your pricing. Setting your prices too high will result in your products or services not selling.

In the jet engine business, the over-riding assumption was: “Use engine sales as a loss leader to secure the lucrative business of selling replacement parts.” But GE Aviation did a rethink. As a result, they upended the industry model by offering customers a bold new choice. Airlines could now buy “power by the hour.” Instead of purchasing jet engines, they could opt to be charged on the basis of uptime, or per hours of use. They could purchase a package that included engines, parts and maintenance, repair and overhaul services.

Renowned investor Warren Buffett has said, “The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10%, then you’ve got a terrible business.”

Yet pricing receives scant attention in most hotels when it is linked to market segmentation. Fewer than 5% of those hotels have a full-time function dedicated to pricing which is the role of the revenue management.

Having the hotels aside from it, but it can be effect and touch the hospitality industry, according to data from the Professional Pricing Society, the world’s largest organization dedicated to pricing. McKinsey & Company has estimated that fewer than 15% of companies do systematic research on this subject. And only about 9% of business schools teach pricing, according to the Association to Advance Collegiate Schools of Business. This neglect is puzzling, as numerous studies have confirmed that pricing has a substantial and immediate effect on company profitability. Studies have shown that small variations in price can raise or lower profitability by as much as 20% or 50%.

Price setting and price getting requires discipline – not luck. Almost any business can improve its pricing performance, provided it approaches pricing in a structured way.

For the last few years with the implementation of revenue management I had the chance to meet hotel general managers, revenue managers, sales managers. Their hotels varied in size from about 50 to more than 2000 rooms and had dramatically different pricing capabilities. I discovered that pricing power is not destiny, but it is a learned behavior. While competition, costs and price sensitivity within a market affect the parameters within which hotels set prices, superior pricing is almost always based on skill. The hotels I have found that have achieved better pricing all have top managers who champion the development of skills in price setting (price orientation) and price getting (price realization). Regardless of their background, the degree to which managers focus on developing these two capabilities correlates to their hotels’ success in achieving a better price for their product than their competitors. Without managerial engagement, hotels typically use historical heuristics, such as cost information, to set prices and yield too much pricing authority to the sales force.

2- Re-think your revenue model

A revenue model is a framework for generating revenues. It identifies which revenue source to pursue, what value to offer, how to price the value, and who pays for the value. In summary it is everything about revenue management, selling the right product to the right customer ……etc.

The revenue model is a key component of the business model. It primarily identifies what product or service will be created in order to generate revenues and the ways in which the product or service will be sold. Without a well defined revenue model, thus a clear plan of how to generate revenues, new businesses will quite certainly struggle to emerge as they will face costs which they will not be able to sustain. By having a clear revenue model, a business can focus on a target audience, make development plans for a product or service, establish marketing plans, begin a line of credit and raise capital.

For many years Blockbuster and Hollywood Video company (now, no more) dominated the movie rental business in the USA with over 9000 stores all over the country before Netfix was born. But then came Netflix with a new revenue model to fix a broken business part of the video rental business: late fees. That part was so broken that even the inconveniences of Netflix (no instant gratification as people had to wait for their DVDs in the mail) were forgiven. The new revenue model changed from per transaction to monthly subscription fee. And Blockbuster began its painful decline, but without giving up. Blockbuster now has an offer called “Blockbuster Total Access” that provides hybrid access-online rentals with unlimited in-store exchanges. That’s hard to replicate by anyone without physical stores across the nation. They may be too late, but only time will tell.

Let’s look at an Operations example. During the process of booking a reservation or checking-in a hotel guest, do the Call Center and Front Desk teams attempt to upsell guests into a higher room type? If so, is there a standard script used by the agents to communicate to the guest the value of upgrading? Does the wording of that script align or conflict with how marketing promotes the property and its amenities? Is the script updated frequently to take into account new promotions, new amenities or new services available to guests? Is there an incentive program for agents to upsell? Having consistent and accurate upsell messaging from all points of customer interaction can lead to increased incremental revenues, but in order to keep the messaging fresh and accurate it needs to be reviewed and adjusted regularly.

There are many other processes that should be reviewed. Are offers always accepted or are they yielded based upon demand? Are guests who often qualify for a complimentary room mid-week offered a reduced casino rate instead on a highly constrained date or are they just closed out from booking? Is there a single customer valuation used across the organization so guests are treated consistently and fairly? Are metrics such as ADR, Occupancy or RevPAR utilized as a measure of performance?

3- Rethink about what your customers need

To understand why the way you are handling customer service is probably costing you a fortune, let me tell you a quick story happening every day.

You and your family take a short vacation to spend few days in a very luxury hotel where you pay a fortune upon check out due to high room rates and expensive F&B services.

The hotel is fine. Ridiculously overpriced, but fine. The problem is with the service. It’s awful, even though the hotel boasts “we have the highest customer service scores possible.”

They do. And their service is truly awful, but how can both statements be true?

It’s simple. The hotel is gaming the system, something your hotel staff may be guilty of as well when you try to judge how well you are taking care of your customers.

Here’s how the hotel does it.

When you are about to leave the hotel, someone from the front office or the guest service will say to you, “You are going to get a customer survey via your mail from our corporation asking how well you were treated upon your staying with us. Please give us a 10, on a scale of one to 10. Otherwise, they consider it a failing grade.”

One of two things happens. People give the hotel a 10, whether it is justified or not, because they don’t want anyone from the hotel staff to get into trouble. Or they avoid answering the survey, which ensures that all the survey that is tabulated received a 10.

Often, business models get built on a partial solution for the customer. Nobody challenges them for decades. But then someone rethinks what “total solution” would look like in the eyes of customers. That’s what happened when Apple introduced the iPod-iTunes solution. The iPod alone would not have had much impact. But combined with iTunes and the ability to purchase songs for a dollar, the consumer got a complete music solution for the first time.

An effective customer service strategy is vital for building and growing a successful business, no matter the size or industry. If you’re planning a quicker growth and bigger profits for your business, it’s time to start rethinking your customer service strategy to get a jump on your competitors. What exactly can you do to make it better? Here are 4 tips to building a winning customer service strategy

  1. Treat Your Customer Service staff Right
  2. Invest More in Your Customer Service
  3. Show Some extra care to Your Loyal Customers
  4. Use TRUE Customer Feedback to Spur Innovation and Improvement

All hotels claim to value and provide great customer service. But the fact is, few hotels understand the components of the customer service model they promise, or deliver the level of customer service expected. In fact, according to a survey by American Express, 78% of customers surveyed chose not to make an intended purchase due to poor service, and 60% of purchasers were willing to try a new brand or hotel solely to receive better service elsewhere.

In an environment where all competitors have broad selections, similar brands, and low prices, excellent customer service is what differentiates retailers from their competition. Why then is mediocre or poor customer service common place, and how can management make a difference?

About  Ahmed Mahmoud

Ahmed Mahmoud has more than a decade of experience in the hospitality industry and business administration, Ahmed began his career early by holding a variety of management positions with such top hotel chains as Accor Hotels, Hyatt International and Starwood hotels. With decades of revenue management experience Ahmed founded RevenueYourHotel.com the very dedicated site for revenue management news, articles,

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