How Hotel Managers Can Generate Profits Above and Beyond Owner’s Expectations

By Max Starkov

Background:

The economic collapse of nearly ten years ago brought not only havoc to the hospitality industry, but also created a new type of hotel owner: the activist owner. These owners are knowledgeable, curious, involved, and demanding.

There is a lot happening in 2018 that hotel owners should be happy about. After the best Q1 on record earlier this year, it is shaping up to be another stellar year in hospitality with demand (2.4%) outweighing supply (2%); occupancy increasing by 0.4%; ADRs growing by 2.6%; and RevPAR increasing by 3% (STR, PWC).

The hospitality industry is enjoying its longest expansion and healthiest growth in decades, yet, are the owners happy?

For one, in spite of record-breaking industry benchmarks, profitability is falling and net room revenue—i.e., revenue that remains with the hotel after accounting for distribution costs (OTA commissions, traditional agency commissions, and other distribution expenses)—has been declining steadily over the past several years. In 2017 U.S. hotels earned roughly $155.2 billion in guest-paid revenue but paid an estimated $25.2 billion to acquire guests in the form of OTA commissions and other distribution costs, retaining significantly lower net room revenue of $130 billion (Kalibri Labs). Revenue capture—i.e., net room revenue that remained with the hotels—declined from 84.9% in 2015 to an estimated 83.5% in 2018 (Kalibri Labs).

As far as falling profitability is concerned, 2018 is shaping up to be a repetition of 2017. The overall growth in room revenue, occupancy, and RevPAR that many hoteliers have been enjoying in recent years cannot possibly compensate for “the loss of wealth” in the form of steadily increasing distribution costs via the OTA.

So what should hotel management companies (HMC) do to increase profitability for owners and fulfill their fiduciary obligations as responsible managers? Naturally, any good and responsible HMC can do a lot to improve the bottom line for their hotel owners. However, here we will focus only on increased profitability as a result of smarter distribution and digital marketing strategy.

1. Lower the Distribution Costs

Hotel managers understand that distribution cost is one of the very few cost drivers they can proactively influence to reduce overall expenses. Why? Except for distribution costs, hotel operators have difficulties controlling the other main cost drivers in hotel operations:

• Labor Costs: creeping up due to unionized labor contract and mandated minimum wage/living wage increases in many municipalities.
• Debt Service: at best, interest rates on commercial loans are staying flat.
• Franchise Fees (Rewards, Marketing, Royalty, Reservation, etc.) are creeping up, as usual.
• Utilities: normally 5% of gross. Water, Sewage, Gas & Electric are all creeping up; Water & Sewage are growing fast lately.
• Real Estate Taxes: always creeping up at the whim of local municipalities.

Note: The importance of these cost drivers varies property by property and largely depends on the size of the hotel, condition of the physical plant, whether property branded or independent, amount of debt, and geographic location.

Distribution cost, as a cost driver, has been rising steadily over the last seven years due to OTAs increasing market share versus hotel direct bookings. A few years back, a study by Kalibri Labs, “Demystifying the Digital Marketplace,” provided concrete evidence that this dramatic shift exceeded 40%.

Direct online bookings are by far the most lucrative and cost-efficient bookings at any hotel, resort, or casino. As a point of reference, across the HEBS Digital hotel client portfolio, the average direct channel distribution costs (bookings via the property website or directly attributable to the digital marketing efforts) are 4.5%, compared to the hefty OTA commissions of 15%-25%.

Hotel managers should make it their priority to increase direct bookings, which come at 3-5 times lower cost compared to the OTAs, and improve their overall direct versus OTA distribution ratio, which will improve profitability to ownership.

For owners, any dollar “saved” from distribution adds directly to the bottom line (Net Operating Income, or NOI) and the investment return. In this sense, the more inexpensive direct bookings, the better. The fewer expensive OTA bookings, the better.

2. Adopt a Portfolio-Focused Approach

We see time and again HMCs utilizing myriad vendors that do not talk to each other, and in many cases do not even know each other. This may include different website design vendors and digital marketing agencies for the different properties of the managed portfolio, or even different vendors for the same managed property: one for CRM, a second for the property website, a third for SEO, a fourth for SEM, a fifth for online media, and so on. Recently we encountered an HMC with a portfolio of dozen hotels that was using 28 different vendors for their digital marketing!

Any HMC can benefit immensely from adopting a portfolio-focused (versus property-focused) approach by hiring a single “Agency of Record” to handle website design and digital marketing for the whole portfolio of managed properties, thus reaping significant savings from economies of scale.

Here are just a few of the benefits and cost savings from the portfolio-focused approach:

• Trusted Partner: The Agency of Record, naturally an expert in hospitality website design, digital marketing and direct bookings becomes a trusted partner, a virtual extension of the HMC corporate team, deeply involved in the well-being of the HMC property portfolio. As a trusted partner, the Agency of Record participates in the HMC’s brainstorming and ideation sessions to solve ad hoc and seasonal occupancy needs, target incremental business and market segments, identify cross-selling opportunities among the managed properties, work to eliminate duplicate efforts and budget waste, and generate significant incremental revenues.
• Property Websites: Design and develop an HMC-specific custom master website design, and then apply it to the HMC corporate website and all properties in the portfolio, whether branded or independent, naturally customizing the design to each property’s unique product and brand requirements. This, plus centralized website cloud hosting, analytics and maintenance, can generate savings of 40%-50% that the HMC can pass directly to the owners’ bottom line.
• Account Management: By applying the portfolio-focus approach, the HMC can negotiate with the Agency of Record corporate level fees, retainers, and allotment of website optimization consulting hours that can be used for all of the properties in the portfolio. This allows not only savings of 30%-40% compared to property-level engagements, but the ability each month to shift focus and spend more time and efforts on “ailing” versus “doing well” properties, and solve concrete occupancy needs.
• Digital Marketing: Balance the marketing initiatives so not to cannibalize revenues from one property to another: keyword allocation strategies in SEM/paid search; SEO keywords allocations; content marketing strategy; GDN targeting and retargeting campaigns; and more. This balanced approach can greatly reduce campaign overlaps among the properties, and generate significant savings of at least 30% from CPC and CPM “waste,” duplicate SEO efforts, campaign creative and management efforts, account management and client communications, etc.
• Marketing Budget Waste: The Agency of Record will conceptualize and propose a balanced portfolio-wide strategic marketing budget, including property-specific digital marketing initiatives, aligned with the managed properties’ occupancy and seasonal needs, and for branded hotels in the portfolio—with the marketing strengths and weaknesses of the hotel chains and brand.com, thus eliminating duplicate spend, efforts and campaigns, thus eliminating budget waste.
• HMC Personnel: Working with a single Agency of Record generates significant “time and effort” savings since such a relationship requires less management time at the corporate and property level. Our extensive experience in working with HMCs shows that in many cases HMCs working with HEBS Digital as the Agency of Record have been able to reduce headcount or re-assign HMC personnel to other corporate functions that needed urgent attention.

Case Study: Portfolio-Focused Approach for an HMC:

A Hotel Management Company (HMC) with a mixed portfolio of franchised, soft-branded, and independent properties, needed to streamline operations, reduce “vendor fatigue,” and save guest acquisition costs, all while increasing revenue and profitability.

The HMC partnered with HEBS Digital as a portfolio “Agency of Record” to handle direct booking strategy, website design and development, and full-service digital marketing.

HEBS Digital assigned a dedicated team of digital strategy and marketing experts to the HMC account, backed by project managers, SEO, SEM, Content Marketing, Online Media, Social Media and Analytics specialists. The dedicated team took a “deep dive” into the HMC portfolio, identified unique product attributes for each of the properties, their feeder markets and key market segments; analyzed their comp sets; dissected the properties’ current and past marketing efforts, including what worked and what hadn’t; and developed a comprehensive digital marketing strategy and budget for the portfolio and each property. HEBS Digital developed HMC-specific custom master website designs for each of their category of hotels, and then applied it to the respective properties, adhering to each property’s unique attributes and brand requirements.

The results: Within a year from the start of the engagement, this portfolio-focused approach generated HMC-wide cost savings of over 30% while increasing website revenues by over 40% and generating thousands of corporate online RFPs, weddings, social events and SMERF group requests.

3. Increase incremental revenues

Whether the HMC manages only branded hotels, independent hotels or a mix of branded and independent hotels, there are clear ways for increasing profitability and maximizing room revenue. For branded hotels the focus should be on generating incremental revenues above and beyond the contribution by the major hotel chain; for independents the focus should be on maximizing both core and incremental revenue opportunities.

Branded Hotels in the HMS Portfolio:

What are these incremental revenue opportunities? As the major hotel chains became bigger—organically and through consolidation—they have become more distant and removed from the local environment and concrete occupancy needs of their managed and franchised hotels. This leaves tremendous incremental revenue opportunities on the table from key market segments and in slow seasons:

• Leisure, family, weekend, senior travelers
• Drive-in guests
• Foreign visitors
• Small and mid-size corporate groups
• SMERFs and special occasions
• Driving bookings during slow seasons with property-specific campaigns

The only viable option to achieve incremental revenues in 2018 and beyond is for the branded hotel to engage and invest in “above and beyond brand.com” solutions to achieve bigger and better presence in this overcrowded marketplace and generate incremental revenues above and beyond what the hotel chain brings to the table. This can be achieved by a two-pronged approach:

• Launching a vanity property website with mobile-first design, smart website technology and CMS, and deep relevant content (textual, visual and promotional) that focuses on incremental market segments like leisure, weekend and family travel, unmanaged business travelers, small and midsize corporate groups, SMERFs and social events and weddings, and foreign tourists.
• Launching property-specific digital marketing to market the vanity website and target the above incremental market segments, which typically fall outside the focus of the hotel chain and brand.com, as well as target important-to-the-property domestic and foreign feeder markets and demographics. These property-specific marketing initiatives include: search engine optimization (SEO), paid search marketing (SEM), online media and retargeting, smart data marketing, dynamic rate marketing, social media marketing, and multichannel campaigns.

For the branded hotel, the main objective of the vanity website and property-specific marketing campaigns is to generate incremental revenues above and beyond what brand.com provides. When the above best practices are taken into consideration and the correct property-specific digital marketing strategy put into place, the property vanity website will reap significant rewards for the branded hotel. Many of HEBS Digital’s branded hotel clients have enjoyed significant incremental customer engagements and incremental revenues from their vanity websites, in many cases similar or exceeding the revenue generated by brand.com for the property.

The HMC needs to convince ownership to invest in the branded properties’ own digital presence above and beyond the brand to generate incremental revenues and improve profitability.

Independent Hotels in the HMC Portfolio:

There are tremendous incremental revenue opportunities for the independent hotels in the HMC managed portfolio. Working with the Agency of Record the HMC can now focus not only on the property’s core market segments (leisure, weekend, transient corporate travelers, small and mid-size corporate groups, social events and weddings, SMERFs, etc.) but also on destination-level limited-time offer and multichannel promotions for the cluster of properties, as well as campaigns targeting foreign travelers, drive-in business, staycations, convention goers, and more.

Fortunately, with independents, the HMC and the Agency of Record have a clean slate and only the sky is the limit as far as creativity in the revenue-generation initiatives:

• Technology: Similar to vanity websites for the branded hotels in the portfolio, they can benefit from the latest UX and website technology innovations. This includes a stunning website design and a cutting-edge website technology platform (CMS), as well as revenue-generation modules like Complete Merchandising Platform, Smart Personalization, Live Rates, Reservation Abandonment Applications, and more.
• Digital Marketing: Utilizing smart data marketing campaigns, the Agency of Record can utilize the property’s knowledge of its past and repeat guests to target new “best” guests and broaden the targeting funnel to engage travelers with intent to visit the property’s destination. By using multichannel marketing, with one cohesive marketing campaign, and the same cohesive marketing message (read: promotion) pushed across all potential touch points with online travel consumers (hotel website, SEO, SEM, GDN and online media, social media, PR and email marketing), the independent hotel can build stickiness and traction across channels and devices and dramatically increase revenue. Today’s complex multi-touch consumer behavior is what makes multi-channel marketing campaigns the most effective way to address concrete business needs, increase reach, and boost bookings and revenue for the slow season or need period.

4. Negotiate Direct Booking Incentives with Ownership

Currently, hotel managers are not incentivized enough in their management contracts with ownership to generate more direct bookings versus the more expensive OTA bookings. This shouldn’t be a hard sale since the owners are the sole losers from this scenario: As illustrated above, OTA commissions are destroying profitability and directly affecting the bottom line.

Owners should wake up and incentivize management companies by rewarding them for generating more direct bookings. The management contracts should include special direct booking provisions to incentivize the operator to achieve more direct bookings, easily covered by a fraction of the OTA commission savings.

These direct booking provisions and incentives could be:

• Direct monetary incentive for each direct booking i.e. 5% from direct room revenue
• Establishing targets for direct vs. OTA bookings and reward hotel managers when achieving these. Ex. If on January 1 for an independent hotel the direct vs. OTA booking ratio is 40:60 and the management company succeeds in shifting this ratio to 50:50 through the end of the year, for any $1 in new direct room revenue, the management company gets a 5%-8% bonus, i.e., 5c-8c.

5. Ask Owners to Invest in Book Direct Initiatives

Endemic under-investing in direct online booking-generating technology and digital marketing is one of the main reasons why hospitality has allowed the OTAs to continuously gain market share over the past years.

Hotel owners must realize that increasing profitability means boosting direct bookings, maximizing incremental revenue opportunities, lessening dependence on the OTAs and investing adequately in website technology and digital marketing to engage past, present, and future guests and drive direct bookings throughout the entire path to purchase.

Ask ownership the following questions:

• For your branded hotel, are you happy with the major hotel chain contribution? Do you believe there are the incremental revenue opportunities left on the table by brand.com?
• Have you visited your own property website lately and liked the experience?
• Have you tried to access your property website recently via mobile and felt frustrated from poor usability and download speeds?
• Have you found your property website when searching on Google?
• Have you found your property in the Google AMP search results?
• Have you seen recently an ad for your property across search, online media, social media, mobile, email, etc. promoting seasonal or ad hoc occupancy need?
• Is your property website WCAG 2.0/ADA compliant thus eliminating legal liabilities for ownership?

HEBS Digital has a very comprehensive whitepaper on the subject: The Smart Hotelier’s Guide to 2018 Digital Marketing & Technology Budget Planning is available for download. It provides HMCs with a concrete mobile-first roadmap to jumpstart their managed properties’ direct bookings and guide its digital marketing and distribution strategy throughout the year and beyond. With so many moving pieces in branded and independent hotels’ digital marketing budgets, from enhancing the property website to revenue-generating technology, it’s important to create a strong plan of action that is realistic and aligned with your business goals.

Conclusion:

The main objective for any HMC is to increase profitability and return on investment from the managed properties. As witnessed by many of HEBS Digital’s HMC clients, by applying a portfolio-focused approach and working with a single Agency of Record and its dedicated team of direct booking optimization consultants, account managers, digital marketing, website design and technology experts, the HMC can generate significant economies of scale, maximize incremental revenue opportunities, boost profitability to owners, and fulfill their fiduciary obligations as responsible managers via smarter distribution and digital marketing strategy.