News for the Hospitality Executive
As the industry recovers from historical lows in occupancy and ADR, I’ve been hearing a common question from many hotels – “How are we going to grow rate?” Occupancy growth has to come first before rate growth, but in markets that are already seeing occupancy come back, hotels have the ability to achieve ADR increases.
In working with hotels across various chain scales and markets, I’ve identified a handful of strategies that can effectively increase ADR without impacting occupancy. I use Manhattan as an example because it is in many ways leading the recovery among U.S. lodging markets, but these observations and recommendations can be applied to any market that is experiencing even modest occupancy growth.
1. Grow Your Yieldable Channels Mix
Adjusting your segmentation to reflect more yieldable business, such as OTA channels, is the best place to start because it’s where rate adjustments can have the most immediate impact. In Manhattan, Expedia ADR has been growing faster than the market’s as a whole. Expedia ADR for Manhattan in June was up nearly 25% year over year, versus market-wide ADR growth of just under 18%. Year to date, the spread is just as pronounced, as the market has grown ADR by 9%, versus Manhattan ADR growth of 14% on Expedia. That means the OTA segment is growing at 57% the pace of the market, and this is due to the fact that the OTA channel is yieldable, as opposed to other pieces of business that were contracted at lower rates prior to the recovery. Because OTA pricing floats off of a hotel’s best available rate, revenue managers can raise or lower rates in immediate response to the market, while with traditional wholesale or contract segments, hotels are locked into fixed rates. In a recovery environment such as the one we find ourselves in now, pockets of demand that allow for rate increases may not become pronounced until closer to the date. In these instances, the hotels that achieve the highest rate increases will be those that can yield up a larger percentage of their business, as opposed to hotels that may already have contracted fixed pricing.
2. Implement a Need Date Strategy
Every market, even in a recovery, has slow periods. But with the right strategy, it is possible to grow rate over these need dates. In Manhattan a prime example is the autumn weekend on which Yom Kippur falls. Corporate travelers check out early, and the locals leave town. Year after year, the market tends to react to the gap in occupancy about three weeks prior to the actual date, and cuts pricing to drive last minute occupancy. But once the 3-week window is reached, not only has the prime booking window passed, but the business in that window is at a considerably lower ADR than in the preceding 4 months. By anticipating need dates, hotels can use advance purchase promotions to fill their rooms further ahead. As long as the dates are identified correctly, promotional rates and the occupancy advantage a hotel gains earlier on will result in a higher ADR than if the hotel waits until the last minute to pick up occupancy. And if you have rooms left last minute, having that occupancy base allows you to discount safely through an opaque channel like Hotwire, as opposed to dropping your retail pricing. To successfully implement this strategy, it is critical to know the booking windows, which for many markets may be further out than expected. For example, in Manhattan, 50% of Expedia’s international package business is already booked 90 days prior to arrival. For international standalone, the average booking window is 60 days. These patterns are examples of the information hotels can use to implement promotional strategies to target the customer during their shopping cycle.
3. Use Value Adds Rather Than Rate Promotions
Once you’ve identified your need periods, the next step is to create an offer that will help shift business in your direction without leaving rate on the table. One effective way to stand out that won’t affect ADR is to use value adds. For example, the best performing value adds we have seen in Manhattan are free breakfast and free upgrades. If your property doesn’t have a managed restaurant on-site or the ability to fulfill a value add at check-in, some OTAs like Expedia will manage the value add on your behalf. For example, Hotels.com’s inline merchandising program recently offered a “free” pre-paid $50 Mastercard with qualifying bookings. Participating hotels saw a lift in their bookings, without an impact on their rate.
4. Turn Up the Volume On Demand During Peak Compression Dates
Every now and then, I hear some hotels talk about “cutting distribution costs” over peak dates by closing out OTAs. But a secret that many successful hotels have realized is that they can achieve higher rates over peak periods by ensuring inventory remains available through their distribution channels, and yielding rate up in response to the significant demand that ensues. We recently looked at one of Manhattan’s highest compression years in recent history. That year, there were 50 days with over 95% occupancy (according to STR). Over those dates, the market ADR was $344 and Expedia’s net ADR was $354. The reason behind this is that Expedia brings a lot of fairly price-insensitive demand at 2-3 weeks prior to peak compression dates, driven by customers that can’t find availability at their usual hotel. By keeping inventory open and adjusting rates up, hotels not only fill rooms at higher rates on Expedia, but also on their own channel through the Billboard Effect. We recently started sharing new peak compression date data with our hotel partners, which provides advance guidance to determine when a hotel has the opportunity to increase rates, or in some cases to revisit and perhaps reduce rates for specific dates. We share a mutual desire with our hotel partners to identify the ideal rate based on what the market can bear.
5. Stop Giving Away Room Upgrades
Many hotels offer some assortment of room types, even if it’s just a choice between standards and suites. The trouble is, the lead-in room type is often overbooked, forcing the property to upgrade the guest for free at check in. By applying a promotional strategy for upgraded room types (being sure to target dates or upgraded room types that might typically go unsold), hotels can entice bookings for higher rate rooms and achieve a higher ADR overall. For example, a typical mix of bookings at one hotel I work with in Manhattan was 75% standard rooms and 25% suites. After they began applying a promotional rate just for the suites, they boosted the mix of suite bookings to 33% and grew overall ADR from $226 to $253. They started getting paid for those room upgrades, and it paid off in higher ADR.
Obviously, the hotel industry today looks much different than in years past. As hoteliers navigate today’s landscape, they need to remain flexible and open-minded to using new and different marketing channels in order to adapt and drive demand in the recovering market, and putting the above strategies into practice is a great place to start. In the final analysis, it benefits an OTA and its hotel partners to grow rate and occupancy. Reach out and engage your OTA market manager. Odds are, they’ll have insights and suggestions about your marketplace that you may not have considered before. Working together with OTA marketing experts like Expedia will accelerate the return to improved rate - but only through active collaboration.
Senior Vice President
Daly Gray Public Relations
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