Revenue versus marginal profitability: what is the true value of the customer?

How much is a customer really willing to pay? What is the true worth of each distribution channel? These are some of the questions that hotel companies are trying to answer as they attempt to understand the true value of a booking. EyeforTravel’s Ritesh Gupta investigates

Revenue management executives are increasingly looking at the profit made from a booking, rather than simply revenue. Since the focus is on assessing the marginal profitability of customers, firms must recognise the price the customer is willing to pay - not wanting to pay which is usually lower. To do this they must include all possible ancillary revenues as well as accurately account for distribution costs.

For distribution costs in particular, the aim is to establish whether a distribution channel is really delivering an incremental guest or whether a hotel could have acquired that guest on its own. “It’s not always an exact science but the process of thinking about it this way partially guides our investment decisions,” says Frederic Deschamps, vice president global revenue optimisation at Carlson Hotels Worldwide.

Looking across channels

Assessing the profitability of a room, for example, should be based on not only the cost to clean and maintain the room, but also the cost to book the room, says Liz Uber, vice president of revenue management, Pillar Hotels & Resorts.

These fees vary based on the method in which a reservation is booked, such as via global distribution system, third-party website, hotel direct, or via the branded website.

According to Uber, often third-party websites will charge a commission in addition to booking fees which can be between five to 25%, depending on the website. Some of these third party websites are more valuable, because they attract different types of guests, such as international travellers that might stay longer, holiday travellers, or travellers during ‘need’ periods such as weekends for a corporate hotel.

If a website is able to bring guests in during these need periods, hotel companies will often be more lenient and are willing to work with the fees they are charging.

Uber’s final point is that when analysing the profitability of each channel, you really need to look at the type of guest the site attracts. “We have had some experiences in which third-party websites tend to attract guests that are very tough on the hotel, and create additional breakfast costs because of the number of people that stay in each room,” she says.

Of course, hotel companies acknowledge the significance of third-party channels, but they are clear that they will turn less profitable channels off when demand is high.

What is clear is this: hotels have to understand the costs associated with delivering a service. Indeed, arriving at a precise break-even cost is important in finalising pricing. So in this context, the more distribution costs go down, the more profitable it is. At the same time, a balanced direct and indirect distribution mix is essential. If a travel company focuses only on direct distribution strategy, it might end up cutting costs, but this would definitely affect its overall income potential.

Lessons from the airlines   

Airlines distinguish their content in terms of product and price to cover distribution cost of each channel as well as tap the exact requirements of a customer segment. For instance, offering re-bundled fares for business travellers via the GDS channel.

Carriers tend to offer the cheapest fares through the most cost effective channels, chasing price leadership in certain markets. In addition to this, air travel can also be booked through integrated high-cost channels featuring an upgraded product at a price premium. For instance, in the case of low cost airline Germanwings, the airline has been offering additional legroom in certain rows. This service is available on the website either as an optional feature on top of the basic fare or as an inclusive part of re-bundled product at a discounted price.

This way travel suppliers can differentiate their content as per the needs of a customer group and specific distribution channel cost.

Marginal profitability

So how can one calculate marginal profitability of customers to a property or a hotel group? “With many groups we do a displacement analysis to ensure the group is profitable for the hotel,” says Uber.

This takes into account commission fees, booking methods, additional services (such as a shuttle to the airport) and what the group might displace. “This really allows us to look at how profitable a group might be to the hotel,” says Uber.

As it relates to transient guests, the hotel really needs to look at their profit & loss statement and determine how the reservations are impacting their bottom line.  If, on the whole, revenues are not making it to the bottom line, then the hotel must look at each segment individually to determine its impact.

“There have been instances where we have cut some lower-rated business because we just were not able to bring the revenues to the bottom line,” explains Uber. “That said, it is still important to evaluate the overall mix of the hotel and to look at those segments where the cost of doing business is negatively impacting the bottom line.”

Just to show that none of this is straightforward, Uber adds that there are times when the lowest-rated business is not the biggest culprit in a deteriorating bottom line. In fact sometimes it is higher-rated business, which includes food, shuttles or additional services, where the hotel needs to adjust staffing to accommodate the guests’ needs.

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