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ROOM WITH A VIEW: A hotel guest enjoys a top-floor view of New York City. Charging extra for a room with a view and on a top floor are some ways hotel operators drive ancillary revenue. As the industry emerges from the economic downturn caused by the COVID-19 pandemic, hotel owners and operators are exploring different ways their businesses can make more money. One idea being talked about a lot is à la carte pricing for services and amenities that were once included in the room rate.
Squeezing every last ounce of profit from a hotel’s top-line revenue has always been a challenge for hotel operators but the COVID-19 pandemic has tested the mettle of even the most savvy revenue manager. One trend hoteliers are debating is à la carte or attribute pricing for amenities and services that are typically rolled into room rate.
Some hoteliers are giving it a go, unbundling services and finding ways to tap revenue from guests willing to pay extra to craft their own stay experience.
Meanwhile, others are in a wait-and-see mode.
“Obviously, I’m a revenue management guy and I want to make as much profit as we can. I want to make sure we do it in the right way. I want to make sure the customers are paying for what they truly value and want,” said Andrew Rubinacci, executive vice president of revenue at Aimbridge Hospitality in Dallas, Texas.
POSITIVE ATTRIBUTES: Episode 339 of Lodging Leaders podcast explores how the hotel industry may unbundle services and find ways to tap revenue from guests willing to pay extra to craft their own stay experience.
MCR Hotels made news headlines in August when it began to charge guests for separate use of amenities and other perks that were once included in the room rate.
The owner-operator based in New York City rolled out its à la carte pricing scheme at its independent hotels. The hotels charge guests to use the pool and gym, for early check-ins and late checkouts and for breakfast.
MCR president and CEO Tyler Morse calls the practice the “unbundling” of hotel services. Its goal, he says, is to keep room rates low while giving guests options. And make money for hotels.
As hotels struggle to come up with ways to increase revenue in a post-pandemic recovery, the topic of a la carte or attribute pricing has been bandied about over the past few months at industry conferences.
While it’s far from a new concept, hoteliers are more open to reformatting revenue-generating strategies to make up for the billions of dollars in business lost in the coronavirus crisis.
In his interviews with news outlets, Morse acknowledges the company’s new amenity pricing model at its independent properties is a concept that flies in the face of industry conventions, but he expects the idea will catch on with independent and branded hotels and customers will eventually get used to it.
Afterall, he said, airline passengers were unhappy with paying baggage fees a decade ago, but now it’s the norm.
LOADED FEES: Baggage carts carry luggage from an American Airlines passenger jet in August 2017 at Boston’s Logan Airport. In 2008, the carrier was the first to charge checked-baggage fees. American said the increased cost of jet fuel is the reason it added the charge. Other airline companies soon followed. Many hoteliers cite the airline industry’s passenger fees as a model the lodging industry should follow.
Airlines Are Not Hotels
For years, hotel owners have had to deal with amenity creep for the sake of competition.
The talk at recent industry conferences such as Hunter and ALIS agrees that as lodging emerges from the coronavirus pandemic, something has to give. But it’s a mistake to compare hotels with airlines, as is often done by conference panelists, said Rubinacci.
“Airlines are very different and I don’t think we want to treat our customers like the airlines treat their customers,” he said.
The airlines have little with which to differentiate themselves. The airliner is the same basic structure. “So they really broke apart things that people were paying for anyway. With an airline you have from luxury all the way down to economy on the same tube.”
Rubinacci agrees breaking apart services is a concept hotels need to explore, but owners and operators have to realize hotels offer more value propositions than airlines do.
And Rubinacci thinks hotel operators need to be realistic in what exactly they’re going to charge for. No matter its price segment, a hotel offers guests what every other hotel offers – a place to stay overnight. But a Ritz-Carlton and a Motel 6 attract different clientele with the services they offer.
“I think the way attributes are going to come about in hotel industry are going to be very, very different (from the airlines),” Rubinacci said. “We’re not going to break apart the pieces that you should just get as part of paying for a Ritz-Carlton product. You’re not going to start to charge for towels. If we were an airline mentality, that’s the first thing we would think, ‘Maybe we can get people to pay a $5 sheet deposit.’ It’s not really a good way forward. I think for attribute pricing for hotels, it’s going to be about value add, it’s going to be about what people want.”
Room types, rooms with a view and rooms on a top floor are all game in attribute pricing, he said. “There are things that people are willing to pay extra for.”
Rather than unbundling services and amenities, Rubinacci said, hotels can increase revenue by adding amenities and packaging a guest stay. Think Champagne for guests celebrating an event. For spring break, add the use of wave runners, golf game or a spa visit. “Make them part of the package path or part of the overall booking path whenever we know that it’s going to convert the highest to the consumer,” he said.
Because the hotel industry is divided into chain scales and tiered segments based on levels of service, full-service properties from luxury to upper-midscale already price services such as dining and premium Wi-Fi.
Limited Owner Options
Meantime, select-service branded hotels, especially, have a lot of value adds that are supposedly built into the rate. Unbundling these pricing standards may be the toughest call.
“There’s a lot of limited-service product out there that you get a free, hot breakfast. Do you unbundle that? There are owners that would like to, but there’s also more competition in the hotel industry,” he said.
Brands are undoubtedly exploring different ways to help franchisees generate revenue and build more cost effectiveness into their operating models, especially as inflation takes its toll in the form of higher-priced goods and increased wages.
“I get the owner side,” Rubinacci said. “I understand that it’s got to drive value. It’s got to drive customers and overall revenue. It can’t just be more for the sake of more. It can’t be an arms race just to have an arms race. As long as it drives customer preference then I think it makes sense and you’ll make more revenue, more profit, on it.
“But if it drives customer preference and we make less money overall, we’ve got to really question that as well.”
HOUSEKEEPING FEE: Corry Oakes, CEO of OTO Development, participates in a panel in May at the Hunter Hotel Investment Conference in Atlanta. He drew audience applause and agreement from other panelists when he said brands should allow owners and operators to charge for daily room cleaning.
Hoteliers often point to housekeeping when talking about how to cut costs as well as find ways to generate more revenue. It’s an issue mentioned at every industry conference so far this year.
Corry Oakes, CEO of OTO Development, and Mitch Patel, CEO of Vision Hospitality Group, were panelists at Hunter Hotel Investment Conference in May. Moderator Teague Hunter asked the panel what they would like brands to change amid the pandemic and ensuing economic recovery.
The brands have to rethink their operating standards, Oakes said. “The model is broken.
There are so many different places that we could be getting revenue. We’re not winning.”
The place to start changing the model is in housekeeping, he said. The first step would be to scale back on the frequency of room cleaning and charge guests who want their room cleaned every day.
“The customer wants choice. The customer wants to maximize their value,” Oakes said. “You may see more value in more service and the next person may see more value in less service. So let’s give them what they want.”
Patel said Oakes offered the same solution two years ago at the same conference. Obviously, the business model has not changed. But it must, Patel said, as hotel owners and operators see their profit margins narrow every year despite increases in RevPAR.
‘Customers Want Choice’
During the Hunter conference, Lodging Leaders interviewed hoteliers who had some ideas on how to generate incremental revenue, including unbundling amenities.
Customers want choice, he said. “Digital gives them the choice and the control. ‘I need more towels. I do want housekeeping or don’t want housekeeping.’ And then you figure out how to monetize it.
“Most of our properties are limited service and you don’t think about the possibility of upgrading, but there are opportunities.”
Besides building package stays, Benton has seen a trend toward hoteliers charging for parking. The hotel can communicate with the guest in advance about the parking fee or that it’s rolled the fee into a value-add.
Another revenue boost is offering guests non-refundable room rates that are paid at the time of booking. The prices are lower, but if the guest doesn’t show that’s money on the table for the hotel. Pre-pandemic, he said, owners were making “some pretty good money” non-refundable reservations, cancellation fees and shorter cancellation windows.
However, he cautions against going too far with unbundling.
“On some of the other segmentation, part of me does like that, but at the same time, we are in the business of hospitality and do I want to be nickeled and dimed for everything?” he said. “It comes back to what are you paying for? Is it just the roof over your head and everything else is extra? Or is there a certain experience that’s expected?”
EasyHotel is an economy brand in Europe that’s owned by EasyJet. Just as EasyJet passengers pay for extras beyond basic airfare, EasyHotel offers a stack of fee-based amenities such as early check-in, late check-out, grab-and-go breakfast, luggage storage and even the guest room TV remote.
SPOT OPPORTUNITY: An empty room is a money-making opportunity, contends Frontline Performance Group, an Orlando, Florida-based company that teaches front desk associates how to upsell guests at check-in. This chart is from a case study in which FPG worked with a resort hotel to increase its ancillary revenue through attribute pricing and upselling.
When it comes to upselling and monetizing the extras, Frontline Performance Group has written the book. Ziad Khoury founded FPG in 1993 by targeting revenue creation at car rental companies. His book, titled “The Frontline Profit Machine,” explains how customer-focused companies can significantly increase revenue by training frontline employees on upselling.
Geoffrey Toffetti was named CEO of FPG in April. The company serves several industries, including hospitality. Also in April, FPG acquired TSA Solutions, a hotel sales-training venture in Singapore. The deal expands FPG’s global reach.
The timing for the merger is opportunistic as the hotel industry tries to develop ideas on how to generate more revenue and greater profit in a post-pandemic recovery.
As with many companies slowed by the pandemic, FPG took advantage of the downtime to restructure not only its leadership but also its whole company with a focus on technology. It has emerged from the COVID shutdown as a software as a service or SAAS with an eye toward hospitality.
“What the technology essentially does now is it provides the platform on which a hotel company can manage their ancillary revenue programs,” Toffetti said.
“There is a lot of talk in the industry about automating all pre-arrival sales or all guests enhancements, but that’s always going to be just a portion of the equation. There’s certainly a very significant portion of the traveling population that will walk up to the front desk. We don’t think that that will ever stop completely or else what’s the point of calling it hospitality?
“We know there are (guests) that will go digital key. They’ll never go to the front desk. But there are definitely (guests) that are always going to want to interact. So the way we built the system is to handle all of that and recognize that employees of the hotel are going to play a role in maximizing revenue, in promoting enhanced experiences and amenities and managing the process.”
Teaching hotel operators how to segment amenities, room types and other services to generate more topline revenue is not a new concept for the hospitality industry. It’s been a bit sheepish to push for unbundling although other industries have been doing it for decades.
“This conversation for us or with us from our customers began probably about four or five years ago. I think that’s sort of when it hit the consciousness of hospitality,” Toffetti said.
“A lot of people look point back to the airline industry. We would go even further than that and say, it goes back to car rentals. Our DNA was in car rental 30 years ago. That’s how the company started. They have been the masters of ancillary revenue for decades. In fact, it probably makes up the majority of their profits over the last few decades.
“So we’ve been sort of on the forefront of this ancillary revenue concept, and in hotels one of the things that surprised and frustrated us a little when we first entered the market is that hotels only thought about it in terms of the room. And we’ve spent almost a decade now trying to convince the hotel industry that it’s more than just the room.”
A hotel can monetize guest preferences beyond room types and rooms with a view, Toffetti said. And the industry can look beyond offering special packages with amenities and services.
“That’s still very much the infancy of where this can go,” he said. In rental cars and in airliners there’s only so much extra a customer can buy. “But in a hotel there’s actually more opportunity than there ever was in airlines or car rental.”
MCR Hotels holds a groundbreaking ceremony on Dec. 15, 2016, at the TWA Hotel project at JFK International Airport in New York City. Center are Tyler Morse, founder and CEO of MCR Hotels, and then-governor of New York Andrew Cuomo. The 500-plus room full-service luxury hotel opened on May 15, 2019. In August, MCR Hotels began charging fees for amenities and services once included in room rates at its independent properties, including TWA Hotel.
Technology in Place
Morse with MCR Hotels has said the hotel industry typically does not have the technology systems it needs to charge for ancillary purchases. But MCR fixed that problem for itself in September 2020 when it bought StayNTouch, a cloud-based property management system that enables hotels to break down a hotel’s product into what Morse calls micro pricing. It’s the where the world is going, said Morse in the Yahoo! Finance interview.
Toffetti with FPG agrees.
“The problem, ultimately, is that none of the systems that drive the hospitality industry are engineered to do this,” he said. “You have some revenue management companies that have certainly recognized this attribute-based selling. We prefer to call it feature-based merchandising.
“They are starting to retrofit their systems to enable the buildup of an offer from its component parts. But that also can be problematic in that you’re making it too complicated to book. We’re sort of torn on this, there’s a way to do that that we believe is correct and then there’s ways to do it that I think will backfire. But certainly the hotel industry has a huge opportunity to meet the guests where they are, meet them with what they want and need and provide them a better experience for more money, which I think everyone is on board with.”
‘Paradox of Choice’
Hotels in the U.S and around the world are trying to figure out how to make more money per booking without stressing out frontline employees and driving away business.
Toffetti talked about psychologist Barry Schwartz who wrote a book called “The Paradox of Choice.” The gist of the Schwartz’s theory is while choice is good, too much choice is a threat to our mental health and well-being.
“If you give someone too many options, they tend not to buy. Anything. So if you go on a website to do your hotel booking, and you’ve got to answer 15 questions, a lot of people will just close the browser and move on.”
Toffetti proposes hotels do some upselling at the time of booking, but reserve the array of choices at check-in. That’s largely because a consumer has different mindsets along the journey.
“We’ve always held the contention that when you’re booking you’re in value-maximizing mode. You’re not necessarily a cheat mode; you’re just maximizing the value while you’re sitting there doing your research,” Toffetti said.
“When you arrived at a hotel, you’re in maximizing-your-experience mode. That’s why some of these things won’t ever get pushed upstream to the moment of booking. We’ll always be reliant on the disposition of the traveler.
“When they walk into your lobby, they’re anticipating an experience. When you’re booking it online two weeks earlier, you’re not having that same experience. So this idea of maximizing the guest experience by personalizing it through amenities in the room can’t be all thought of as a digital strategy. There are other factors.”
Toffetti said no property is without something it can upsell. FPG is producing a training segment on how owners and operators of roadside motels can generate more money through upselling.
“Even a roadside motel anywhere in the country could have a couple of things they could have early check-in because you might get there in the morning and need your room. They might have late checkout. They might have, you know, shower amenities. They might have slippers.”
Motels also have room types. Even rooms with a view.
Operators of motels and limited-service hotels “don’t think that people will pay to look at a park versus the highway. And we’re trying to educate them that if you’re looking out your window at the dumpster or you’re looking out the window at the highway, the highway is going to be an upgrade to the dumpster. There is segmentation available at all strata of the hotel marketplace,” he said.