Why total profitability is the way forward for hotels

Historically, the hotel industry has focused heavily on utilizing room rates as the main revenue driver, but as external costs continue to rise and guests look for a more blended experience, hotels need to shift their focus to total profitability.

To achieve maximum profitability, hotels need to analyze a more comprehensive data set as revenue only tells part of the story. While it represents how much money is coming into a property, it ignores operational efficiency and how much money a hotel is spending to run the entire operation.

Profitability tells the true story of a hotel’s financial health, impacting whether a company can secure financing from a bank, attract investors to fund its operations and grow its business.

When analyzing hotel performance, revenue managers should think of themselves as profit managers. They are in a unique position to directly impact and attract high-value, loyal customers and focus on net cash generated and return on investment (ROI).

Six ways to manage total profitability

• Manage all revenue streams

Yes, room revenue is often the number one source of income. Still, to boost revenue and profit, hotel teams need to also focus on ancillary profits, such as food and beverage, meetings and conferences, golf, spa and parking facilities.

• Understand total guest value

Total guest value takes into account all guest spending, including room rate and ancillaries, less the costs associated with that customer, such as online travel agency commissions and marketing costs. Once you have this data, you can easily identify who are your most valuable guests or guest segments, and target them more accurately.

• Run a channel strategy that maximizes profits

Not all distribution channels are created equal. By understanding channel costs, like commission fees and transaction fees, revenue teams can identify the most profitable channels and build strategies to maximize their return on investment variable to demand.

• Create loyal guests

Loyal guests spend more and stay longer. Understand who your most profitable guests are and where they come from so that you can offer them exactly what they want to stay with you. Build internal sales and marketing strategies to boost guest spending.

• Look beyond revenue

If hoteliers want a full picture of profitability, they need to monitor more comprehensive metrics, such as total revenue per available room (TrevPAR) and net revenue per available room (NetRevPAR). TrevPAR measures total revenue across all outlets, including spa, pool and restaurants. However, like RevPAR, TrevPAR fails to account for cost factors and occupancy rate. NetRevPAR refers to the room revenue generated, minus any costs associated with
distributing the room.

• Unify marketing and revenue teams

Working together with sales and marketing, commercial teams can run promotions that are targeted at bringing in the highest value customers and create sales incentive programs that create opportunities for upsells in the purchase process and on-property.

Hotels using targeted promotions to boost profitability 

For Dutch hospitality chain, Van der Valk Hotels, which operates more than 60 hotels across the country, Europe and the Dutch Antilles, room revenue accounts for just 45% of total revenue, while food and beverage produces 30% and banqueting 25%.

As such, pre-stay communication and upsell promotions have played a big part in optimizing for total profitability. The Van der Valk portfolio takes advantage of the upselling integration between our technology and Oaky, which can yield up to 45% higher guest spend per upgraded night.

Total profitability is also top of the revenue agenda for Grupo Posadas, the largest hotel company based in Mexico, with more than 170 hotels in operation.

Grupo Posadas is benefiting from selling room upgrades at check-in and charging guests for late check-out. However, the revenue team is now getting more involved in ancillary sales and upselling to improve other revenue lines.

Part of this project involves developing and promoting a digital concierge, "Lexi." The aim is for Lexi to be the main point of contact for guests while they are on-property and for the system to curate and send personalized offers to guests to boost ancillary spend.

Pursuing your most profitable business

To optimize for total profitability, hotels need to start with the basics - understanding their costs and expenses. It doesn’t have to be perfect, but by engaging the right departments and capturing this information in cloud-based solutions, revenue teams can begin to put processes in place to start their profitability journey.

Building on this cost data, pricing and reporting solutions can make it easy and intuitive for revenue teams to understand the impacts of costs and expenses on their strategies to focus on net cash generated and return on investment. This will help increase revenues, decrease costs, improve efficiencies and make your hotel more competitive.

Looking to the future, profitability will become a key factor in setting apart good from great revenue teams. As exciting new developments like attribute-based pricing and personalization start to take shape within our industry, having a firm grasp on costs and expenses will be critical to achieving success.