How to win the revenue game in the next downturn

(Revenue Management)

The U.S. economy and the hotel industry are likely to enter a downturn some time in the next two years. Given that industry-wide RevPAR growth already has begun to decelerate and occupancy is falling, the slump might already be upon us.

The upshot for hotels is that, even though they won’t know for sure when the inevitable slowdown will come, they can ensure they’ll emerge from it with their profitability intact. To do that, they need to adopt the right mindset to beat the competition, which means pricing effectively and managing distribution.

In a recessionary environment, hotel owners and executives must redefine what winning looks like. When your overall market is contracting, the most important metric becomes RevPAR Index: how you stand against your competitive set. Top-line revenue gains may not be possible when fewer people are traveling and they’re carrying lighter wallets. But if you can take share from your competition, you can maintain your revenues and drive bottom-line results.

The easiest way to seize market share is not a multimillion-dollar renovation or additional investment in guest-facing technology, but something as simple as having the right information to make the right distribution decisions and then having the fortitude to stick with them.

Winning or Losing the Game Before It’s Begun

In previous recessions, hotels thought maintaining their occupancy would help them tread water, so they cut their room rates aggressively and turned over more inventory to distribution intermediaries, such as online travel agencies.

These moves did little to improve hotel demand. All hotels accomplish with that is eroding revenue and neutering their own pricing power, and they lose the competition before it really gets underway. Let the race to the bottom be the only game you lose.

Hotels can hardly afford to make the same mistakes in the next downturn, as they face a far more complex and prolific distribution landscape. OTAs have created too much transparency in pricing for that, and online-booking newcomers—Airbnb, Google and TripAdvisor, for instance—have their own ways of pressuring room rates down and commissions up.

If hotels aren’t cutting rate in during a slowdown, they’re slashing their budgets wherever they can, particularly in labor and technology expenditures. We’re advocating something different. When overall RevPAR is falling, revenue managers will have to be even smarter about managing distribution channels, optimizing business mix and yielding room rates higher whenever they can. The best time to learn these strategies is right now.

As longtime real estate owners and investors know, even small gains in RevPAR Index have significant multiplier effects on net operating income, meaning a hotel’s profits can still grow when the market’s revenues are shrinking. But to take share from your competitors in this way, you need better information than they have, and you’ll need it faster in order to recognize rivals’ missteps and pounce on the opportunities they create.

Data Drive Outperformance

The right information helps your revenue managers wisely react—not overreact—to economic factors or to pricing moves made by the hotel on your block. The most important thing hotels gain from having bigger and better data is the confidence to make the right pricing decisions at the right time. Here are a couple tips:

1. Revenue managers should learn how to wield data-driven strategies now, because the most important task in a recession is to identify the peak-demand dates that will be fewer and farther between. Competitors with less information or confidence might try to maximize occupancy during the downturn, cutting room rates too aggressively, even on those rare high-compression dates. Those will be the days your hotel wins the downturn: Have the confidence to hold rate when other properties are seeing how low they can go, or yield your prices higher when your competitors hesitate.

2. Having better information helps your property target when to best deploy or pull back discounts. Again, use a competitor’s misstep to your advantage, and sell rooms on the same date for a smaller discount or lower OTA commission. Your strategy also can help your revenue managers evaluate which distribution channels are worth the acquisition costs on a date with a high rooms need. If your rivals did not prepare for the downturn by altering their revenue strategies, it’s their loss—and your gain.

Perhaps you’re able to command a $50 premium above your comp set’s rate on a peak weekend. For a 250-room hotel, that equals a $25,000 swing in revenue that flows through nicely to the bottom line, if labor costs and acquisition costs are relatively static.

The Past is not Prologue

When the hotel industry cycles into a recession, brands and properties will want the strategies and systems that can stick with them through lean times already in place. They won’t want to make the same mistakes they made in previous downturns.

But no hotel can proactively break the cycle of the industry’s typical responses to recession without confidence in its strategies to outcompete rivals through better pricing and management of distribution channels.

They should move toward these strategies today while they have time and capital to invest in them. Savvy pricing and distribution methods cost less and drive more revenue over the long term than any remodel initiative or marketing campaign. If you take these steps now, you’ll be prepared to better withstand the next downturn and be set up to ride the next recovery before it appears—and before your peers.

Leland C. Pillsbury is the co-founder and chairman of Thayer Lodging Group, a Brookfield Company. Prior to launching Thayer, he developed one of the hotel industry’s first revenue management systems while at Marriott International. He sits on the Dean’s Advisory Board at both the Cornell University School of Hotel Administration and the J.L. Kellogg Graduate School of Management at Northwestern University.

Patrick Bosworth is co-founder and CEO of Duetto, a San Francisco-based developer of revenue strategy technology for hotels and casinos. Before leading Duetto, he was director of yielding and business strategy for Wynn Las Vegas.