Reigniting profit optimization through alternative revenue channels

Pressured by high interest rates and ongoing uncertainty, hoteliers are already engaged in a challenging 2024. The best option available to hotel leaders today is to set their sights on the elements of profit optimization that are most pertinent to their business. This approach will help them offset higher costs and grow ancillary guest spending, and it is now within reach of automated systems supporting optimization. Hoteliers can tap into spend from multiple revenue streams during each stay and adapt to minimize costs from acquiring reservations or providing the services associated with the guest’s stay.

Room revenue is just one element of a hotel guest’s total spending during a trip. The important consideration here is not just to try to understand and attribute spend on top of the room cost, but to consider the delicate balance between the ancillary spend and the rate charged. Guests typically have a limited overall budget for each trip. The more a hotel can capture and divert to profitable revenue streams, particularly beyond room bookings, the higher overall value each guest commands.

Ancillary spend can improve overall profit for hotels with outlets or alternative revenue streams of any kind. That said, it’s also important to focus on reducing costs.This process requires some complicated math to execute, but doesn’t require perfect data to start. Hotels can fold in the cost of acquiring guests from different channels across specific dates, the average length of stay and more. Making granular decisions based on cost data is difficult, even for different room types, and extending this to different channels is even more challenging. Hotels must focus on gathering cost data while leaving complex tasks to be handled by advanced automated technology.

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Providing insight into consumers' potential spending power will be instrumental in achieving total profit optimization in today’s economic climate. Consumers were willing to spend more per booking as travel began to recover from the pandemic. Today’s economic pressures, such as the rising cost of living in many developed countries and continued uncertainty, have led to more price-conscious decisions from travelers. There is a limit to how much further rates can be driven upward. Revenue managers must re-learn how to price amid these pressures.

Consider this: In many cases, a person has a total trip spend in mind. The higher the nightly rate, the less consumers believe they have left to spend on other activities throughout their trip. Hotels may be reaping more significant booking profits, but they could be coming at the expense of food and beverage purchases or events that travelers attend. Hotels are one of many compulsory elements of each travel journey, from food to transportation. Furthermore, not all hotels have upsell opportunities to tempt travelers and expand ancillary revenue opportunities.

These factors limit consumers’ purchasing power during trips, but revenue managers have some ways to account for these disruptions. When travelers are marketed favorable or pre-paid rates months in advance, it gives them more time to budget for additional expenses during the trip. The benefits of this strategy are also often psychological. Creating distance between arrival on property and payment can help consumers acclimate to spending while on the road and build anticipation for the trip. This strategy also benefits hotels by storing more bookings over time, creating a healthier financial outlook (collecting prepayments on the balance sheet), and informing forecasts through booking data.

It’s a Balancing Act

Operators can begin to collect and leverage the data they gain through guest activities to build scalable, adaptable tools capable of calibrating the exact impact of costs or ancillary profit on pricing. From there, operators can tweak their revenue management strategy specifically for each unique hotel in their portfolio. Hoteliers should prioritize collecting directionally correct data using automated tools, helping them optimize revenue while gaining time back to focus on strategic decision making.

One example of this balancing act comes as a question: Is it more valuable to welcome guests who stay longer at your hotel or prioritize a large volume of short bookings? Data shows that guests typically spend less on amenities and services the longer they stay at a hotel, but fewer operational costs are associated with longer reservations.

Hotels must reach these conclusions individually based on market positioning and demand factors. How hotels use data to reach these conclusions will determine their ability to attain total profit optimization in 2024.

Hotels can take steps to retain as much guest data as possible during their stay. Operators must encourage travelers to use mobile apps to arrange services, leave their membership or room numbers when making purchases, or use in-network credit cards or services as much as possible. When a guest purchase leaves the hotel’s sphere of influence, that information is lost to another data collection effort. The more hotels know who is spending where and on what, the sharper a hotel’s marketing and forecasting capabilities become.

It is also important to start to gather data on each booking end point's average cost per reservation and commission and how much it costs you to service reservations based on a single night or multiple night stays. This input does not have to be perfect, as directionally appropriate inputs will be a great start, and data collection can improve over time. This data in automated processes and systems can support folding all these complex data points into tools that make the best decisions. It’s all part of a delicate balancing act designed to maximize guest spend, optimize hotel profitability, and improve guest experiences by tailoring the services offered to things your guests want to buy.

Stephen Hambleton is senior director, product management and product success at IDeaS.