The Almighty Price Point: Lowering Overhead to Compete

May 4, 2016


It may not come as a surprise, but luxury hotel managers enjoy a few luxuries of their own.


A 2014 study of the Hospitality Industry, conducted by Gallup, sheds light on the relationship between price point, brand engagement, and hotel profits. The study found that customers of upscale brands are more likely to be “engaged” by a hotel brand—that is to say, they more likely to develop an emotional connection to the brand that overrides other considerations. According to the study, guests at upscale and luxury hotels spend from $650-1100 AUD per night on average, and are more concerned about amenities, service and familiarity.


In other words, upscale brands don’t have to worry so much about price point. And that is a very big thing not to have to worry about.


But for vast numbers of hotel guests, money is definitely an object—and the ability to compare millions of hotels instantly through OTAs makes them even more fickle. Economy and mid-range hotels often find themselves studying concepts like price sensitivity and rate elasticity, trying to strike a symphonic balance between price, occupancy and profit. Eventually, some throw their hands up and turn to revenue management agencies—people who promise to be clever on your behalf.


If you can find a good agency, the benefits might be worth it: Clear pricing strategies and shorthand explanations that allow hoteliers to remove their analytical wizard hats and focus on what they do best. If you happen to hire a bad agency, well…it may provide a semblance of relief, but it’s not going to help your quarterly reports. And the service itself isn’t going to come cheap.


Beyond learning how to navigate pricing, however, it’s natural for hotels to think about overhead—that is, the actual cost of operating a hotel. Granted, there aren’t many “unicorns” to be found in this area. Hotels have been crunching the numbers for a while now, and miraculous ways to reduce operating costs are not so easy to come by. Often times, bold attempts to lower costs will erode the quality of service and amenities—which is a straight path to negative guest experiences and reviews.


Unicorns or not, things are constantly changing. Hotels can always benefit from lowering costs, so long as they don’t compromise the guest experience in any way. Here are a few areas where your hotel might have some room to shrink overhead.


Enter the cloud


The cloud is one of those IT words that is both new and annoyingly oversold; but there’s good reason for its popularity. What the cloud really represents is a shift away from owning and maintaining physical IT infrastructure, whether at home or in business. Instead of relying on physical hard drives and automatic or manual backups, hotels can outsource data to a secure, dedicated server. Instead of purchasing, installing and updating sophisticated booking/management software, hotels can move toward subscription-based software platforms that stay currrent as technology evolves.


Are there privacy and security issues? Absolutely. That’s why it’s important to research your options and go with a reputable company that guarantees both security and privacy. But if your hotel spent a fair amount of cash on IT last year, it’s worth looking at moving more of your IT operations into a cloud-based, subscription-based model. One of the biggest and most recent unveilings is from Oracle, whose new suite of cloud-based services for hospitality providers was introduced in early 2016.


Look at energy efficiency


Energy efficiency is an important frontier for everyone, but hotels have a special stake in  the matter. According to the US Energy Administration, the vast majority of hotel energy expenditures are related to lighting, water heating and climate control. There are exciting strides being made in these areas. Siemens, for example, now offers specific advice and system upgrades (including intelligent climate automation, energy efficient lighting, and high efficiency HVAC systems) for hotels who want to be more energy efficient. Some hotels are looking into things like tankless water heaters and other new appliances that take less space and provide greater efficiency.


Beyond flashy new technology, there are a thousand little things to be done: Better thermostat control, energy-efficient vending machines, paperless accounting solutions, and the simple practice of engaging housekeeping staff to reduce energy wastage in everyday practice.


Pay attention to the amenities your guests want today


“Gold plating” is a wonderful term for spending money on things you erroneously think your guests want, and the aforementioned Gallup poll gives insight into how the priorities of guests are changing. Retail shops inside hotels, fitness rooms, and even hotel bars could be on the chopping block in economy and mid-scale hotels. Upscale customers indicate a surprise willingness to part with room service. But no demographic, according to this particular study, is willing to part with certain fundamentals: Quality mattresses, high speed internet, staff who solve problems.


Other areas you could consider include: changing from bottles of shampoo and conditioner, to professional looking dispensers that use good quality product and don’t just substitute one colour for another to distinguish between shampoos and body wash.). Hoteliers have agonized over this for many years, but if done well, this is an area where you can not only save money, but also reduce landfill by many tonnes. (An excellent example is found in the showers of the Etihad Business Class lounge in Dubai); also, what about self-service checkin? This isn’t just the domains of midscale hotels. Airlines have been using these for years and they make it even easier for valued flyers to check in seamlessly with a swipe of their loyalty card, so why not hotels? I can’t count the number of times regular guests have complained about having to complete another registration card.


In terms of doing little things to mitigate wastage (food, water, energy), it’s always possible to step up your game and improve your balance sheets. But when it comes to bold strategies that involve the elimination of services, or sizable investments in energy efficient technologies, hotel operators should think and strategize carefully. Lowering overhead is a well-worn battlefield. The importance of research, observation and mimicry can hardly be overestimated.



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