Any seasoned hotelier knows that occupancy is only one piece of the puzzle. It’s just not as simple as filling as many rooms as you can. If it were, you could simply offer rooms for a dollar and achieve 100% occupancy overnight. You might even be able to enjoy this perfect number for a month or two before going bust.
A more realistic example is booking 80 out of 100 rooms at a regular rate of $150, as opposed to dropping the rate to $120 and booking all 100 rooms. In both cases your revenue is $12,000—but the operational costs of running that promotion will make the higher occupancy scenario less profitable for your hotel. This is what’s known as profitless volume.
But what if you factor in the promise of more meaningful reviews, more repeat customers, a broader awareness of your hotel brand? Might those extra twenty bookings be worth the trouble after all?
Here’s where it becomes obvious that the relationship between occupancy, rate and profit is a lot like tuning an engine. Finding the optimal balance depends on your market, your geographical location, the size and star rating of your property, and a host of other variables.
What’s certain is that higher occupancy is always desirable in the absence of desperate discounts. When occupancy consistently reaches 80-90% at more-or-less regular rates, your engine is running on all cylinders and racing toward higher profits. If you operate in a major city and you’re spluttering along at less than 60%, you’re in need of roadside assistance.
But there’s another bump in the road.
A perfectly tuned engine is not entirely contingent on promotions, locations, amenities and quality of service. Fluctuating markets at every level—global, national, regional and local—play a huge part in deciding how well a hotel will function. You can do everything exactly right, and know everything there is to know about hotel operations and marketing—but if visitors are not flowing into your area for business or pleasure, you won’t have the horsepower you need. Hence the importance of foresight (and perhaps a bit of luck) in the planning and development stage.
The data shows, fortunately, that Australian hotels are getting luckier every year. A recent report by Deloitte Access Economics shows occupancy rates in Melbourne and Sydney regularly pushing 90%. National averages are as high as 70% and climbing. We’re seeing consistent increases in both the number of tourists (especially international arrivals) and the amount of cash tourists are spending. The lower Australian dollar, although cause for concern in other industries, has helped this visitor influx. Millions arrive on our shores every year with the promise of exploring the unique landscapes and pushing their domestic currency further.
Much of this growth is coming from China - Australian tourism’s biggest customer. Case in point: Executives at China Southern Airlines are complaining that hotels in major cities like Sydney don’t even have enough space for pilots and cabin crew.
The point here is that Australian hotels now have ideal conditions for higher occupancy and greater profit. When visitors are pouring in, and the overall number of bookings is sky high, tuning your occupancy/pricing engine is a matter of knowing where and how to market, and what business to say “no” to. There’s truth in the idea that a rising tide lifts all boats, but who will achieve the highest occupancy rates as Australia’s tourist industry continues to boom? And who will continue to survive beyond this?
Successful operators understand where their guests are coming from, how they’re booking, and what drives a given demographic to choose one priority over another. Every hotel’s toolbox would include event-related bookings, local business partnerships, package deals, creative branding, brand loyalty programs, and good old fashioned discounts targeting specific booking channels.
But how should they determine which of these to use and when?
Modern Revenue Management has moved light years from its simple beginnings. Yield management systems use a plethora of complicated algorithms to advise on what rate should be sold when, and at what level. Healthy arguments are taking place, between Directors of Sales/Marketing and Revenue Management, as to 1) What business should be taken and 2) How the displacement will affect the hotel now and into the future. Often times, the General Manager has to decide.
Make no mistake—Australian hotels are hard at work under the hood. The question is, what’s your hotel doing to win the race for higher occupancy and profit? Part two of this series will go into greater depth about how your hotel can achieve long-term success as bookings increase nationwide.
This is part one in a two part series. Part two will be published on the 6th of January, 2016. If you have any questions between now and then, please do not hesitate to get in touch.