Maximizing Hotel Profits Even While Renovating
By Paul Van Meerendonk, Director - Advisory Services at IDeaS Revenue Optimization
Money never sleeps, and neither do hotels. It's often one of the biggest challenges faced by hoteliers: maintaining facilities to the standards expected by discerning guests, and determining how and when to upgrade those facilities without turning away or losing business.
Some hoteliers may take the view that there is never a good time to renovate their property; it can result in a whole or partial closure of their business. Unfortunately, there is no way to avoid substantial property refreshers in the longer term if hoteliers want to ensure their property looks its best and caters to the expectations and desires of targeted guests. The question then for hoteliers considering an upgrade or renovation: total or partial?
To Close or Not to Close
Many hoteliers struggle to decide whether a total or partial renovation is best for their property given the likely short-term impact on revenues. A major factor in the renovation decision is whether or not short-term cash flows are needed. If that is the case, then a partial or staggered renovation is often the best course of action. Major hotel brands usually take this approach, whereby the whole property does not close and a level of operating revenues are maintained. However, if long-term revenue and profit generation—or even repositioning the hotel at a different service or star level—are the key motivators behind the property refresh, it would be best to close the whole property while the refresh is undertaken. A major re-opening of the property then elevates visibility and interest: similar to the project undertaken by the Savoy in London.
The Perfect Time to Reposition Your Business
It is not simply enough for a hotelier to undertake a physical upgrade of their facilities and expect to receive all of the revenue benefits a newer facility could offer. Renovations should always be accompanied by a repositioning exercise. If a hotel decides to carry on with business as normal following a renovation, then customer satisfaction may increase as a result of renovations. Revenues and profits, however, may not see any impact. It is essential that a detailed repositioning exercise is conducted, evaluating price vs. value equation and examining the potential for more aggressive upward pricing based on the impact of renovations. This exercise should take place prior to any major investments and determine the effectiveness and ROI of the renovation. Also, revenue management is not often involved early enough in the renovation decision-making process, and as a result, the full benefits of renovation can be negatively impacted.
A hotel often considers or undergoes a renovation in order to maintain the quality of their rooms for customers. But to take full advantage of room renovations, hoteliers should also consider if the renovation warrants a reclassification of room types. Oftentimes, this reconfiguration can create an entirely new room type and allow hoteliers to rethink their customer positioning. But this goes beyond just increasing the price by one-to-five percent, it should be a combined sales, marketing and revenue effort to reposition the new room types.
Careful assessment of the new market demand created by hotel renovations is also very important. Since contracts for both corporate and leisure clients are often based on certain room types, it is important to think through what the implications are for existing contracted clients. If contracts are not dealt with effectively and continue to be priced at 'old' pricing levels, a hotel will struggle to get a positive return on investment from the renovation by only being able to get increases from non-contracted and group business.
Saying Goodbye to Bad Business
Not only does a renovation allow for a hotel to reposition itself, but it is also a good time to evaluate whether some of your existing contracts are still relevant. It is often difficult for hotels to let go of key accounts post-renovation as contracts will not usually accept price increases. Therefore, contract pricing and evaluation becomes infinitely more important in the lead up to the renovation. In some cases, even if it may be difficult to say goodbye to some business in the short-term, hotels will have to accept that following a renovation and repositioning of a property, some of the contracts that they used to accept is no longer good business.
The Time is Now
Hotels often time renovations by taking into account operational or financial implications. "As soon as we get approval from owners, we can start renovation work", or "Let's make sure we renovate during a low demand period so we can take rooms out and not impact demand." These are of course valid inputs into the timing of renovation, however hoteliers often forget to consider when the hotel and its rooms will come back into full operation.
While there are important financial implications to be considered when planning a renovation, determining the best time for a launch of the new rooms or products can be more important than short-term financial or operational impacts. If renovations are timed incorrectly, the demand and ROI needed may simply not exist. For example, if a new hotel opens nearby during the same time as a renovation is complete, the potential rebranding opportunities could be tarnished. Launching new room types during a time when market demand is low could also impact revenue opportunities. This is all incredibly important for the medium to long-term impact of renovations from a pricing perspective.
How Will Your Choice to Renovate be Reviewed?
Hoteliers all know the importance of online reviews and online reputation scores, especially in how they can affect bookings. A bad review on a prominent hotel review platform can turn away potential guests, sending them to a rival property.
Hoteliers should realise that renovations will likely result in changed reputations scores—hopefully for the better. This impact will be apparent both during renovations (potential complaints about noise or availability of rooms) and post renovations (will guests like the new rooms?). When making strategic decisions about repositioning a hotel in line with its major property refresh, it is crucially important to factor in reputation scores and the current and future impact they may have. Pricing correctly will help to find an appropriate balance, whether it be short-term promotional pricing to overcome negative reviews due to noise or inconvenience, or long-term rate premiums as a result of positive scores from the renovations.
Group Booking Considerations
As any hotel management team will know, group lead times can be anywhere from one to 18 months out. Group contracts for arrival post-renovation will need to be confirmed far in advance of the renovations even taking place. In some cases, groups will even need to be confirmed before the extent of renovations can even be determined.
It is essential that revenue and sales teams monitor group activity in relation to the whole renovation process—from the early planning stages to post-launch when the management team will immediately need to conduct repositioning and incorporate the new hotel product and strategies into group evaluation and pricing decisions. If a hotel makes the wrong decisions on group bookings, they could end up with either very cheap groups when its position has changed drastically, or empty rooms because they were uncertain about pricing and could not convert groups effectively.
Fencing for the Future
While undergoing the renovation process all hoteliers must consider having appropriate fencing strategies in place to protect their business. Uncertainty of the impact of the renovations themselves, or even the final product after renovations, means hotels have to be cautious not to set the wrong pricing strategy for the short-term that will negatively impact the long-term. By applying effective fencing to promotional rates, short-term business can be generated despite any negative impact of renovations. This should all form part of the overall sales, marketing and revenue strategy.
Getting the Most Out of Any Renovation
While there are undoubtedly large challenges that any hotelier must overcome and address to ensure a successful renovation of their property, a major property refresh also presents a hotel with the unique opportunity to reposition itself in the market and ultimately support its longer-term revenue goals. It is the hotels that take a considered approach, determining the right time to relaunch renovated rooms while also having the right pricing strategists in place, that will ultimately get the most out of their renovation.
Global Client Marketing Manager
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