The Channel Mix Action Plan for M Hotel

In the article I published last week, entitled “the Channel Mix Effect on Profitability”, I provided you with an actual hotels revenue channel mix for the 1st quarter of 2016 and a proposed change to that channel mix for the same period in 2017. Through a selective process, a channel combination was constructed for 2017 in which complete channel-by-channel costs are used to qualify channel use. Through it, we are able to increase M Hotels profitability by $284,054 (before operating costs are applied). M Hotel is a fictitious name.

Today, it is my privilege to present, in summary form, “Actions” that I feel are warranted in order to achieve the “new” proposed future channel mix. Please keep in mind that this is an ocean front weekend resort of 100+ units that has earned the unusually high occupancy rate of 91.0% in the first quarter of 2016. As always, I am pleased to receive your notes and commentary.

It’s important, at the outset, to state the premise of my findings. I came to the conclusion that the “rate structure” at M Hotel was (1) lacking, (2) inconsistent and (3) detrimental to reaching optimal profitability.

Wholesaler / Receptive Operators (“wholesalers”) produced 32.4% of all M Hotels gross reservation revenues. The Average Daily Rate (ADR) for the 1st quarter in that production was $196.00. This is a NET RATE.

• Behind the scenes - the $196.00 rate received from “wholesalers” is the NET RATE calculated using the merchant model. Here “wholesalers” collect payment directly from the consumer. They deduct their commissions from those funds and then pay the hotel in “NET FORM”).

It would stand to reason that we would want to be able to compare our Merchant Model business to the business received when consumers pay the full amount for their stay when they check in, and so we GROSS UP the merchant model NET RATE by the amount of the commissions that are removed.

In applying the typical “wholesaler” markup to the NET ADR of $196 paid we can see that the amount that the ‘wholesaler” is charging guests to stay at the M Hotel is $269.00. We now have the ability to compare that to what M Hotel is charging guests through other revenue channels. It’s an extremely powerful equation to use and “levels the playing field” in analytical comparison.

With no evidence of resistance (based on high volume) to the $269.00 ADR charged by the “wholesalers”, my hypothesis brings me to believe that this is an ADR that M Hotels other “non-discount” revenue channels should be offering. This rate should also support typical productivity (demand). My hypothesis is further enhanced when I take into consideration the unusually high occupancy at the M Hotel of 91.0% (which one would have to assume exists, at least in part, because of the unusually low channel-by-channel ADR’s offered to consumers). The conclusion would have to be that by increasing rates to “normal or typical” levels M Hotel would make an overall downward adjustment from that 91.0% occupancy rate. Based on area results and other mitigating factors I was able to determine that the higher rates would create an occupancy range of 85.0% to 87.0%.

I’d like to now address my proposed channel mix changes and the necessary actions to achieve that end.

My presentation makes use of revenue channels that have been created by grouping reservation-vendors that possess a common Key Performance Indicator (KPI). That KPI is stated in the title of each channel.

The lineup of KPI driven revenue channels used by M Hotel are:

• 2b - Call In Reservations
• 4a - Website Vanity
• 4b - Website Packages & Promos
• 5a - OTA Tier 1, Commissions 15% to 19%
• 5b - OTA Tier 2, Commissions 20% to 31%
• 5c - OTA Last Minute Sales
• 5d - OTA Opaque
• 6b - Global Distribution System (GDS)
• 7b - Mega Travel Agent - Independent
• 9a - AAA Tour Book, Website
• 14a - Wholesale / Receptive FIT Allotment

I will address each of the revenue channels separately and in order; almost as a road map of action and in which my theory is explained.

2b – Call in reservations – I propose that the Average Daily Rate (ADR) in this channel be increased to rival that, that is being successfully sold by the “wholesalers” of $269. The result is to anticipate a 1st quarter contribution drop in 2017 from this channel from 6.2% to 5.2%.

Behind the scenes - I did not drop the contribution more significantly because it was also noted in my study, that the M Hotel would typically sell out their weekends 2 weeks in advance of sellout dates. This means that the WISE USE OF TIME was absent and occupancy was effected. “TIME”, in striving to reach optimal results, means money. Had rates and restrictions been appropriately used, where the number of unsold units were mathematically released so that the lead-in time to those final 2 weeks could be used to take full advantage of what we knew would be optimal reservations typically coming in that time period, the hotel would have had a higher occupancy and higher profitability.

• Summary – the 1st quarter channel cost was 4.9% and is projected to stay the same.
• ADR was $201. I recommend increasing this rate (in stages) to that which has been successfully sold by hotel “wholesalers” of $269.
• The gross reservation contribution was 6.2% and this was reduced due to the rate increase to 5.2%.
• Based on projected changes, the channel will produce a reduced profitability of $663.
• 4a Website & 4b Website Packages – A new website is under development. An aggressive, yet carefully monitored key word campaign will be launched. New photographs, keyword rich content (for SEO) and video will be used. Landing pages with “native” keywords will be used for geographic campaigns to proven global zones. Landing pages will also be established for local events.

M Hotel has been inconsistent in offering packages/promos on their website. I recommend that 5 to 7 packages/promos always be offered to stimulate interest in engaging various profit centers at the property or outside interests. Since M Hotel had been using promos primarily for discounted rates I pointed out that Packages and/or Promos DO NOT have to only provide discounted rates, if at all.

The Average Daily Rate offered on M Hotels website should at least rival that, which has been successfully sold by “wholesalers” of $269.00.

We see very low performance coming through M Hotels website in 1st quarter of 2016. The combined website contribution (vanity and discount) was 7.7%. Based on area production I determined that the website will perform and contribute 27.0% of all gross reservation revenues. The area supports website contribution ranges of 18.0% to 29.0%.

Behind the scenes. M Hotel has historically only used website promotions to offer discounted rates. When this was done in 2015 they successfully drove a high volume of room nights through the website. The problem was that the ADR offered was very low. The complete channel-by-channel cost analysis, we prepared, showed us that that low rate (even combined with the low cost of the website promo channel of 12.3%) provided a significantly lower profit then either of the two primary OTA revenue channels would have produced. Both OTA channels at that time showed more than enough demand to have sold those same rooms; and at a significantly higher profit. YIKES!!

When discounted rates are offered through the website, the revenue tactician should be engaged in order to determine the appropriate selling rate. When complete channel cost is applied, CHANNEL PROFITABILITY CAN SOMETIMES PRODUCE SURPRISING RESULTS. You can see the complete cost of each channel on the pink chart presented.

• Summary – the 1st quarter channel cost was 10.1% and 12.3%, respectively. In order to stimulate website channels I have increased the amount to be spent here to 17.0% in both cases.
• Average Daily Rates were $252 and $161, respectively. I have increased both channel to $269 to rival that successfully used by “wholesalers”. In-season promos and packages DO NOT have to offer discounted rates. They instead can provide for meals, events, services, tours, etc.
• The gross reservation contributions of 7.3% and 0.4%, respectively will increase to 22.4% and 4.6% for a total contribution of 27.0%.
• Based on projected changes shown on the chart, this channel will produce an increased profit of $293,437 and $78,852, respectively for a combined total increase of $372,289.

5a – OTA Tier 1, Commissions 15% to 19% - 32.3% of M Hotels 1st quarter gross reservation revenues in 2016 were contributed by the OTA Tier 1 channel. This channel is deemed a “lower cost” channel and it performed well. The ADR of $232 in 2016 should be increased to rival that which was successfully sold by “wholesalers” of $269 in 2017. The effect will be a lower occupancy.

Behind the scenes – In my study I noted that M Hotel has only taken advantage of using one of the two primary OTA producer sites in achieving this OTA Tier 1 contribution. I suggested that the other primary OTA also be engaged and at the same 17.0% commission rate charged. It is anticipated that the second primary OTA site is capable of producing a similar volume to the other. My interpretation then is that this channel can be used to further dissipate other more costly channels. I have adjusted occupancy accordingly in this study.

The gross reservation revenue contribution, on the pink chart, was moved from 32.3% to 28.9% taking all into consideration.

• Summary – the 1st quarter channel cost was 18.9% and that remained the same,
• Average Daily Rate was $232 and I increased that to rival that successfully sold by “wholesalers” to $269.
• The gross reservation contribution was 32.3%. By adding the 2nd “primary OTA”, I anticipated that the drop-off in resulting occupancy would be less substantial. I decreased the total contribution to 28.9%.
• Based on all above, this channel will produce an increased profit of $30,723.

5b – OTA Tier 2, commission 20% to 31% - all OTA’s in this channel use the merchant model of payment and pay the hotel in NET FORM (they collect directly from consumer, deduct agreed upon commissions and pay the hotel after deducting the commission). I have grossed up the NET RATE based on the amount of commissions charged by these vendors. This allows an easy comparison to non-merchant model vendors.

Based on channel-by-channel PACE REPORTING (the production/demand barometer) in M Hotels surrounding area, I was able to conclude that a portion of this business should be displaced into other more lucrative channels. It would appear that M Hotel will have to decide whether to eliminate several OTA’s to accomplish this goal. Eliminating any reservation-vendor is not an easy decision. However, because of the insistence of these highly commissioned OTA’s to have rate parity and an equivalent availability to unsold inventories, some 3rd party vendors may have to be eliminated to accomplish revenue goals.

I advised M Hotel that before selecting the OTA (‘s) to eliminate, consideration should be given to the annual benefit that each provides. We can do an annual displacement analysis that will provide guidance and present a clear answer on which OTA (‘s) should be considered. As is the case of OTA Tier 1, OTA Tier 2 should also offer an ADR of $269. This increase, plus the aforementioned actions mentioned I anticipated to bring the total Gross Reservation Revenue contribution down from 14.4% to 9.2%.

• Summary – the 1st quarter channel cost was 20.8% and that is projected to remain the same
• Average Daily Rate was $238 and I increased that to rival that successfully sold by “wholesalers” to $269.
• The gross reservation contribution was 14.4% and it is forecasted to drop to 9.2% in 2017.
• Based on all above, this channel will produce a reduced profit of $50,970.

5c- OTA Last Minute Sales – The “OTA Last Minute Sales” channel can be a desirable one when used to fill last minute vacancies. The same ADR of $197 that this channel produced in the first quarter of 2016 is used in 2017. By the way, it is important to note that the “Last Minute” ADR of $197, offered by M Hotel, rivals the NET AMOUNT received from “wholesalers”!

Since an overall reduction of M Hotels occupancy from 91.0% to a range of 85% to 87% produces more unsold inventory this may present the need for higher use of this channel. I increased the contribution from .7% to .9%

• Summary - 1st quarter channel cost was 25.2% and the same is projected in 2017.
• Average Daily Rate was $197 and the same is projected in 2017
• The gross reservation revenue contribution was .07% and .09% is projected in 2017.
• Profit from this channel is anticipated to increase to $4,430.

5d – OTA Opaque – These reservation vendors are typically used to fill need periods.

The “OTA Opaque” ADR of $186.00 in 2016 was again used in 2017. In the case of M Hotel, it is important to note that, in the current rate structure, this $186 rate is less than that which is received from the Wholesalers NET RATE (of $196)! If the rate structure were to stay the same the question at M Hotel would have to be on whether to use the OTA Opaque channel at all.

• Summary - 1st quarter channel cost was 23.2% and the same is projected in 2017.
• Average Daily Rate was $186 and the same is projected in 2017
• The gross reservation revenue contribution was 2.2% and .06% is projected in 2017.
• A reduction in profit from this channel is anticipated of $22,004.

6b – GDS (Global Distribution System) – the current GDS engagement at M Hotel is very limited and I believe that GDS reservations are currently being posted to the revenue line in “Channel 2b – Call in reservations”. M Hotel needs to break those reservations out as a separate line item. I recommend that action be taken so that M Hotel can take its fair market share of this moderately costed channel.

The GDS channel is typically a mid-ranged, moderately costed channel. It typically shows a COST of 16.0% to 18.0% and would be a preferential to using OTA channels when used effectively.

Optional GDS programs are available and can provide M Hotel with “group”, “corporate” and “consortia” business. All of these can be exploited by M Hotel; ample meeting and breakout space is available.

Behind the scenes - It is noted that overall area results indicate that M Hotel would be able to contribute 5.0% to 8.0% of its gross reservation revenues from the GDS channel. The ADR offered through this channel, like the “wholesalers”, can be close to the $269 realized there in the 1st quarter of 2017. A tiered ADR offering would be extended to corporate, group, consortia and the like through the GDS. Here again the revenue tactician should be called upon to set those rates.

Since I had no meaningful historic record to determine a performance pattern I did not include those projections for the GDS Channel. It would stand to reason that this mid-range cost channel would have a positive impact on M Hotels profitability and provides additional potential when added to the channel mix.

7b Mega Travel Agent – M Hotel has established a single direct relationship with a “mega travel agency” in which a 15% commission is paid. In this particular case, the allocation of Sales Managers time, plus additional agency fees paid, brings that total channels cost to 21.2%.

Behind the scenes – Please note that a 21.2% “Mega Travel Agency” COST is higher than that which is typical and I consider it an anomaly. A typical cost range in this channel is 16 ½% to 18.0%.

• Summary - 1st quarter channel cost was 21.2% and the same is projected in 2017.
• Average Daily Rate was $199 and $269 that has been successfully used by “wholesalers” is projected.
• The gross reservation revenue contribution as a result of the increased ADR was moved from 2.3% to 1.7% in 2017. Agency commissions of 15% is seen as the main driver here and therefore ADR is less sensitive (as long as it is close to that of rival hotels).
• A reduction in profit from this channel is anticipated of $3,453.

9d – AAA Discount - This revenue channel is ordinarily used when the hotel makes an investment in (1) the AAA travel book, (2) the AAA website and/or (3) any other AAA related advertising platforms that are used to communicate with members. In this case, M Hotel DOES NOT invest in any AAA advertising platform and simply offers the AAA discount (of 10%) to members on their website and/or to walk-in or call-in guests.

The overall annual benefit of offering this discount should be weighed. Based on the seasonal overview, the discount need not have been offered and all business derived through customers seeking that discount would have easily been displaced. The final 1st quarter result, without offering the discount, would have been that an additional $32,344 of profit would have been realized.

14a – Wholesaler / Receptive Operator FIT Allotment - 32.4% of all M Hotel business came through this channel in the first quarter and that contribution becomes higher through the course of the rest of the year. I have recommended that this contribution be lowered in first quarter of 2017 to 26.4%, with a goal toward lowering the contribution in the 1st quarter of 2019 to 20.0%.

This reduction, to 20.0%, will be able to be displaced based on my analysis that (1) alternative channel production will be adequate, (2) alternative channels will suffice in filling the same need periods furnished and (3) in taking into consideration the anticipated increase in volume contributed by the new website channel

• Behind the scenes – Currently, M Hotel enters into guaranteed allotment agreements with all “wholesalers”. I recommend that allotments be provided only to the top 2 providers and that all others be moved to FREE SELL arrangements.
• Behind the scenes – Absent guaranteed allotments, M Hotel would then be put into the position where they can take advantage of the real time “wholesaler” intranet offering. These cater to both B2B and B2C audiences and rates are dynamic. It is important to monitor B2C carefully so as to avoid potential OTA rate conflict.
• Behind the scenes – Because of high seasonal demand I recommended that M Hotel should cease relationships with “wholesalers” that are only able to provide IN SEASON reservations. Leverage exists, and benefits accrue to all parties, when M Hotel negotiates (for example) that for every 10 guaranteed room nights provided IN SEASON that the “wholesaler” will provide 25 guaranteed room nights in OFF SEASON.
• Behind the scenes – M Hotel might consider the use of small allotments during blackout dates for additional annual benefit incentive. Build minimum length of stay restrictions into wholesale agreements.

• Summary - 1st quarter channel cost was 29.1% and the same is projected in 2017.
• The grossed up Average Daily Rate (to accommodate the merchant model effect was $269 and the same is projected in 2017. The actual ADR was $196 which is what was received.
• The gross reservation revenue contribution was 32.4% and 26.4% is projected in 2017.
• A reduction in profit from this channel is anticipated of $13,953.

In Conclusion

M Hotel requires a significant rate structure modification in 2017. This will provide material increases to ADR and PROFITABILITY.

Revenue channel production by similar hotels in M Hotel’s local area, indicate that adequate demand/production exists in revenue channels discussed, in order to reach stated goals.

M Hotel showed an overall COST in the 1st quarter of 2016 of 20.8%. That cost will drop to 20.6% in 2017 and at the same time gross reservation revenues will rise.

The overall result of all actions discussed would provide an increase to M Hotel profitability of $284,054.

Please note that the increase in overall optimization achievement (profitability) from 2016 to 2017 is achieved despite the reduction to occupancy.

• Behind the scenes - It should be noted that once a hotel achieves a high occupancy rate, as is the case here, anything achieved short of that occupancy rate can impose a psychological conundrum to the hotel executive! This can occur despite the fact that a study, such as this one, proves that optimal profitability comes from less occupancy.

A disciplined revenue culture is worth its weight in gold in cases like this in order to achieve “buy-In” and understanding between colleagues. This is an underlying issue at M Hotel that I have noted.

If you’d like to read the original article in this series please follow this link to: “the Channel Mix Effect on Profitability” - http://bit.ly/1r1bBjs