Hotels: Merchandising and Marketing Effectiveness

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1 Dr. Higbie Revenue Management Merchandising Mindset: The Future of Hotel Revenue Management By Jon Higbie, Managing Partner and Chief Scientist, Revenue Analytics, Inc. Hotels are no strangers to Revenue Management (RM). They were among the first industries to embrace Revenue Management, albeit by focusing exclusively on yield management. Retailers took notice and decided they, too, should employ Revenue Management, but weren t certain how to do it since they didn t have perishable inventory like hotel rooms. Instead, retailers zeroed in on price elasticity, giving birth to price optimization. However this time it was hotels that took notice. By the early 2000s, they were swiftly adopting price optimization of room rates and again transforming their industry. While this strategy has paid handsome rewards, it s time again for hotels to emulate retailers and even consumer goods companies if they want to conquer the next frontier of Revenue Management. Think Like a Merchant Adapting an analytical mindset to drive transactional profit and total Customer Lifetime Value is the next frontier of Revenue Management. To be successful in the future, and to quantify the total Customer Lifetime Value of a guest across all potential revenue streams, hotels can learn a lot by changing their business mindset to think more like consumer goods companies and retailers. You may be asking yourselves, do hotels really need to think like a merchant, and how can they do this? To make this concept real, let s use a grocery store as an example. Shoppers go there for their weekly groceries and navigate their way through sections divided by similar products, making for easy shopping and quick product comparisons. In addition, each end cap is brimming with featured items that might be a fresh take on an existing product, or on sale, or both. However, once at the checkout, the customer faces a new slew of choices, called impulse buys, such as candy bars, gum, and magazines.

2 Sam Walton helped pioneer the modern-day checkout aisle out of his astute observation that placing offerings where customers want them, at a price they are willing to pay, could fuel revenue. He also knew that the location outside the store was just as important as inside. Retailers understand that if they are in a city where people are less price-sensitive, they most likely can charge more. Or if they are close to a beachside resort, they can sell different items than in Middle America, such as noodles and boogie boards, and probably at a premium. This is how hotels must think in the future. Thinking like a merchant also means that hotels should stop thinking about their demand as bookings, and instead, should look at them as occasions. Each potential guest stay should be thought of as an occasion, and each booking as a purchase event. This is the same kind of terminology and segmentation approach that retailers and consumer goods companies use to segment their customers occasions. Every time a consumer even considers booking a room, the hotel should be asking, what s the occasion? Is it business travel, a convention or meeting, a weekend getaway with a spouse, a golf outing with buddies, or a family vacation at a resort? While hotels have come light years in Revenue Management, they have not come far enough in determining why their guests are staying there. This is important because once they determine the occasion, they can predict what products might be important to their guests. For example, how about offering champagne for a romantic couple s getaway, golf balls for the golfers, or discount tickets for the family for the nearby theme park. Knowing the occasion will also tell the hotelier which room would best suit the guest, at a premium, of course. The busy business traveler might want a room close to the elevator; the weekenders with kids want proximity to the pool and a room on the ground floor; the romantic couple might want a room on the top floor with sweeping views of a city.

3 Determining the occasion should then influence what a potential customer sees on the hotel web page as they explore room options and prices. Would you like a room overlooking Times Square? Yes, says the weekend couple, it s exactly what we were looking for. However, the hectic business traveler with no time to enjoy the view doesn t get that offer, because they are in town on a different occasion and unlikely to make that purchase. Conversely, hotels must present these options like a merchant, with a good assortment of products that consumers are likely to buy. That means not cluttering the web site with irrelevant offerings. Pinpointing why customers are staying, who is most likely to accept the offer, and how much they are willing to pay for it is critical. Treat Each Room like a Product Lots of Products When a customer books through the hotel call center or website, the hotel operates more like a retailer. When they book through an Online Travel Agency (OTA) or Travel Agent, the relationship is somewhat removed and is more like a consumer goods company providing a product to customers through a retail channel. Both types of channels offer different degrees of merchandising options specifically the opportunity to present the consumer with additional options and value adds that may increase the hotel s share of wallet. Thinking like a merchant means hotels must treat each room as a product on the store shelf. Not all rooms are created equal sometimes you can get a premium price, and sometimes you cannot. Each room also should come with an assortment of products that goes beyond the mini-bar and Pay TV. The business traveler who is staying midweek might enjoy access to the concierge club, with its luxurious reception area, complimentary hors d'oeuvres and drinks, and a concierge to help them with requests. Offer them a car service to and from the hotel, and you re likely to generate additional revenue. Tourists might be interested in food and beverage packages, excursions such as jet ski rentals, tours, golf, spa services, or even dinner at a nearby restaurant. The sky is the limit and the premiums may be as well. To think like a merchant means to act like a merchant. This requires a more critical analysis of merchandising and marketing effectiveness. In retailer terminology this is how you engage the consumer. If the manner in which you present products to your customers overwhelms them, then that will hurt sales. It would be better to limit the choices to a reasonable list that is more relevant to each guest. Marketing effectiveness begins by measuring the real impact of the offers and products that a hotel is putting out there. The problem is that many companies aren t so good at measuring the effectiveness of their merchandizing decisions and marketing campaigns. Historical booking, folio, and web traffic data contain vital information that informs those measurements, and it is readily available. This data can be mined to determine the effectiveness of a particular marketing campaign and the effectiveness of web merchandising/assortment decisions. In addition, this analysis is far more preferable than what most companies rely upon to test how their customers will respond to offers, such as panels and surveys conducted in a controlled environment. It s better to know what a customer has done making actual purchase decisions than what a customer says they will do.

4 Companies on the cutting edge of these Revenue Management strategies have built entire systems dedicated to measuring marketing effectiveness. These same systems also can predict what marketing campaigns will work best, triggering offers to customers most likely to respond to them. Customer Loyalty Programs Produce Customer Lifetime Value Retailers have benefited greatly from customer loyalty programs. Hotels have caught wind to this success, and have moved forward with the same strategy, which has provided them with rich information on their customers including their interests. This intelligence can be leveraged to devise strategic and targeted offers to hotel customers, and to develop and maintain customer loyalty, thus increasing their lifetime value and driving organic revenue growth. It all starts when a guest joins the hotel s loyalty program, and data is collected. Suddenly the hotel knows where they live, their previous hotel stays, other volunteered demographic information, and hotels can reasonably estimate other useful data, such as income level and whether they have a family or not. This information gives hotels better insights into the occasion for the latest stay so they can more effectively engage with the consumer by presenting a targeted list of products and services. How critical are loyalty programs to hotels? Cognizant reports that 67% of shoppers are influenced by hotel loyalty programs, but there is plenty of room for growth. The same study says that 84% of shoppers are influenced by airline loyalty programs. Once a customer is in the loyalty program, the hotelier s opportunities to engage with the consumer and provide added benefits are endless. In fact, the benefits of loyalty programs are so great that some boutique hotels are joining the loyalty programs of their big competitors in order to broaden customer reach. Given the value of customer loyalty programs, hotels need to make certain it s easy for people to sign up for their loyalty programs. During a brand.com or call-center booking occasion, it should take just one extra click to become a loyalty club member.

5 Once armed with customer loyalty data, hotels should mine that data relentlessly. By doing so they can learn their guests travel patterns and know whether they are dealing with a business traveler on a tight schedule with little flexibility for additional travel, or a Millennial who would be interested in taking a spontaneous weekend trip to San Francisco. Loyalty programs also lead to better one-to-one marketing opportunities, such as providing follow-up offers via , direct mail and even outbound calling the latter of which is used heavily by cruise lines and which hotels, particularly resorts, should utilize instead of relying too heavily on tour operators and travel agents. After all, why not fill your rooms with your own customers? It s Not About Tonight s Stay, It s About the Customer Lifetime Value Matching occasions with offerings is an additional way to leverage customer data. For example, for a hotel website, this means leading with the best available rate, but choice No. 2 might be that more expensive room near the pool or elevator, and further down the list might be rooms with more expensive perks, such as that Times Square view plus a spa experience plus Broadway tickets. However, everything would be contingent on the occasion for the guest s visit. Customer loyalty programs also help hotels drive up their total Customer Lifetime Value. With loyalty data, hotels can estimate guests Customer Lifetime Value and, again, deliver the most appropriate offerings. For the right high-value lifetime customer, some of those amenities might even be offered free of charge. When hotels bundle or give away amenities for free they need to make certain they call it out in their marketing, on their websites, when the room is reserved. Quantifying the monetary value of the amenities acknowledges their true value, therefore enhancing customer loyalty and conditioning the consumer that, on a different occasion, the amenity may not be discounted or free. Thinking like a merchant, treating stays as occasions and rooms and other amenities/services as products requires a different mindset for hotels. The hotel industry focuses too heavily on the latest guest stay, rather than building a loyal customer who can deliver future revenue. The hotels that can conquer the next frontier of Revenue Management, and change their business mindset to think like a merchant, can develop both organic revenue growth and a strong, loyal customer base. Dr. Jon Higbie is Managing Partner and Chief Scientist at Revenue Analytics, a strategy consulting firm, and oversees the company s science and innovation efforts, including solution design and Business Development support. Dr. Higbie is also responsible for delivering excellence in science and analytics as it relates to creating Revenue Analytics intellectual property, which includes toolkits, best practices and innovative products/service offerings. He has helped Fortune 500 companies increase organic revenue and profit through the application of sophisticated pricing, forecasting and Revenue Management techniques. Dr. Higbie can be contacted at or jhigbie@revenueanalytics.com HotelExecutive.com retains the copyright to the articles published in the Hotel Business Review. Articles cannot be republished without prior written consent by HotelExecutive.com.