Here’s a piece of advice for hotel operators struggling with a slowdown in revenue growth: Rethink your definition of your guests’ journeys.
By that we don’t mean their specific travel itinerary—though that does come into it. Instead, we’re referring to a metaphorical journey—the story of why the guest came to your doorstep and what their travel objective is.
If you understand that story, you’ll understand the full range of the guest’s needs. And once you understand those needs and how they are not the same for every guest, you can start to create add-on services to better meet them.
With base rates under pressure, the most powerful strategy available to hotels at all price points is to create an array of add-on services targeted at the needs of different customer segments.
As indicators point to an end to the boom years, it’s time to look for new revenue streams from the guests you already have.
The hospitality industry has enjoyed years of unprecedented growth. But now times are turning tougher. In 2016, there has been a slowdown in the growth of revenue per available room. Some critical markets like New York have even seen declines. At the same time, many properties that started construction during the boom are coming online, adding to oversupply and putting still more pressure on prices.
The industry is indeed being proactive—for example, aggressively steering traffic from online travel agents to direct bookings in the biggest effort yet to cut commissions. The trouble is that this likely won’t be sufficient, especially in a market already under downward price pressure.
The best growth opportunities often lie at the “edge” of your core business.
We have observed countless examples of success when businesses take a fresh look at what permission they have from their customers to do more for them and what more can be squeezed out of existing resources and capabilities. Hospitality companies, too, can find new value by taking a closer look at, and perhaps modifying, intersections of their existing offers and the differing needs of the customer segments that they have already engaged. Every customer segment is a bit different in its needs, so necessarily any branded experience will be incomplete in meeting all these needs, and there is value to be harvested by exploiting this very fact. Continually doing this leads to what we call an “edge mindset,” which creates opportunities for new revenue and profit with a relatively low-risk profile.
A powerful way to find these “edge” opportunities is to focus on the journeys of key customer groups before, during and after they use a product or service. What does that mean in the hospitality industry? A business traveler on a demanding schedule might want to make best use of her time, reduce “friction” and pamper herself. She might therefore be willing to pay a little extra for faster Wi-Fi, a slightly upgraded room, or an in-room premium espresso maker. Alternatively, a package aimed at schedule disruption might do the trick (e.g., late checkout and rented exercise clothes so she can use the extra time to go for a run). Each of those is a relatively modest service to add, at marginal cost—because they are closely related to the core services that the hotel already offers. Each presents the possibility of a new, high-margin revenue source. The investment is in getting the guest in the door in the first place—the add-ons are often where the profit leverage is derived. Adding a couple extra services can transform the profitability of a low-margin corporate reservation, while providing an experience that improves satisfaction and engenders true loyalty.
Each customer segment has needs that lead naturally to new services.
Think of the segment of business travelers who want to hit the road quickly after they check out. Hotels can cater to them by selling grab-and-go breakfasts. In a similar fashion, luxury hotels that serve executives commuting to the same location could theoretically offer a high-end service to store and clean these guests’ clothing between trips.
In midscale hotels, where less natural room variation resides, differentiation can be created. For obviously operational efficiency benefits, most chains furnish nearly all their rooms in more or less the same way. However, by feathering in the premium showerheads and 600 thread-count sheets in, say, 20 percent of rooms, a hotel could have access to an upgrade to sell that doesn’t involve much capital expenditure or excessive complexity.
Go beyond the moment of booking: Technology creates more ways to engage the customer, and more opportunities to sell.
Technology can help hotels capture new opportunities at the edge. In the legacy model of the hospitality industry, all services are purchased at the moment of booking. That moment determines everything—revenue, profit, and guest experience. But mobile apps and next-generation database systems enable the hotel to engage the guest at many points along the journey, offering relevant, customized options “in the moment.”
Price pressures and inventory trends suggest that the hospitality cycle may have peaked. But for edge strategists in the hotel industry, there is a green field of opportunity—as long as they are willing to rethink their definition of their role in the guest’s journey.
About the Authors
Dan McKone and Alan Lewis are the authors of Edge Strategy: A New Mindset for Profitable Growth (Harvard Business Review Press, 2016). They are managing directors at L.E.K. Consulting, a global management consulting firm.