In the first of a series of articles, Starwood’s former Director of Revenue Strategy for North America lays the case for focusing on suite sales.
It is no secret that after eleven fun, enjoyable and self-fulfilling years at Starwood, I decided to start my own company dedicated to selling suites. Over the years, I’ve developed a passion for this particular room type, not just because it represents dreams, success, and hope or because it’s sexy, stylish, and luxurious, but also because it makes sound financial sense to be selling more of these. It has always made financial sense and does ever more so in the current environment. So, at the risk of sounding like a promotion pitch for my company, or worse, a self-promoting diatribe, I will pen my thoughts about my passion – hotel suites. Why do we need to sell them? How should we measure their performance? What has changed in the last 5-8 years? How is it likely to play out with the new disruption in the industry? and what can Sales, Revenue & Operations teams do to make the most out of this prized, but costly and underutilized asset? In this nine-part series, I will endeavour to answer these questions from my experience, and what I've learnt while launching SuiteStory.
I hope no one will doubt me when I say that hotel suites are sold about 30%-40% of the time, although it’s more towards 30% than 40%. Few hotels and companies have been able to achieve a 40% sell rate. Of course, hotels do not publish this number and in many cases hotels do not even calculate this number independently. What I mean by 'sold' is that the suite was sold through distribution channels, internal or external in advance of the guest arriving at the hotel. It was not an upgrade or crucially, even an upsell which is a last minute discounted sell in most cases. In my countless conversations with hotel brands almost all have admitted that this is no secret in the industry. So why is there no urgency in selling these suites if the sold-rate is so low? That's because a lower sold rate doesn’t mean a lower utilization rate! Here are some of the reasons why the low sold number is masked:
Higher utilization (occupied by upgrades and upsells) means that the suites seem to be running occupancy the same as your hotel rooms.
Upgrades count for some revenue from suites. If you upgrade someone paying $250 in to a suite worth $800, the revenue booked for the suite is $250, which hides the fact that the suite didn’t make any money for you, it was the room that did. You just attributed the revenue to the suite.
Very few but high rated suite sells raise overall suite Average Daily Rate (ADR) thus bringing it up to a respectable level and again masking the suite problem.
Data and statistics are simply not available. I’ve seen many companies struggle with accurately separating selling efficiency, RevPar, booking windows, segments, competitors etc. of rooms from suites. They are two different products which need to be evaluated separately.
In short, understanding the suite problem, if you have one, is the first step in resolving it. In later articles, I will detail how to precisely measure it – in a way that it becomes clear if you have an issue or not and how large is the problem – and then how to act on it.
So, why should we worry about this problem? After all, if we apply the Pareto principle here, suites make up a small inventory of the hotel (less than 20% in most cases, in fact), so perhaps we should focus our efforts on selling rooms, not suites. The first and most logical reason is that any underutilized asset is not maximizing profitability and it’s the operator’s common-sense, if not fiduciary, duty to do so.
But there’s a bigger problem at hand. After 2008, in the U.S. when demand was low, hotels didn’t have a chance in hell of selling their rooms, let alone suites. Rates dropped in futile efforts to generate demand. Then things stabilized a bit, and as new supply started to taper off reaching bottom in 2012, occupancy rates began to rise. Rate, however, stubbornly did not move as quickly as some had wanted. Year after year, I remember our hotels budgeting demand in higher priced segments, and year after year, they’d change forecasts to make our North America revenue number through occupancy more than rate. Many factors contributed to this slow rise – transparency in rate comparison, OTAs etc. but more importantly the consumer was anchored at a low price and the long-term damage was done. Hotel occupancy rates rebounded to beyond 2007 peak levels but average rate still remained low. Revenue & Sales Directors are facing ever growing pressure from hotel owners to drive rate, in turn drive flow-through and thus profitability. But how do you do that? Some hotel ownership companies even offer advice on doing it – a sign that they’re serious about rate gains. Let’s face it, hotel teams have had to live with less-than-hoped-for rate growth for the past eight years.
So now, on one hand, you have the need to grow average room rate, but you can’t just raise everything by $5 because supply is increasing in many markets and corporate transient demand is tepid at best. I'm not even counting the short term shocks to the system like the terrorist attacks in Brussels and Paris. Then, on the other hand you have a typically higher priced, underutilized asset. It’s not hard to connect the dots, that by selling more suites, you could raise the average rate of the hotel, without jeopardizing other rate structures and contracts. Industry insiders will tell you that Revenue per Available Room (RevPAR) gains through average rate growth is the Holy Grail of hotel Sales & Revenue Management.
The immediate question that comes to mind is – but what if there isn’t any more demand? At least not a consistent flow all year round? Demand for suites exists. Every time someone buys a room, they’re doing a conjoint analysis in their mind with price being the equalizing factor. We’ll go in to more detail in upcoming articles on how to spot demand. But to capture it, hotels will need to treat suites differently than rooms. The product is different, so why not treat it differently.
Volkswagen owns Porsche, but have you ever seen a Porsche sold next to a Passat?
Price elasticity is different, competitors are different, segmentation is different, and so must the selling techniques be. It's time we took our market response models, revenue management and pricing systems and pointed them towards selling suites.
By our estimates, if the major luxury chains worldwide raised ‘sold’ occupancy of suites by just 3% of total hotel occupancy, it will add a billion dollars to the top line. Now that, is a number I think we all can live with.
Next: Chapter 2. Pretend you have a second General Manager - describes how you can measure if you have a suite problem