In this second post about selling suites in today’s environment, Starwood’s former Director of Revenue Strategy for North America, explains how to measure if you have a problem selling your suites.
Ask any hotel General Manager (GM), Director of Sales & Marketing (DOSM) and Director of Revenue Management (DORM) about their suite sales and you’re likely to get some version of “we’d love to sell more suites!”. It’s not just a generic wishful statement, but in most cases, an admission of a trend they know exists in their hotel – a disproportionate ‘sold’ ratio of rooms vs. suites, even after factoring in the high price (and thus lower demand) of suites. As I mentioned in my previous article, hotels sell suites on average 30% - 40% of the time and routinely oversell rooms, with consequent free upgrades to suites, in order to achieve maximum occupancy for the whole house. It has become such an accepted norm in the industry that many top-notch revenue optimization systems (off-the-shelf or internally developed) are taught to oversell standard room types right from the get-go to at least the number of unused suites in the hotel. It’s as if we don’t even give ourselves the chance to sell our most prized assets, but resign to a ‘normal’ rate of very low suite sells. I made the case last week why we should be worried about this, and the urgent need to change this. But, as with most challenges, the first step in identifying if an opportunity exists is to measure your current situation – then set incremental, measurable goals, and put actions in to place. I’ll cover some of the actions in later topics. For now, we’ll understand how you can measure suite selling efficiency.
Before I go into details, let me be clear that some complimentary upgrades are good for business – the keyword here being ‘some’. Hotels and brands have to walk a fine line between rewarding their most loyal members and monetizing these opportunities. Some hotels I know reach out to their arriving mid-tier loyalty members beforehand to ask if they would like to secure a confirmed upgrade at a nominal premium. The idea being, your highest tier members, say Platinum, will get free upgrades and by the time you come to the Gold members, there may not be suites left for free upgrades. If these Gold members pay a small premium – lower than the standard retail premium (and mostly out of their own pocket) – they can secure their suite and the hotel raises ADR. It is controversial on many levels and I'll let you be the judge of that – but this only underscores the tight balancing act.
With that said, let’s get back to measurement of suite selling efficiency. Note: this is the only article in the series where I deal with some mathematics/numbers - subsequent articles are more about strategy.
I’ve always advocated treating suites differently than rooms and I’m going to take it all the way to propose that you imagine your suites as a totally separate hotel with a separate GM. That way, hotel Sales & Revenue Management teams effectively become a team for this ‘complex’ of two hotels and are answerable to two GMs. Why? Because, we need to measure how the hotel teams are doing in selling each ‘hotel’ separately. In reality, we use our rooms and suites interchangeably, and ultimately are responsible for the whole ‘complex’. Sure, but by separating the two for measurement purposes, we're now introducing the concepts of transfer pricing and opportunity cost. Let me explain.
In many casino hotel agreements, where both businesses are run separately by two different parties, casinos pay a pre-arranged transfer price to the hotel for suites and then control the suites' availability and pricing. If the casino wants to reward a high roller with a free suite, why should the hotel suffer for the casino’s benefit? Hence the transfer price. Now apply the same concept to your ‘rooms’ and ‘suites’ hotels.
If I were the GM of the 'suite' hotel, I’d never give you my suites for free to upgrade your overbooked rooms into.
The hotel team is thus accountable for selling just as many suites as you would sell rooms – or to be more precise, generate a proportionate amount of revenue from suites as they do from rooms. It is important to realize that there is a cost to overbook your rooms and upgrade guests to a suite. Just because actual money doesn't change hands, we can't turn a blind eye to this opportunity cost.
Once we establish this concept of dual or complex responsibility, and the need to maximize each part of the complex, we can now measure the selling efficiency of one 'hotel' against another. How? By taking a very familiar concept of comparing revenue through Revenue per Available Room (RevPar) Index.
We’re all familiar with measuring hotel success by comparing it to our competitive set through RevPar Index. An Index of 100% means that you’re getting your fair share of demand in this competitive group of hotels. So, why not track if your suites are getting their fair share compared to your rooms. You could even set this up for each room class that you want to measure not just suites. Let’s call it Suite Revenue Index (SRI). You can now also measure your Suite Occupancy Index (SOI) or Suite Average rate Index (SAI). By conventional logic, suites should sell at an index far above 100% compared with rooms, if we believe that suites should make us more money per unit than our rooms do. But do they?
Here’s an illustrative example to explain the exact process. Let’s imagine that for every 10 sold rooms you sold 3 suites. If we equalize the capacity of suites to match rooms, the Suite Occupancy Index (SOI) would be 30%. However, those three that you sold, were at a premium. For every $100 of rooms sold, the suites were sold at $140. So your Suite Average rate Index (SAI) is 140%. None of these numbers are extreme – you’d expect to sell a suite for 40% premium and we already know that we sell suites only 30% of the time. Then comparing the revenue you make from rooms vs. suites, you’d get a Suite Revenue Index (SRI) of just 42%. That means for every $100 of RevPar made through rooms, you made only $42 RevPar through suites. Granted, your competitive set is probably running a 42% Suite RevPar Index compared to their rooms as well and your suite situation is no worse off than theirs, but, competitive data is not available in the industry today. No data, hence no measurement, no accountability, and hence no results. Comparing your own rooms with suites anchors suite performance to a known, easily calculable number – revenue from rooms.
So what is a good Suite Revenue Index number? Each hotel has to decide that based on their own conditions. If you use your suites as concessions and upgrades to win big conference/meeting business for the entire hotel, then you’d run high Suite Occupancy Index but a low Suite ADR Index because your suites would run at a $0 rate. For others, driving Suite ADR Index might be a priority because they’re in a high demand market for premium products. But once you establish what should be the ‘normal’ you can now make plans to attack where you lack the most. At least now you have strategies, resources and people to deploy against it. It’s measurable, so you can hold someone accountable and reward them for a job well done. I know of at least one ultra-luxury iconic hotel that brought down their rate on premium suites slightly to take advantage of increased occupancy thus boosting their Suite Revenue Index by 5% year over year - it translated into $1.1m in additional revenue. The best part is, their overall Average Rate for the hotel grew because they sold more suites, did fewer upgrades, and almost all of the additional revenue flowed through to the bottom line.
Suite sales are tough enough, but measurement is even tougher. What I’ve explained above is a concept that I’ve had success with in measurably influencing revenue and rate growth through enhanced suite sales. Putting it in practice, collecting the data internally, and coming up with the necessary tools has its own challenges but I know it can be done – it was my last big project before I left Starwood. In today's environment, what option do we have anyway?