In business, the laws of supply and demand tend to be immutable. Barring external interference (such as government regulation), any change on either side of the marketplace tends to have a near immediate effect on prices. And any change in prices has a direct impact on profit margins. Indeed, the effects of supply-and-demand are nearly self-regulating. For instance, an increase in supply leads to a drop prices, leads to some players exiting the market because of reduced profits, leads to a decrease in supply, leads to a return to price stability. 

But the effects of supply-and-demand can also be transformative at the industry level. As supply or demand fluctuate, the businesses that survive learn to adapt. Whether its sourcing new inputs, reinventing their supply chain, ramping production up or down, finding new ways of reaching new or fewer customers, or restructuring operations to maintain (or increase) profitability under new market conditions, a change in supply-and-demand can have resounding effects across an industry.

The hotel industry has been no exception. The rise of Airbnb has not only drastically impacted the supply-side of the hotel industry equation, it has also altered guest expectations, changing the face of demand as well. This, however, has not spelled doom for hotel operators. Rather, hotels are finding new ways of doing business that help them navigate these new market conditions.

 

How Airbnb has Disrupted Room Supply

It seems intuitive (or even obvious) that Airbnb has meant increased competition (and lower RevPar) for the hotel industry. After all, with more rooms on the market in any given city, the price per room drops as hotel operators and Airbnb hosts clamor over limited demand. As with most market forces, however, the big picture is not as simple or as straightforward as we’re inclined to think at first glance.

One study from the National Bureau of Economic Research that analyzed data from 10 US cities with the largest Airbnb market share found thatthe entry of Airbnb resulted in 1.3 percent fewer hotel nights booked and a 1.5 percent loss in hotel revenue”. But this 1.3 percent drop in hotel bookings is only part of Airbnb’s market share. As PostFunnel notes:

When considering the impact of Airbnb, it’s important to remember that customers aren’t necessarily embracing the platform because they prefer it over hotels. Sometimes, Airbnb is the only feasible option for many customers. Airbnb’s greatest success stories come from cities with limited room availability during peak seasons, such as New York, Los Angeles, and San Francisco. Meanwhile, Airbnb listings are far more limited in cities with lower demand such as Atlanta, Houston, and Memphis. […] As room availability decreases, prices for remaining rooms increase, driving customers to alternatives like Airbnb.

In other words, a booking gained by Airbnb doesn’t always equal a booking lost by the hotel industry. Essentially, many Airbnb bookings only occur because guests are unwilling or unable to book hotel rooms during peak pricing periods. As the US Bureau of Labor Statistics points out, while “[h]otel revenues would be 1.5 percent higher without the presence of Airbnb […] between 42 and 63 percent of [Airbnb guests] would not have resulted in hotel bookings if Airbnb were not available.” Nevertheless, it’s estimated that the bookings that hotels are losing to Airbnb are cutting into hotel profits by up to 3.7 percent.

So in a nutshell, Airbnb has the greatest impact on room supply (and the hotel industry) in higher demand cities — i.e. where there is probably just not enough real-estate to completely fill the demand for hotel properties to begin with. And not only are about half of these Airbnb bookings being diverted from the hotel industry, but those diverted bookings seem to be higher value bookings where a mere 1.3 percent drop in bookings results in a 1.5 percent drop in revenues, and a 3.7 percent drop in profits.

So the question remains: How can the hotel industry offset this disruption to their peak-season profit margins?

 

How Hotels are Reinventing Operations

When a new technology emerges that changes the nature of supply in the marketplace, barring regulatory interference, there’s little that can be done to undo it. A Pandora’s box has been opened, and you can’t put the proverbial toothpaste back in the tube. 

Fortunately for the hotel industry, Airbnb’s online marketplace is far from the only new technology relevant to its bottomline. There are also a number of technologies available that can help hotels streamline operations to the point any revenue lost to Airbnb is more than offset.

Smart Financial Management

From operations to finance to guest experience, there are a lot of key performance indicators that hotel owners and managers can track and monitor to cut costs and increase revenue. Of the dozen or so KPIs that hotel owners and managers rely on, however, arguably none is as important as GOPPAR (Gross Operating Profit Per Available Room).

Why? Because it factors in both operational costs and revenue. And by focusing on improving their GOPPAR, hotels are unlocking new operational efficiencies and cost-savings.

RevPar vs GOPPAR

Revenue Per Available Room (or RevPar) is a hotel KPI that’s crucial to understanding the success and profitability of a property. Indeed, it’s extremely useful for planning and preparing for both high and low seasons. RevPAR can be calculated in one of two ways.

  • Either by multiplying the hotel’s Average Daily Rate (or ADR)  by its occupancy rate
  • Or by dividing the hotel’s total room revenue by the number of rooms that are available during a specific period of time

Gross Operating Profit per Available Room (or GOPPAR), however, goes a step further by taking into account the operational costs incurred to generate the revenue of any given room (or the hotel as a whole). As Olivier Harnisch put it when writing for Hospitality Net:

A GOPPAR maximization strategy is more sophisticated [than a RevPar one] as it encompasses a broader scope of hotel success criteria. Since GOPPAR is calculated by dividing a property or company GOP by the number of room nights available, all factors impacting GOP are included. Therefore cost items are taken into account as well as revenue factors. For one, selling below variable cost is avoided as this will lead to an immediate GOPPAR decrease. A GOPPAR focus [also] considers the variable costs generated by an occupied room (such as housekeeping, laundry, energy …), additional profit induced by a room sale (F&B, laundry, telephone …), but also the cost of generating revenue, such as channel cost.

In other words, GOPPAR offers better insight into a property’s profitability because it compares room revenue against the actual costs incurred over the same period of time. Indeed, by taking into account operational costs, GOPPAR can help hotel operators calculate how much it costs to operate any given room or, the hotel in its entirety. More importantly, however, it allows hotel operators to identify unnecessary or gratuitous costs that are eating into their profit margins.

GOPPAR is calculated by subtracting your total operating costs from the hotel’s total revenue, and then dividing that number by the number of rooms that were available in that time period.

Of course, once you have a comprehensive picture of a property’s performance, it’s time to look at ways to increase those margins by optimizing your operating costs.

 

Energy Management + Cost Savings

In the hotel industry, “keeping the lights on” extends to a lot more than just, well, lighting. As the 2015 edition of Trends® in the Hotel Industry found, “electricity is the largest utility expense comprising 60 percent of total expenditures.” Consequently, it’s not surprising that hotel energy consumption has a considerable impact on GOPPAR. Indeed, the difference between having and not having an energy management system can often mean the difference between a hotel being in the red or in the black.

Fortunately for hotel owners, a variety of energy management technologies make it possible to not only monitor energy consumption with the utmost accuracy, but adjust and optimize their consumption in response to real-time consumption patterns.

Overhead of an office environment with many cubicles and several people working.

HVAC Energy Management Technology

Specifically, energy management devices now allow hotels to both use their HVAC systems more efficiently and save significantly on their energy consumption and costs. While smart thermostats and occupancy sensors monitor and respond to fluctuations in occupancy, smart energy management systems like Verdant EI use sophisticated machine learning algorithms to continuously analyze historical thermodynamics, and local weather patterns, to optimize energy consumption in real-time, all year round. Indeed, using smart energy management systems to monitor and optimize energy consumption can reduce hotel energy costs by up to 20%, and generate some of the fastest payback periods in the industry (between 12-24 months). The ROI is from HVAC energy management systems is so significant, in fact, that they actually increase the resale value of a hotel.

Overhead of an office environment with many cubicles and several people working.

Smart Lighting Technology

Smart HVAC systems aren’t the only technologies that hotels use to save on their energy consumption. Smart Lighting technology also allows hotels to better understand their energy needs, automate their consumption, and adapt to real-time changes in occupancy.

Where some companies have cut energy costs by up to 75% by converting to a smart LED lighting system, hotels specifically have seen even greater savings. For example, when the Chatwal Hotel in NYC retrofitted ~1,300 lamps in hallways, common areas, and 80 rooms, it reduced lighting energy consumption by 90%, and saving more than 410,000 annual kilowatt-hours. Indeed, the property saved around $124,255 in the first year alone.

Similarly, in 2009, the Radisson Blu Dubai Media City was able to reduced lighting energy consumption by 81% by replacing 95% of its lights with LEDs. And later in 2014, the Grosvenor House Hotel in Dubai Marina reduced energy consumption by about 80% by replacing over 24,000 halogen lamps with smart LED lighting systems. The saving were so significant, infact, that the property was even able to recoup its investment in only 18 months.

Essentially, just as smart HVAC systems (such as Verdant EI) use occupancy sensors and machine learning algorithms to continuously analyze demand load patterns and optimize HVAC energy consumption, smart lighting systems similarly allow hotels to set preferred lighting times, track occupancy patterns, and improve overall lighting energy consumption. In fact, both of ​Verdant’s ZX​ and ​VX smart thermostats​ integrate with external third party lighting systems, turning lights on/off according to whether or not a room is occupied. This allows hotel operators to use the Verdant EI energy management system to optimize lighting energy consumption year-round, as well.

 

Water Consumption Management

Energy management isn’t the only best practice that hotels should employ on an operation, cost-saving level. Water consumption management is also an integral part of operating a profitable hotel. Indeed, after energy consumption “Water/service is the second largest utility cost (23.8%).”

After all, whether it’s for guest rooms, pools, sanitation, or food/beverage service, water is an unavoidable cost of doing business in the hospitality industry. Indeed, it represents a significant piece of overhead that can and should be managed carefully. For instance, the hospitality industry relies so much on its water consumption to keep afloat that it:

[A]ccounts for about 15 percent of total water use in US commercial and institutional facilities, according to the EPA … [And some] estimates suggest that implementing water-efficient practices in commercial buildings can decrease operating costs by approximately percent and energy and water use by 10 and 15 percent, respectively.

For this reason, many hotels now use IoT-enabled devices to conserve water and prevent water-related damage. Just consider how a single leaky toilet can cost as much as $840/year. Add the costs of any additional water damage, and it’s easy to see how water can become an unnecessarily expensive business expense. By monitoring water lines with smart, low-cost IoT-enabled water meters, however, hotels can see an ROI on their water consumption in about 4 years.

 

Labor Costs Management

Of course, and possibly the most obvious part of any hotel’s overhead is labor. After all, once the lights are on and the water’s running, all hotels still require staff to serve guests, manage bookings, clean rooms, and perform any number of services that are considered a fundamental part of any guest experience.

Indeed, labor is traditionally one of the most costly overhead inputs, so this KPI is crucial to healthy operation of any hotel. By closely monitoring and managing  overall labor expenditures versus revenue, however, hotels can avoid over-staffing during slow seasons, days, or shifts, and maximize their performance and profitability.

Employee Performance Best Practices

Labor costs, of course, aren’t just limited to salaries. There are also the hidden costs of employee performance. In other words, there’s how much a hotel pays for each unit of labor, and then there’s how much value it gets from each of those individual units. This is why hotels should:

[…] develop KPIs to measure [their] employees’ performance, both in terms of their attitude and their output. For example, [they] might have KPIs measuring appearance and friendliness as well as KPIs measuring speed of service, cleanliness of rooms, etc. Staff turnover is another employee-related KPI that’s important in any business.

After all, a big part of maximizing the ROI of a hotel’s staffing decisions is understanding not only the optimal number of staff to have on hand at any given time, but also the optimal output for each staff member. Indeed, it’s not hard to imagine how many hotels can likely offset much of that 3.7 percent of profits lost to Airbnb bookings just by optimizing staff scheduling and employee performance.

 

How Airbnb has Disrupted Room Demand

Of course, the supply-side isn’t the only part of the hotel industry that Airbnb has disrupted. Indeed, it has also impacted the demand-side by altering consumer expectations of what a guest experience should be at any given price point. As Chiara Farronato, co-author of the study of NBER study points out:

Consumers don’t always pay a lower price [through their Airbnb booking]. What changes is the quality of [their accommodations]. You might find a Fifth Avenue apartment or a place by the beach at a more reasonable price than you would if Airbnb wasn’t an option. Or a listing might have additional amenities, like a kitchen.

Essentially, through Airbnb, consumers have been exposed to guest experiences that can differ greatly from that offered by conventional hotels; and those changed expectations have fundamentally altered the consumers booking decision-making patterns. To cater to these changing guest expectations, however, hotels have begun to offer services and amenities that are markedly distinct from an Airbnb guest experience and, in some cases, well beyond anything the average Airbnb host can offer. They are also leveraging their brand promise “and how it defines and shapes the guest experience.”

 

How Hotels are Reinventing Guest Experience

While financial best practices allow hotel owners to measure performance, and operational best practices allow hotel owners to minimize costs, guest experience best practices allow hotels to maximize bookings and the revenues that they generate.

Essentially, not only can guest data be used to help better accommodate guest needs; but in conjunction with occupancy sensors, it can also be used to automate guest interactions throughout their stay, reducing both friction points and labor costs. In other words, IoT technologies have made it possible for hotels to predict and personalize a number of guest services based on both previous visits and aggregate guest data.

 

Smart Check-In / Check-Out

Hotels are now using IoT to enrich guest experience even before a guest’s arrival. By allowing guests to check-in remotely through their mobile device, hotel managers can better predict/manage their staffing needs and save considerably on labor costs. 

For example, when guests can check-in remotely using a smartphone app, staff spend less time on the welcoming process. And using location services, hotel apps can also alert hotel staff when guests arrive on the premises, allowing them to greet the guest by name, offer appropriate upgrades/upsells, and provide them with a more personalized guest experience — even on their first visit.

These IoT technologies also allow hotels to offer a more personalized check-out experience. Through self check-out features, hotel apps allow guests to arrange for their preferred transportation to their next destination (whether it be taxi, airport shuttle, or rideshare service of choice). Smart check-out services also allow hotels to save on associated labour costs — such as manually processing the check-out and/or making travel arrangements for departing guests.

 

Smart Reserved Parking

Hotels are also using IoT sensors and hotel apps to allow guests to reserve parking spots in advance of their visit, and to have their space assigned upon arrival. This is not only saving hotels on the labour costs of manually managing parking inventory, but it will also offer guests a smoother experience from the moment they pull-in.

With Airbnb bookings, however, parking can often be a point of friction. In the case of Airbnb listings that don’t have reserved parking, guests are often left to navigate the neighbourhood in search of free or paid street parking. 

 

Room Service

While Airbnb’s often feature kitchen amenities, guests are still left to prepare their own meals. Hotels, on the other hand, are using using IoT technology to enhance in-room guest experiences.

For instance, smart occupancy sensors allow hotels to push menu notifications to smartphones at optimal times when the guests are actually in their room. These notifications can even include personalized suggestions based on dietary preferences or past orders. Indeed, many home food delivery apps (such as JustEat and SkipTheDishes) already offer a similar experience, sending push notifications to frequent users at their preferred ordering times on their preferred days.

 

Laundry Services

It’s not uncommon for Airbnb listing to feature laundry facilities. And while that can be convenient for families booking longer stays, doing your own laundry is not always an option or desirable for shorter bookings or business travelers.

Similar to room service notifications, hotels are also using IoT enabled apps to send push notifications at appropriate times of the day to remind guests of available laundry services and turnaround times. This way, guests can ensure that their items are ready for pick-up in time to be cleaned and pressed for when they’re needed.

 

Mobile Room Keys

Accessing an Airbnb accommodation is not always straightforward. Sometimes the host will meet guests to grant them access to the property, and sometimes a key needs to be retrieved from a lock-box that countless previous guests have had access to (a security concern).

Hotels are offering a level of service above and beyond this cumbersome experience by allowing them to lock and unlock their room door, via the hotel’s smartphone app. Such technology also saves hotels the expense and hassle of managing a key card inventory that is prone to loss and demagnetization.

 

Loyalty Program Management

There’s no business like repeat business, and for hotels, the feedback that returning guests can offer through loyalty programs can provide valuable (and actionable) insight into a property’s guest experience and how it affects a hotel’s ongoing revenue performance. As iDashsoards puts it:

From tracking repeat customers to tracking the value of their purchases, there are several KPIs you can use to measure the success of loyalty programs. If your loyalty program isn’t meeting the goals and objectives you had for it from the outset, revamp it to be ROI driven and more enticing.

In other words, loyalty programs can help hotels measure the guest experience of their most valuable customers, helping to optimize guest experience and secure revenue through future repeat visits.

 

A Brave New Industry

Change is one of the most immutable of universal laws. Everything changes in its own way in its own time. And at this moment in history, the hotel industry is in a significant state of flux.

New technologies have brought new competition and new challenges for hotels, and Airbnb has posed a series of challenges to an industry that’s almost as old as civilization itself. It has directly impacted the supply-side of the market (cutting into hotel profits) and, in doing so, indirectly altered the demand-side of the market, as well.

Reaching so far back into human history, however, the hotel industry is no stranger to change; and just as it has reinvented itself many times before in the past, it is doing so again. Indeed, there are a number of technologies available that can not only help offset the revenues lost to Airbnb bookings, but create more competitive service offerings that the sharing economy simply can’t match. And the hotel operations that prosper in this new ecosystem will be those that leverage those technologies to reinvent the very nature of hotel management.

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