In a free market, the laws of supply and demand are what governs how we do business. Barring external interference (such as government regulation or unprecedented historical events such as the pandemic), any change on either the supply or demand side of the market tends to have a definitive impact on pricing – and, in turn, a direct impact on profit margins.
That being said, any significant shift in supply-and-demand can also be transformative for an industry as a whole. As supply or demand fluctuates, the businesses that survive might have to adjust their business model or even core service offering. Whether it’s sourcing new inputs, reorganizing their supply chain, ramping production up or down, finding new ways of reaching new customers, or restructuring operations to maintain (or increase) profitability under new market conditions, a change in supply-and-demand can have resounding effects across any industry.
And the hotel industry is 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 fundamental nature of the hospitality industry’s demand-side, 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 almost redundant to say that Airbnb has meant increased competition (and lower RevPar) for the hotel industry. After all, “[b]uoyed by a growth rate of over 100% year on year, Airbnb now has over 4 million listings, with the U.S. being its largest market”. As one 2018 study found:
[A] 1% growth in Airbnb supply across 10 key hotel markets in the U.S. between 2008 and 2017 caused hotel RevPAR to decrease 0.02% across all segments. [And] given that Airbnb supply grew by over 100% year-on-year over this ten year period means that the “real” decrease in RevPAR was 2%, across hotel segments. Surprisingly, it was not just the economy but also the luxury hotel segment that was hard hit by Airbnb supply increases, experiencing a 4% real decline in RevPAR. […] Brands that felt the impact the most were those in the midscale and luxury segments, with a decrease in RevPAR of 4.3% and 2.3% respectively.
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. However, as with most market dynamics, the bigger picture is not as simple or as straightforward as we might be inclined to think at first glance.
Source: Research Gate
For instance, another study from the National Bureau of Economic Research that analyzed data from 10 US cities with the largest Airbnb market share found that “the 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
As Airbnb has demonstrated, technology has fundamentally changed the supply side of the hotel industry. And barring regulatory interference, there’s little that can be done to undo it. Pandora’s box has been opened, and the proverbial toothpaste can’t be put back into 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 KPIs that hotel operators and hotel managers can track and monitor to cut costs and increase revenue. Of the two 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 (RevPAR) is a valuable metric for hotel operators. Specifically, it helps hotels measure the efficiency of their operations by tracking how well they’re filling available rooms at their Average Daily Rate (ADR). And since RevPAR measures revenue made during a certain period of time, it can be used to compare any given time period against previous periods, plan for seasonal trends, and measure the long-term performance of a property.
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). It is used by hotel operators to maximize a property’s profitability by factoring operational costs into its forecasting.
Some examples of operation costs taken into account when calculating GOPPAR include energy consumption, housekeeping, Internet, laundry, and food and beverage. By factoring in these operational costs, GOPPAR provides a more complete picture of operating costs per room, allowing hotel operators to more accurately calculate overall profitability. 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 Forbes reports, “60-70% of [a hotel’s] utility costs are exclusively billed for electricity”. So by implementing smart energy management systems, a hotel can increase both its GOPPAR and the resale value of the property as a whole – all while offering an improved guest experience. 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.
Source: Hospitality Net
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.
HVAC energy management technology
Climate control is essential overhead for any hotel property. Whether it’s heating or air conditioning, every hotel property has a need for some kind of HVAC system. So to reduce their carbon footprint, many hotels are implementing IoT-enabled energy management systems that monitor and adjust energy consumption in real-time, improving HVAC systems performance and significantly reducing energy consumption.
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 occupancy sensors and smart thermostats monitor and respond to fluctuations in room occupancy, smart energy management systems like Verdant EI employ machine learning to analyze historical thermodynamics, local weather patterns, and peak demand loads 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 from HVAC energy management systems is so significant, in fact, that they actually increase the resale value of a hotel.
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 saved 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 reduce 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 savings 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 operational, 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 a necessary cost of doing business in the hotel 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 the 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:
Effective performance evaluations can be tremendously beneficial for your staff. […] This feedback assists them in their short- and long-term career goals, and improves the overall performance of your hospitality 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.
Reducing employee turnover costs
A final operational cost that hotel operators are managing more efficiently is employee turnover. After all, recruiting, onboarding, training, and managing new employees are all significant cost centers.
For instance, while an employee is being trained, they are generally less productive than their fully trained counterparts, meaning that hotel operators are paying more per hour for lower output. Furthermore, the time managers spend training a new employee is time lost that they could’ve spent doing something else. As DailyPay puts it:
The average 2021 turnover rate in the leisure and hospitality industry [was] 84.9% compared to the overall rate of 47.2% nationally. Hospitality companies can work to reduce turnover and increase retention rates to improve guest experience and reduce unnecessary hiring and onboarding costs associated with replacing employees.
High turnover rates among hotel and hospitality staff may have damaging effects on a team’s morale, reduce the company knowledge base, interfere with customer service, and burden remaining staff.
In sum, onboarding and training new employees represents a significant cost center for hotel operators, and reducing that turnover can help significantly increase hotel profitability. Furthermore, a fully-trained and experienced staff will contribute to overall better guest experiences.
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 a HotelTechReport notes:
79% [of guests] prefer traditional hotels but, once they experience a vacation rental, that number dropped to 40%. In other words, home-sharing siphons off 39% of hotels’ target market. Another survey found that 60% who use both hotels and Airbnb prefer Airbnb versus hotels.
Essentially, Airbnb has exposed consumers to guest experiences that can differ greatly from that offered by conventional hotels; and those changed expectations have fundamentally altered consumer 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. As the Boston Hospitality Review notes:
Hotels need to re-think the brand promise, both for the parent brand as well as individual brands in the portfolio, and how it defines and shapes the guest experience.[…]
An authentic brand has at its core the brand promise, an authentic value proposition that gives consumers a raison d’etre for associating with the brand.[…] [An] idea that lies at the heart of the brand promise is what we call the experiential value proposition, or EVP. For the longest time, hotel marketers have relied on the guest room as the primary source of value for the guest. But think about the last time you traveled. Was it the prospect of the hotel room that got you excited about your trip? Or was it everything that the hotel enables you to do – the experience outside the guestroom? […] We call this proposition offered by the hotel—what’s inside and outside the guest room, enclosed within an experience of hospitableness and a connection to humanity—its EVP.
In other words, hotel operators are leveraging their ‘brand promise’ and how it defines and shapes their guest experience as a whole.
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, smart 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 loyalty programs
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 the Boston Hospitality Review also notes:
the role of the loyalty program cannot be emphasized enough. Loyalty programs must move beyond programmatic levels to being able to leverage data from guest history, social media, and other marketing data sources, powered by predictive analytics, to personalize and individualize the guest experience of the brand. In an age of instant gratification, the loyalty program has to be gamified to unlock value-adds and offer creative bundling.
In other words, loyalty programs can not only help hotels measure the guest experience of their most valuable customers, helping to optimize guest experience and secure revenue through future repeat visits, but they can also enhance the EVP that modern travelers demand from their accommodations.
Smart check-in / check-out
Hotels are now using smart technology 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. In fact, since the advent of the pandemic, one study found that:
Furthermore, 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). So not only does smart check-in/check-out technology not allow hotel operators to create more personalized guest experiences, but also further reduce their operating costs
Smart Reserved Parking
Hotels are also using smart 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 labor 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 neighborhood in search of free or paid street parking.
While Airbnb’s often feature kitchen amenities, guests are still left to prepare their own meals. Hotels, on the other hand, are using smart technology to enhance in-room dining 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.
It’s not uncommon for Airbnb listings 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 mobile 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.
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 and recreation.
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.
However, new technologies have also created opportunities for hotel operators to reinvent the way they do business, reduce costs, improve guest experience, and increase both revenue and profits. Indeed, these technologies are allowing hotels to offer an experience value-prop that the Airbnb model can’t fully compete with. And the hotel operators who are embracing these new technologies and the business models they make possible will prove to set the new standard of both hotel management and guest experiences.