ZACH DE GREGORIO, CPA
I’ve found this is a good example because everyone can relate to it. Everyone has been to a hotel. And no matter what industry I have worked in, I find this example very helpful in drawing insights about your revenue strategy. Now the hotel business is interesting, because your inventory is not likely to increase or decrease. The number of rooms you can sell does not change. What you can change is the type of revenue you bring in. So if you go and read an annual financial report for any hotel company, what you will find is their most important metric is called RevPAR (which stands for revenue per available room). So since the number of rooms does not change, we look at how much revenue comes in per available room.
So let’s imagine you have a hotel with 1,000 rooms. So it’s a pretty big hotel. There is many different types of travelers you could go after to book your hotel rooms. What you want to target is the type of customer that fits your revenue strategy. Now every hotel is going to be different depending on your property’s strengths and weaknesses. But generally a very attractive type of business for hotels is booking conferences. Think about what a conference does. They are usually once or twice a year, so it is repeat business that will book a large group of rooms in your hotel. This type of business is so attractive that it is a common practice for hotels to give discounted rates for the room block.
Now you might think to yourself, if I am giving all these discounts, how am I increasing my revenue per room? Well for starters, conferences usually generate all kinds of other revenue streams for the hotel. But let’s just set that aside for the moment and talk about the rooms. What you have effectively done is shrunk your supply of available rooms to sell. And we all know, with supply and demand, when the supply goes down, you can charge more for the remaining rooms. And we have all experienced this. If you try and book a hotel room in a city where there is some major conference going on, all the room rates go up.
But it is more specific than that. You are actually targeting a higher end customer. So travelers come in a whole spectrum of customers from high end to economy travelers. Economy travelers are always looking for a deal and are comparing prices on travel websites. Higher end customers tend to be business travelers who are generally not paying for their own room so they are less price sensitive. So you have this whole spectrum of travelers. Well, if you limit your available rooms, you can target the higher end travelers. What this does is shift the spectrum down and the economy travelers will not want the high prices anyway. So that is where you are making your money, is from charging high prices for your remaining rooms. Not only that, it pushes the economy travelers to your competitors’ hotels. So you are not only generating more revenue, your competitors are generating less revenue.
Neither Zach De Gregorio or Wolves and Finance Inc. shall be liable for any damages related to information in this video. It is recommended you contact a CPA in your area for business advice.