Part III Being There
4.2 Basics
4.2.3 Marketing Matters
Because most hotel markets are highly competitive at least for some parts of the year (or sometimes parts of the week)—the shoulder or low seasons, for instance—mar- keting is a critical tool in filling the rooms and maximizing returns on invested capital.
Most major hotel chains spend at least 2–4 % of total revenues on advertising and have also—in emulation of airline frequent-flyer marketing methods—begun to actively develop frequent-stayer bonus programs.
However, in addition to the usual advertising and promotional campaigns that companies in most industries conduct, hotels will use to advantage reservation systems, frequent traveler programs, brand names, and the services of destination marketing organizations (i.e., DMOs, which are also known as convention and visitors bureaus). The brand names suggest to the customer which of four broad categories—luxury (high-end full-service), basic full-service, limited-service, or extended-stay—a particular property presumes to represent.
For marketing and sales purposes, customers may also be generally segmented into three categories:
• Transients (60 %): Rooms reserved at rack rates, with corporate negotiated, package and other rates booked via third party websites.
• Groups (35 %): Rooms are sold simultaneously in blocks of 10 or more.
• Contracted (5 %): Rooms (for airline crews and permanent guests) are sold at contract-stipulated rates.
Reservation Systems Although there was a time not so long ago when a reservation system was no more than a pencil’s marking on a smudged index card, reservation systems have come to function as the main traffic-control and business allocation nerve centers of a hotel’s operations. Without the reservation systems, most modern hotels would probably shut down and chaos would reign because neither the hotel desk clerks nor the arriving guests would know who is entitled to accommodation.
Current technology embodied in reservation networks allows hotels to handle a
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volume of traffic that would have been inconceivable in earlier years. Here again, as in other networks, theLaw of Connectivity(discussed in Chap.2) is operative.
A manifestation of this is that reservation systems are also potent marketing tools that can promote a property’s unique charms and benefits to faraway travelers who might not otherwise be so informed. The efficiency, courtesy, and general friendliness of the reservation system operators can make a good immediate impression on the prospective guest as perhaps no other promotional medium could. This is important because even small changes in occupancy rates can make a large difference in total profitability (with yield management systems using these data to optimize room rates for specific customer classifications and dates). To this end and to circumvent travel agency fees, booking sites such as RoomKey.com have been launched by a consortium of large chains.27
Brand Names The power of a brand comes from the information that it efficiently conveys to the consumer. Although brands don’t always provide the consistency of product and service that they should, in the hotel business a brand name at a minimum suggests the probable pricing range and level of service to be expected and perhaps functionality and prestige as well. Brands such as the Four Seasons and Ritz-Carlton convey a sense of luxury that the perfunctory, perfectly good budget rooms of Motel 6 do not have and are not designed to offer. Boutiques, which attempt to convey a youthful sense of style and account for more than 3 % of hotels in the United States, are also strongly branded. In all, brands make marketing statements that attempt to funnel each class of traveler into the promoted chain’s units (but with the percentage of branded hotels in each major region of the world varying from around 40 to 70 %).28
Brand names are thus important intangible assets that must be continuously supported, often in the form of frequent-stay reward point programs that are similar in concept to airline frequent-flyer programs.29 Hotel chains also attempt to use
27See Salzman (2013) and Edleson (2013a), in which the four models typically used by online travel agencies (OTAs) are discussed. OTAs can book rooms in ways similar to traditional travel agencies (sometimes referred to as global distribution systems, or GDSs) and the hotel then pays the OTA 5 % commission. There is an auction system as used by Priceline; an opaque model as used by Hotwire.com in which consumers don’t know what brand they are buying; and a merchant model, in which an OTA buys room inventory from hotels and the hotel then typically pays a commission of between 18 and 38 %. OTAs are estimated to account for nearly 20 % of all bookings and the percent of room revenues paid to them by hotels may generally range from 10 % to 25 %.
28According to Smith Travel Research, in 2015 in shares of branded properties were: North America, 67 %; Europe, 41 %; Asia/Pac, 51 %; Middle East/Africa, 44 %; and South America, 41 %.
29Hotel loyalty programs were launched in 1983 by Holiday Inn and Marriott and were originally conduits to airline programs wherein currency earned in hotels could be used for free flights on participating airlines. The programs, now often co-branded with credit cards, then evolved so that accrued rewards could be used for free roomnights and other benefits. Points in loyalty programs are accumulated when a guest checks into a hotel and the hotel’s owner pays a fee into a special fund that is structured to cover the expected costs of potential future point redemptions. When guests redeem their points for a free night or other benefits, the management company charges the
branded locations (e.g., Times Square in New York, Hollywood in Los Angeles) as associative tags for Internet Search Engine Optimization (SEO) strategies. Table4.4 provides examples of brands in each of five major categories.
The effectiveness of marketing in terms of branding efforts, reservation systems, and pricing structures are then all reflected in theownandcrossprice elasticities of demand for lodging. Using the same approach as for airlines (Sect.2.3), the own price elasticity of demand is defined as the percentage change in room demand in market segmentXcaused by a change in room rates in segmentX, all other things being equal. The cross elasticity of demand is defined as the percentage change in room demand in segmentXthat is caused by a percentage change in room rates in segmentY, all other things being equal. In other words, for two competing hotels, room rate increases (decreases) in one hotel will lead to room demand increases (decreases) in the other hotel.30
A convenient way to gain marketing insights is to compare properties and features within categories or locations via scatters diagrams. Just by plotting occupancy rates versus ADRs (Fig.4.6), it is easy to see how Las Vegas compares to London or New York or Atlanta. Las Vegas emphasizes relatively low room rates to attract visitors to gambling, food, and other attractions and, despite the large number of rooms (>150,000), is able to fill most of them most of the time with the help of its large trade show and convention center business. Atlanta, in contrast, hosts the world’s busiest airport (101 million passengers in 2015 according to IATA/ICAO and Airports Council data) and is a major convention center site (#5 Table 4.4 US hotel brand categories, selected examples, 2015
Category Representative brands
Luxury (high-end, full-service) Four Seasons, Ritz-Carlton, Peninsula Basic full-service/upper scale Hilton, Hyatt, Marriott, Sheraton Limited-service/economy Hampton Inn, La Quinta, Motel 6, Moxy
Extended stay Homewood Suites, Residence Inn
Boutique W, Andaz, Chatwal,Edition, Modo
fund to pay the hotel owner back for the room night that is redeemed (but at a fraction of the published room rate). The challenge for the hotel is that it must have sufficient cash to cover all of the potential redemptions. As noted in Hudson (2010), the economic recession that began in late 2007 led to an increase of merchandise redemptions as compared to overnight stay redemptions.
The hotel owner must then pay more to product suppliers for merchandise instead of being compensated for the cost of a room out of a reserve fund that hotels pay into. See also Audi (2007).
30For example, estimates by PriceWaterhouseCoopers suggest that at upscale hotels, a 1 % rise in price (i.e., in real ADR) results in a 0.4 % decline in room demand and a 0.6 % decline in occupancy percentage points for each $1 increase in real ADR. The cross elasticity for the economy sector against midscale hotels without food and beverage indicates even greater sensi- tivity, with a 1 % increase in economy prices raising midscale demand by 0.8 % and with each $1 change in economy real ADRs raising midscale occupancy percentage points by 1.4 %. See Hanson (2000).
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rank in the US), but its hotels average a much lower occupancy rate than those in Las Vegas.