REPORT FROM THE U.S.—A full house, or 100% occupancy, is the Holy Grail for most hotel owners and operators. When a hotel approaches this level of compression, it’s important for revenue managers to maximize rate and occupancy without alienating loyal customers, sources said.
Opinions differ on the definition of compression and what strategies hoteliers should pursue when they reach those levels. Markets with high average occupancies face this opportunity more often than do other cities.
“It varies from asset to asset, but typically anything above 95% (occupancy) is what I would call very compressed,” said Thomas P. Botts, executive VP and chief customer officer for Denihan Hospitality Group. “Of course, in Manhattan it seems as though there is always compression.”
Nolan Wrentmore, VP of revenue management and e-commerce for Aimbridge Hospitality, said the definition differs by market, city and hotel location.
“We define it individually. In Los Angeles, for example, you may have 15,000 attendees for a citywide event, but it won’t have an impact more than a few miles outside of the city center,” he said. “However, take that same convention and put it in a city like Tulsa (Oklahoma), and the whole city will sell out. We have to define it from a perspective of a threshold of an individual city and a hotel perspective.”
Strategies to deploy
When future bookings point to a state of compression, revenue management involves more than just raising rates, said Calvin Anderson, director of revenue at The Lexington, an Autograph Collection Hotel, in New York.
“From a retail perspective it’s always teetering between a rate increase and a tightening by yielding restrictions,” Anderson said, in explaining his rate strategy for compression periods. “Sometimes, I’m able to get away with both at the same time, and sometimes it’s a step by step in which I can force people to a three-night (stay) or other stay patterns.”
Anderson said it’s not always possible to push guests into stay patterns that will benefit the hotel. For example, it’s usually difficult to coerce customers into extending or starting their stays on a Sunday.
“No one wants to stay into that Sunday, and you’re not going to be able to get them to do so,” Anderson said. “If you force people to do it, you’ll completely shut off your compression.”
Wrentmore said when his hotels reach defined levels of compression, property revenue teams combine basic yield management with length-of-stay strategies to maximize revenues.
“We look at our rates and manage according to the market and demand,” he said. “While we have lower profitable channels, we try to manage and whenever possible accept the demand that’s coming through the most profitable channels.”
Anderson said even during compression it’s not good business to close out discount rates, such as for government travelers and AAA members. Instead of closing these channels, he will adjust the amount of discount offered with the hope of retaining the loyalty of these guests.
“It’s foolish to shut off the government per-diem channel,” Anderson said. “The government traveler is a great traveler. They’re good for your hotel. They’re consistent. They book far in advance and are typically loyal. My goal is to never shut that channel off, even if I can only offer 5% off or 10% off of a retail rate, because at least I’m offering something when all my neighbors are closed out.”
New technologies, such as mobile, have had an effect on rate strategies, especially during periods of compression, Botts said.
“If you look at the advent of the mobile space, the majority of it isn’t new demand,” he said. “It’s just people who previously would have called or walked into a hotel and now have the ability to do that with their mobile devices. How we leverage (this trend) and get those customers is a key part of our strategy for 2014.”
In some cases, rate-management strategies during compression periods seem to differ on weekends versus weekdays. In an article last September, Jan Freitag, senior VP of strategic development for STR, the parent company of Hotel News Now, presented data showing that operators of upper-upscale hotels tend to charge less on high-occupancy weekend nights than comparable nights of compression during the week.
“That’s absolutely true,” said Anderson. “The mix of business is always stronger mid-week because you (typically) only have a few leisure guests and more corporate travelers. On the weekend, you hardly ever have those corporate travelers, and the demand isn’t there in many cases to produce compression.”
Wrentmore said there is a belief by some operators in the industry that demand is softer on the weekend and that weekend travelers are always seeking the lowest rates possible.
“In a lot of markets that can be a misconception,” he said. “There are certainly markets where the weekend traveler doesn’t have to be the low-cost leisure traveler. Unfortunately, we’ve gotten into an environment where we’ve made that assumption that because it is a leisure guest they are budget-conscious. It’s market to market. You must look at your market and determine what the demand is and price accordingly.”
Walking the tightrope
As a hotel approaches forecasted compression-level occupancy, the temptation for revenue managers is to raise rates as high as possible, even for loyal and frequent customers. Sources differ on whether that’s the best strategy.
“It’s always a fine line to walk, and gouging is something we don’t like to do in the hotel industry,” Botts said. “It’s all about getting the right price and a fair price for a room. There is only so far you can go, with the exception of during things like the Super Bowl or Indianapolis 500, where there is truly unlimited demand and a very, very limited amount of supply.”
Anderson said he’s never afraid of alienating frequent customers by pushing rates higher, adding that consumers understand the dynamics of hotel-rate structures and use them to their advantage when they can.
“We have a fluid product that expires overnight so there shouldn’t be any apology for maintaining a market value as the entire market goes up,” he said. “Perhaps 20 years ago there would be more concern about that, but today we’re dealing with a customer who is very empowered: empowered to find a better discount, to cancel on you in the last minute. We give them everything, so when the power is occasionally in our hands there is nothing wrong with saying, ‘Sorry the rate tonight is this.’”
Wrentmore said his revenue managers are more likely to offer some relief to their hotels’ loyal customers.
“We’re going to protect our best customers,” he said. “They’re with us through the tough times as well as the good times, and if they are truly a good customer we’re going to ensure they have a room at their rate.”