Understanding the Difference Between Revenue and Profit

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A closer look at how three customer segments can affect your bottom line.

by DAVID LUND

Global is a big word, and now that I have your attention, I want to define global in a hotel setting. Global refers to all sources of revenue and its corresponding profit picture: A global perspective on revenue management that yields the highest possible profit because we understand and apply a BIGGER view to our business.

I think the title and buzzword that has our industry locked on revenue management is entirely the wrong way to look at it. Revenue is where we start, but profit is where we end. Understanding what happens to the room revenue and resulting profit from different segments is the starting point to a much more effective outcome.

We essentially have three types of customers in hotels: leisure, contracted individual and groups. Let’s have a look at the profitability profile of each major segment of the room business.

LEISURE CUSTOMERS

There’s a common piece of advice: Do not put all your eggs in one basket.

Understanding this and applying it to your hotel’s global revenue management strategy is, in turn, understanding your hotel’s DNA. Knowing your DNA and how we can affect it is the highest and best use of the profit maximization strategy.

Leisure customers are, on the surface, the most desirable segment in most owners’ eyes. They normally pay the highest rates, and we like to think that they spend more on food and beverage, parking and the spa. But not so fast on this one.

What we need to examine is the cost to get our leisure customers. Usually, they book through an online travel agency or the company website, and both are expensive sources of distribution. Typically, 15-20 percent of the rate comes back to the operation as a commission or reservation expense.

The second aspect we need to consider is their activities on property. Most leisure customers will use the hotel’s other facilities, but in most instances they also are busy seeing the local attractions, including restaurants and bars. Long gone are the days when these leisure guests stay put.

It’s hit or miss with leisure customers and how they treat their room. If it’s a multi-occupancy family stay, the housekeeping department better have loads of supplies and staff for service. This segment on the whole is hardest to service. We don’t know when they will arrive, but it’s often early. We don’t know when they will leave, but frequently it’s a late checkout, and they always pay with a credit card that attracts a nice two-plus points of total spend.

The last aspect of leisure customers to be aware of is that they are predominantly weekend or seasonal customers. Leisure guests are, at best, tied for second place in my preferred customer profit profile.

CONTRACTED CUSTOMERS

Next up are the contracted individuals, or as some hotels describe them: corporate individual travelers. In many hotels, contracted travelers serve as a base for the rooms business. Hotels pop up all over the place, and in many instances they want to plant themselves close to other businesses and offices, which attracts business travelers to the hotel.

Business travelers are a desirable element for hotels because they have several positive attributes. First, they use the hotel throughout the year and less on holidays. They typically arrive late (after 6 p.m.) and leave early (before 9 a.m.). Housekeepers love corporate guests because usually it’s just one customer who uses the room lightly.

The use of the room can’t be overlooked. With renovations needed as early as five to six years in some properties, a good mix of corporate business can push the renovation out a year or more. We have costs on the distribution side, but almost always less than leisure guests because we have the ability to negotiate the distribution.

Corporate customers usually eat breakfast in the hotel, and quite often they will use the hotel bar to have a beverage after the business day is over. Another positive aspect of corporate customers is their potential to bring other corporate customers, as well as small to bigger meetings to your hotel. So nurture your relationship with these repeat customers. Let’s just say the corporate customers are easy. Overall the preferred customer rating I would assign the corporate individual traveler is tied for second. In this case, like baseball, the tie goes to the runner, and the runner is the corporate individual traveler.

GROUP CUSTOMERS

The most desirable customers in most hotels are groups. At first glance at your rates, you might conclude that the group average rate is low. Don’t stop there; look at the sheer economics. With this in mind, groups often win the top prize.

First, look at distribution costs. If the hotel is well run, the group is booked through a rooming list or another low-cost reservation method. No OTAs or central reservations need be used. In effect, this adds 15-20 percent to the group rate. The group may come with a commission from a third party but many don’t, especially if you have your own sales team.

Second is the group movement; the group arrives, moves in-house and they leave en masse. This is desirable from a labor and efficiency perspective.

Third, it’s F&B. Groups meet, eat and drink together at the same time. This effect is the most powerful profit combination. A good group with breakfast, coffee breaks, cocktail receptions and dinner is the perfect profit combination. In demand situations, hotels can place groups perfectly in their need periods.

In addition to the room and F&B revenue, groups almost always need AV, display space, drayage and best of all meeting room rental. The cherry on top of the group cake is they almost always pay their invoice with a check. Groups business is the No. 1 desired customer in my book.

How does a hotel measure these different sources of business and decide which way to go? The easy answer is you need all of them to be successful. As the saying goes, don’t put all your eggs in one basket. Having a diversified customer base means you can better manage when one or more segments face headwinds. If you were running a hotel in the last financial crisis, you know what I mean by customer segment diversification.

Knowing what each piece of business is likely to spend and where is key. Most hotels have tools to analyze spending and the profit to come from that revenue. Global hotel revenue managers are looking at the profitability of each piece of business, weighing the operational challenges with the economic benefits. Hotels are a pure example of the supply and demand principle.     ■

David Lund, CHAE, “The Financial Hotel Coach,” is an international hospitality financial leadership expert who has held positions as a regional financial controller, corporate director and hotel manager with an international brand for 30 years. He authored an award-winning workshop and two books on hospitality financial leadership, coaches hospitality executives and delivers his financial leadership training worldwide. To learn more, visit www.hotelcoachdavid.com.

Photo credit: garagestock/Shutterstock.com

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