The Revenue Paradox
Times are tough for any tourism business at present with the high Australian dollar and other economic factors challenging even the best operators.
The dilemma facing many of our clients is how to price their rooms. Many will discount to gain their share of the pie and others will increase pricing and work on quality rather than quantity. Some will focus on internet marketing and distribution channels; others will work hard on marketing to repeat customers and direct bookings. However you choose to operate your business, you need a plan.
The key is to understand the main drivers of your business and work to improve them while times are tough. Some key drivers of your business are:
• occupancy;
• average $ per room per occupied night;
• repeat business;
• new business; and
• conversion rate of enquiry to booking.
In this month’s article I would like to focus on revenue per occupied room night.
Revenue per occupied room night (RevPAR) is an interesting mix of occupancy and average room rate per night. This one indicator moving in a positive way can improve your business markedly. You could have a reduction in occupancy and an increase in room night rate but still move backwards on RevPAR. The idea is to only give in to occupancy increases if it means an increase in your average room rate; not an increase in occupancy at the expense of a decrease in your average room rate. Let’s illustrate:
If you reduce your price by $X, then what happens to occupancy?
So if we pick a median range on the above table of 40% profit margin and you discounted your room nights by 20%, then you would need to increase your occupancy by 100% to make the same profit.
Whereas if you are increasing your prices, your occupancy could decrease before your profit would be impacted:
Many accommodation operators have come to the conclusion that in the current competitive environment, cutting rates and focusing on occupancy is the only way to compete. Too many business operators focus purely on occupancy, which feeds last minute websites and puts them in direct competition with the corporate model. Sure, there is a market segment of customers that shop on price but they are not the only customers in the market place. If you do focus on this price sensitive market then you need to be aware of the occupancy volumes required to keep your profit at the same level (for you and the unit owners). These types of customers need to be “wowed” to buy their loyalty but typically they will move on to another resort and to the next cheap deal the next time they holiday.
It is worth noting that there is a smaller group of managers out there who are more focused on the average nightly rate and its relationship to occupancy. These managers are hard at work marketing to their past guests and new enquiries who appreciate their unique selling proposition and they are maintaining and, in some cases, increasing their rates. While occupancy may drop slightly, their returns and importantly, the returns of their unit owners, are being maintained or increased. Is there a value add that sets you apart from the competition in your area?
It is harder out there with more competition and the high Australian dollar providing cheaper overseas holidays than we have seen in many years. However, if you are marketing your property properly you can buck the trend. We have had a number of savvy building managers with good properties in good locations get creative with value add packages and market heavily based on their uniqueness in the market. They have noticed good improvement in their figures in the current environment.
At present, the average nightly rates being achieved by holiday complexes are under pressure from the corporate end of town. It is more important than ever to note that lower rates does not increase demand for your product it merely creates an expectancy with the travelling public for lower rates and they are encouraged to shop on price rather than your uniqueness, such as quality rooms, destination, an indoor heated pool, a magnificent view or a child friendly resort. What is a room night at your property really worth? This type of information is sent to get you thinking in an environment that is testing for all in the holiday industry. Are you doing all you can do?
Permanent complexes should also take note as downward or upward pressure on weekly rentals and your complex vacancy rates between tenants can have the same effect on your bottom line. It may seem strange to consider but there is a place for marketing in a permanent complex.
Damien Moffrey
Baker Affleck Moffrey
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