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July-August 2005

Pricing & Promoting Rooms for Maximum Income

Eric Goldreyer

  

The problem:  Most inns run at annualized occupancy rates of around 43%1, making it hard to generate the profits needed to hire the staff required to prevent burnout and complete other projects that will improve income.  While conventional wisdom recommends spending 5% of gross revenues to market an established property and 10-15% for a new or turn-around business, that’s hard to do when your credit line is maxed out.  

The trends: David Hiler, of Oates & Bredfeldt  inn consultants, compared his company’s cost studies for 2002 and 2004, and explained: “In both our B&B and Full Service Inn studies, which each analyze over forty well-operated properties, the average number of rooms and average daily room rate increased from 2002, while the occupancy rates decreased.  Sales also increased, but net income was down.  In other words, the inns we studied are getting bigger and better, but they are leaving more rooms nights unsold.  In addition, the stronger demand for services and amenities is cutting into the bottom line. The good news is that the B&B industry’s visibility in the national marketplace continues to rise.  Now, the challenge is for innkeepers to find creative solutions to fill up those extra room nights.“  

The solutions:  Take advantage of marketing solutions and distribution channels that cost you money only when the reservation has been made, and spend strategically on marketing and amenities that will drive revenue. Consider these three parallel strategies:

  • Value-added Packaging

  • Flexible Pricing via Yield Management

  • Pay-to-play Marketing vs. Pay-if-they-stay Marketing

 Value-added Packaging 

When David Hiler (mentioned above) was the innkeeper of the Three Mountain Inn in Jamaica, VT, he offered a winter midweek “Ski Free” package with nearby Stratton Mountain Ski Area. “This money-saving value-added package was included in the “Deals and Discounts” column of the New York Times Travel Section, with great results. Although we nervously expected a plague of bargain hunters, most of the guests were delightful. Best of all, many returned to the inn many times thereafter, often at full price.”

 Value-added packages will cost you money in reduced revenues—but the costs are incurred only after you’ve taken the reservation. In the example above, the inn had to pay for those “free ski passes” but it was more than compensated by the midweek reservations generated by the promotion.  When creating a package, remember that the consumer needs to perceive real value; you have to actively promote it through prominent place on your website and in email newsletters, via the special packages and Hot Deals on BedandBreakfast.com, through media press releases, and to your past guests.

 Develop an inventory of value-added packages that you can promote to your mailing list, on your website, on directories like BedandBreakfast.com, and to the media. Packages should be varied and seasonally appropriate.  Don’t be afraid to experiment; you never know what will succeed and what will bomb.

Flexible Pricing via Yield Management 

Establish your direct costs when renting a room:  One innkeeper said: "I keep my rates the same every day, year-round. After all, my costs are the same, so why shouldn't my rates be as well?"  If you are happy with your occupancy rates, then never change your rates.  Most innkeepers, however, realize that a room-night is a perishable commodity. The unrealized revenue from an unsold room can never be recaptured, so it’s important to adjust rates to meet the supply and demand of the market.  

Start by estimating your direct cost to rent a room, including such variable costs as utilities, housekeeping and other staff, food, wear and tear on furnishings and linens (soft goods), and so on.  Do not include indirect costs like your mortgage, real estate taxes, and insurance that are the same whether a room is vacant or rented.  Add in the marketing cost that you’ll need to pay in commissions or advertising to rent the room, and you have a good idea of what’s the lowest price you want to charge when most of your rooms are vacant.  The price should be tempting to consumers, competitive with other area properties, but not so low that potential guests are either scared off, or you end up attracting guests who don’t respect your B&B.   

For example, let’s say your direct cost is $50, and your regular rate is $200.   If you sell the room for $150, and pay a commission of $37.50, you still have a profit of $62.50, giving you a reasonable return on investment (ROI).   In addition, you’ve acquired a new customer, who is likely to generate additional income via repeat and referral business. Roughly 20%2 of guests produce repeat/referral reservations; for empty rooms, the number is zero percent.  

Here’s how yield management can work for B&Bs:  Will Dewey, long-time innkeeper at the luxurious Francis Malbone House in Newport, RI, explained how it works for them:  “Although our peak season rates start at $245, we offer the same room mid-week off-season for $99.  Our off-season guests are thrilled to be able to afford an inn of our caliber, and their stays result in higher occupancies at all times of the year through repeat and referral business.”

 David Hiler suggests: “Each innkeeper must decide what to do and when to do it. Spring mud season in Vermont inn is really slow, so there may be no point in a big sales push to sell a few rooms at low rates. On the other hand, if it’s early September and you’ve got a soft spot in an otherwise busy time, why not make a big push to book additional rooms, even at a lower return?  After all, it’s a beautiful time of year, your staff is on board, and you’re gearing up for foliage.”  

Take a look at your “price-spreads:” The difference between a property’s lowest and highest rates is called the “price-spread,” and is generally in the three-to-one price range. In other words, if a hotel has a peak season rate of $299, it might have rooms at $199 in the shoulder season, and $99 in off-season. Sharp peaks and valleys are common in resort areas, while cities that attract a balance of business and leisure travelers might use a price-spread ratio of two-to-one.  If the rates at your B&B are not more or less in line with nearby hotels following 3-to-1 price-spreads, you may feel the pinch in your occupancies.

Deciding factors in consumer travel:  Price, location, and property attributes have long been the deciding factors for travelers. Of these three, price is the most important and the easiest to adjust.  Although aggressive pricing can make the difference between full rooms and empty ones, it’s a mistake to make price the only factor.  If weekends are your busy time, drop midweek rates enough to reasonably change consumer behavior.   Monitor the pricing of your competitors so that you don’t drop rates lower than effective or necessary. Rather than trying to create demand solely by low rates, build value by adding amenities, ramping up marketing efforts that will drive midweek business, and organizing packages. Keep a careful eye on the bottom line when adding amenities. There’s little reason to add in-room telephones if your area has good cell phone reception, while free in-room Wi-Fi access is a big plus at a modest cost.  Setting up a small butler’s pantry where guests can enjoy round-the-clock access to coffee, tea, water, and soda creates a wonderful atmosphere of generous hospitality in contrast to the endless nickel-and-diming of many hotels. Sometimes little touches make the biggest impressions: if your property is located near the beach, supply guest rooms with a logo’d canvas bag, packed with towels, bottled water, and sunscreen.  You can also sell this “beach-in-a-bag,” package it as a value-add item, or present it as a gift to returning guests.   Adding your name, logo, and URL to the bags, towels, and even the water bottles will advertise your inn to many other beach-goers.

 How do the “big guys” do yield management? The process of forecasting supply and demand and adjusting pricing strategies accordingly is called yield management; it’s been very successful for both airlines and hotels.3  Prices are adjusted downward when demand is low and availability is high, and are raised when the reverse occurs. In addition, minimum stays are added to maximize duration as well as price during peak periods.  

You can see this in practice on the Southwest Airlines website; up to five different fares may be offered, allowing consumers to choose the price, timing, and flexibility they need. Similarly, most Las Vegas hotels use yield management software to tweak room rates on a daily basis. Amazon.com follows a similar principle when they offer customers a range of shipping options; if you want your purchase tomorrow, you pay a premium; if you’re not in a rush, free shipping is offered.   Although large hotels use specially designed software to track and impose pricing, B&Bs can usually stay on top of booking trends by studying past reservation behavior and responding to current market needs. Property/guest management software is helpful in studying occupancy trends but is not essential.

High occupancy rates: The golden rule of yield management for hotels is that an annual occupancy rate of 85% is the optimal level; for owner-operated B&Bs with minimal staff, the figure may be closer to 60%.  If you’re running at higher than 90-100% occupancy during peak periods, you should give serious thought to raising rates and/or adding/extending minimum stay requirements. Most experts agree that long-term high occupancies are not worth the wear and tear on you, your inn, and your staff; a slight increase in rates usually results in a slight decrease in occupancy, giving you the same income with slightly fewer guests.  Although two-night weekend minimum stays are common for advance reservations at most B&Bs, consider extending them to midweek stays as well. Alternatively, ask for three- or even four-night minimums if demand warrants.  Since B&Bs tend to be minimally staffed, increasing stayovers minimizes innkeeper stress while preserving income.

Low occupancy rates:  For most properties, occupancies are lower midweek; certain months are worse than others. During off-peak periods, competition increases as demands slows; the Internet makes it easy to monitor prices being charged by area lodgings, so make the time each week to see what the market will bear.  Many moderately priced motels now offer convenient buffet breakfasts and free Internet access, plus reasonably comfortable accommodations at competitive prices.  Book a night at one and see how your inn compares, both positively and negatively, then respond with appropriate action.  If you want those wonderful midweek low-maintenance business guests, you must have at least one guest room with in-room high speed Internet access (sorry, dial-up is no longer adequate in most locations), a usable desk or table, in-room TV, and flexible breakfast, check-in/out, and cancellation policies.  Further enhance low and medium occupancy periods with special offerings and amenities for families, pet owners, and those looking for a four-night mini-vacation.

Experiment with promotional rates, both on your own website as well as other sites that drive significant traffic to your own.  Take advantage of programs like BedandBreakfast.com Online Reservations and BedandBreakfast.com Hot Deals that give potential guests strong reasons – both in terms of convenience and price – to book your B&B.  If most of your guests come on weekends, try different ways of “growing” the weekend by offering a 50% discount for Thursday and/or Sunday night stays. If your inn is about two hours from a major city, give folks the option of a Monday “breakfast-to-go,” (don’t forget logo car coffee mugs as a gift) so they can still be back at their desks before lunch.   Give your weekend guests transferable gift certificates for $50, good for a two-night stay during off-peak periods. Build your own mailing list of past and potential guests, and spread the word when you’re offering special deals.  There’s no “magic feather” (or, as computer folks say, no “killer app”); you’ll need to keep trying different strategies to see which programs work best for you.

Pay-to-play marketing vs. Pay-if-they-stay Marketing 

In general, there are two ways of marketing your property, pay-to-play and pay-if-they-stay. In the former, you pay in advance for advertising and promotion via your chamber of commerce, online directories, websites, brochures, etc., in the hopes that potential guests will learn about your B&B and make a reservation.  Pay-per-click (PPC) marketing is a refinement of that concept, in that you incur a cost only when someone visits your website; nevertheless, a website visit is not a confirmed reservation.  However you drive traffic to your website, the cost is fairly low, because the number that converts into reservations may be approximately one in 50-100 site visitors for a well-designed site. In pay-if-they-stay programs, you have minimal upfront marketing costs, but do pay a commission when you actually get a reservation.  Use these programs for dates when you are unlikely to sell the rooms yourself; set a “lowest available” rate that covers the commission and your direct costs, and the profit falls right to your bottom line.

 For example, BedandBreakfast.com Online Reservations are an ideal way to generate bookings for dates that you’re not selling directly. Although the 25% commission is significant, it’s better to have 75% of some revenue than 100% of nothing at all. Returning to our earlier example above, if your direct costs are $50 per room, and your regular rate is $200, consider posting inventory for rooms you’re unlikely to sell  yourself at $150 a night. You’ll have $50 to cover your direct costs, $62.50 in profit you would not have seen otherwise, and will pay a commission of $37.50 to BedandBreakfast.com.

 Because it takes just minutes to add or delete inventory and adjust pricing, you can easily adjust your inventory for maximum results.  For example, if you know from your booking patterns that certain dates are high demand, set your rates high and impose minimum stays of 2-3 days; if you know that others are low demand, cut your rates and eliminate minimums.  Similarly, allocate rooms to the online reservations program for those low-demand days.  In addition, manually factor in demand and availability criteria as specific dates approach. For example, you wouldn’t allocate inventory to the online reservations system for a peak weekend two months in advance, but as the date gets closer and you still have rooms free, adding a room or two to the system makes sense. 

Test and evaluate the ideas here, come up with more of your own, and give them a try; while there are no guarantees, you have an excellent opportunity to improve your occupancy and revenue.

 

 1PAII Industry Study, 2002, reported occupancy rates averaging 43%.

2 PAII Industry Study, 2002, reported returning guests at 13%, referrals at 7% from former guests, 5% from family/friends of local residents.

3 Although it’s easy to blame the financial woes of many airlines on yield management, the real reasons are high fixed labor and pension costs among legacy carriers, over-capacity on many routes, and a variety of reasons that make it hard to pass along increased fuel costs to consumers.  For more information on yield management, read these articles:

·          Understanding Yield Management, by David Peckinpaugh

·          Yield Management

 

 

 

  

 

 

 


 

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