08 Feb

It’s not about the room, it’s about the value of the guest (over time)

Written by Stephen Barr


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From a hotel operator perspective, which of the following is better:

A hotel that is full or a hotel that isn't?

It’s such an obvious question that we all know the right answer…except when it isn’t the right answer.

The question itself is at the heart of the debate more of us should be having about what hotels actually do.

At one level, hotels rent out rooms on a short-term basis to customers, their guests. Every room has a price and the hotel wants to fill as many rooms as possible. That’s why measures such as Occupancy, Average Daily Rate (ADR) and RevPAR are so widely used; they’re helpful measures for seeing how well you are doing at maximising the number of rooms that you sell. 

So, hotels are in the property management business. It’s no surprise then that the operational software underpinning the hotel is called a property management system (PMS).

It also helps explain why so many hotels rely upon OTAs to deliver bookings to their rooms—OTAS can be a very efficient way of filling those rooms. Expensive yes, but efficient. Lots of hotels generate the majority of their bookings from OTAs. A booking from an OTA looks as good as any other booking when it comes to Occupancy, ADR and RevPAR, which I suspect is part of the reason that those metrics are still so commonly used. They’re simple and they assume:

‘A booking is a booking is a booking’

It’s only when we want to account for the cost of getting that booking, using a metric like NetRevPAR (which measures the commission paid to 3rd Parties, including OTAs) that relying on OTAs doesn’t look so rosy.

And the problem here is that whilst hotels operate on a day-to-day basis as if they are in the property management business, they are property managers only in the basic sense that a certain number of bookings are required every day to pay the bills. Beyond this, thinking of yourself as a property manager is not at all helpful if your focus is on efficiently growing a profitable business. 

In fact, hotels are in the customer service business and it just happens that what gets purchased is a room. The decision-maker is a person and it’s the person that is key to success, not the room.

That person might have only a ‘one-stay-only’ requirement, in which case if you can service their booking profitably via an OTA, you’ll probably be happy to get that one-time-only guest from an OTA. 

(As an aside, if you’ve integrated with Google Hotel Ads, you’ll almost certainly be better off getting that booking using Google Hotel, as the booking will usually come with a lower cost attached and if you use Google’s bid-based purchasing model, the approach we always recommend at Noetic—and you include bidding for bookings beyond 30 days’ time, that cost will typically be much much lower. Noetic has a very cool integration, which you can read about here. Sales pitch over.)

If your guest isn’t one-time-only, and has an ongoing requirement, it would be irresponsible to simply take that person’s booking the second, third, fourth time, via the OTA, with the inevitable commission cost each time, just because it is easy to do so. Frankly, it’s lazy. It also devalues your own brand. Remember why that guest keeps coming back. It’s not because the OTA is offering them anything special, it’s because of the experience you provided. It could be location, or friendliness, or a good restaurant…or any number of things, but it isn’t any added value they’re getting from the OTA — they booked via an OTA in the first place, simply because the OTA does more advertising than you do, because they’re bigger than you and you can’t change either of those facts. But you can change what happens next time to a guest who wants to come back. OTAs should only be relied upon to deliver first-time bookings from guests who otherwise probably would not have found your hotel in the first place, getting them to come back is your job, and a little bit of effort should always yield huge cost savings.

A guest who comes back five times in a year — at a room rate of £100 per time — should be worth much more than just the five lots of additional revenue they bring in, because when they come back direct you avoid all those those OTA commission costs. Just as importantly, you create a habit in them, to come straight back to your site, building up your brand presence in their mind. Once you become first in mind, they’ll simply come straight to your site...

Putting all the above together, there are some questions you need to ask of your guest data so you  can start to see just how much value (£) there is in your repeat-booking guests, so you can quantify the potential benefits of getting them back, direct.

Q    Do you know how many of your guests book repeatedly with you? And what proportion of all guests these are? And how much of all your revenue comes from these groups?

If you don’t know your repeat-booking rate and how much of your business they represent, you’re not even in the game.

Q    Do you know how much they were worth to you last year?

Collectively, your repeat guests are often where most of your profit actually comes from. But if you don’t know who they are, how can you focus on making their experience good enough for them to want to come back next time?

Q    Do you know how much of your predicted next year revenue will come from these best-guests (compared to one-time-only bookings)? And how profitable these guests have the potential to be?

You should know how much of your forward revenue is likely to come from guests who are likely to come back. If you know this, then you know how much new business you need to acquire and how much you need to budget for Direct acquisition, Google Hotel Ads and OTA spend.

Q    Do you know the relative difference in cost to you servicing these repeat guests?

Repeat guests who don’t come through a third party each time don’t have commission costs attached to them each time. But as importantly, what you do spend to support their coming back is invariably a small fraction of the ongoing OTA cost because CRM programmes are typically very inexpensive, £ for £ cost vs. revenue generated and also because the direct advertising will overwhelmingly be brand-focused, and brand advertising is almost always less expensive than generic terms.

And the killer question (which shocks almost every stakeholder we share the answer with whenever we do a first-look at their guest data):

Q    Do you know how much you are paying the OTAs each time a repeat guest books—that you would not need to pay—if you managed that relationship directly?

So, unless you genuinely don’t have any repeat-booking guests, or you do but you don’t care about the money you’re giving away that you don’t need to, you need to get your head around the idea that all bookings are not the same because the guests making those bookings are not the same. Some guests make only one booking, some make many and for these repeat-booking guests, paying the OTA commission is usually ‘optional’.  

So, let’s return to the question I asked at the top of the article, which of the following is better?

A hotel that is full or a hotel that isn't?

Hopefully, you can see that it’s the wrong question. A better question is, which of the following is better:

A hotel full of ‘whoever you can get, wherever you can get them’ or a hotel with lots of repeat-purchasing guests, who come to you direct? 

My point is, it’s not about the room, it’s about the value (over time) of the guest. 

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