How to identify and optimize ancillary revenue for your hotel

When managing your hotel's revenue stream, it's important to identify and optimize ancillary sources to help you improve your profit margins and, ultimately, provide better service and amenities for your guests. This has always been true of the hotel industry and being able to identify those ancillary revenue streams is vital.

In today's post, guest blogger Adam Knight is looking at how you can find ancillary revenue opportunities that work best for your business.

Tony Hsieh, the founder of Zappos.com, wrote in his book Delivering Happiness, “Without conscious and deliberate effort, inertia always wins”. That quote jumped off the page at me when I read it many years ago and has stuck with me ever since. I love its simplicity and profoundness.

Sometimes running a hotel feels like a plate-spinning act in a circus. There are so many projects and priorities demanding your attention that you spend your time going from one to the next to keep it all working; and depending on the day one may leapfrog the other, and you have just enough time to stabilize it before the next one starts to go.

All hotel managers know that finding ancillary sources of revenue is one of these priorities but it’s also one of the most difficult things to do, especially during a downturn.

Whether the reason - price sensitivity, low uptake by guests, staff not being properly trained, the offering not resonating, or another crisis takes priority - driving new sources of revenue doesn’t always get the consciousness and deliberate effort required to go much further than an initial rollout.

This article is here to help you change all that.

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Getting started: key concepts

Average Daily Rate and occupancy are typically linked to market dynamics, and restaurants can only seat so many people during a meal period. So, especially in light of COVID-19, finding the time to plan and execute new sources of revenue could be the difference between a hotel staying open or having to close.

There are countless revenue options available to operators. Some may be relatively easy, others demand more effort, but all require a different way of thinking and a desire to try something new.

Here are some proven principles and best practices that should be kept in mind to increase the chances of successful implementation and adoption:

Average Daily Rate (ADR)

• ADR flows through at about 90%+, so every dollar increase here drives more profit. If your hotel doesn’t have an upsell program for your front desk and reservation call centers, you're almost certainly leaving money on the table.

Profit

• Always do a cost analysis before rolling anything out. Ultimately, you’re looking for high-margin initiatives.

Value

• Aim to charge reasonable prices, especially if what you’re offering can be had at a lower price a short distance away. Be warned: people know when they’re being over-charged, and justifying it with “better service” doesn’t cut it anymore.

Training

• Don’t skimp on the time and resources required to properly train your employees. Ultimately, training reduces credits and adjustments and will more than pay for itself in the long run.

Five Senses

• Consider how your offering engages all five senses. The most beautiful bar in the world means nothing if it smells bad. The right lighting, sounds, smells, tastes, and textures will draw people in and keep them there longer.

With these best practices in mind, the following examples of ancillary revenue opportunities are intended to spark inspiration and show some of the options available to your business.

Room Division

Amenity Fees

About 7% of US hotels charged an amenity fee in 2019, bringing in roughly $2.9b in additional revenue. For those doing the math, there are roughly 54,000 hotels in the US, so 3,780 hotels in the country averaged $767K in amenity fee revenue.

Depending on the inclusions and how the amenity fee is accounted for, the flow through to the bottom line can be 75%-95%. These are real dollars here, and with the downturn in the industry, it’s not unreasonable to assume that others will jump on the bandwagon to fill in the gaps regardless of the pushback from customers.

If an amenity fee is in your future, or if you recently adopted one and the complaints are mounting, there are a few practices that you should follow:

1. You have to notify guests upfront and be transparent throughout the reservations, confirmation, and arrival process. You should also break out the details and inclusions of the fee so people know what they get so they can take advantage of it.
2. Make sure that you’re showing value in the fee. Don’t just say that guests get gym access and a newspaper if those were free before. Include new services like better wifi, bike rentals, local transportation or an F&B credit.
3. OTAs are starting to charge commission on amenity fees. While this is being contested at every level, it’s important to know, especially if your booking strategy is largely dependent on OTAs right now.

Attribute Selling

Many hotels struggle to sell more expensive room categories, opting instead to oversell less expensive rooms and upgrade reservations to balance the house. Rather than relying on large rate jumps between major room categories, try to sell room attributes at lower increments. In other words, instead of trying to sell the whole orange, try selling the segments.

Room types are typically divided into macro attributes like size, floor level, or the view. Take it a step further by adding a premium to rooms with a king or two-beds. Perhaps you’ve got rooms in the same category, but some are large or have a better view than the others.

Another way to do this is to offer different in-room amenities in certain rooms, like upgraded linens, bath amenities or F&B inclusions. Establishing smaller, incremental rate bumps for different room attributes can make it easier to yield your rate rather than overselling lower room categories and upgrading. You’re only limited by your imagination.

Food & beverage

The new room service

If the pandemic has shown us anything, it’s that meal delivery apps are here to stay; but all is not lost. You can mitigate their impact on room service by providing items that enhance your guests’ experience. Offer (for free) plates, silverware, and napkins; this makes a big difference compared to take-out containers and plastic utensils.

Once guests know that they can call for these items, you can sell beverages, desserts, or a nightcap to compliment the meal. Do this at a reasonable price with no delivery fee. Room Service has been a declining offering for years and in many cases, hotels have done away with it altogether. You can bring it back by embracing the new normal and providing a service people will buy because it takes what they have and makes it better.

Technology

There are three types of technology that are becoming ubiquitous in hotels and are in the perfect position to be leveraged to drive additional revenue in your food & beverage outlets.

1. Digital displays give you an opportunity to communicate time-based, one-time specials. Chef just received items from special farm/in-season produce etc? Perfect! Tell people about it on your digital signage.
2. Texting platforms give you the opportunity to target individual guests with offers that might resonate with them. Give your chef, sommelier, baristas, and bartenders access to send out a message to VIPs, guests who are there for a special occasion, or others that they’ve seen throughout their stay. It could be a special cocktail or a couple of glasses of wine left in a rare bottle. Whatever it is, invite guests to come try it.
3. Voice-activated tech gives you the opportunity to provide contextually relevant information. For example, when a guest asks Alexa or Google Assistant where the pool is located, you can share special offers from the pool bar.
   
   You can also schedule promotions at specific times during a guest's stay, like telling guests about Sunday brunch on a Saturday night... or share information about the spa whenever it's forecast to rain... or highlight any special events happening at the property upon check-in. There are endless possibilities with what you can share based on time of day, week, or year.

Miscellaneous

Locals

Many hotels talk about attracting locals, and rightfully so. It’s a big, captive audience that can be a huge revenue driver for your business, but all too often policies and practices do the opposite. Turn this around by thinking like a local and what services you can offer that will meet a need and truly attract these potential regulars.

Expanding your definition of a typical hotel guest by offering gym memberships, parking passes, food and beverage or spa discounts, dry cleaning and laundry services, hosting community activities in your lobby. By thinking about the needs of those beyond the physical boundaries of your hotel you’ve got plenty of exciting opportunities to create new revenue streams and enhance loyalty. If anything, it’s a great way to top up excess supply.

Collaborative Workspaces

Every square foot in your hotel should be seen as “rentable”. The rise of collaborative workspaces was undeniable in our “pre-pandemic” world, but there are still opportunities to provide places for individuals to take calls, hold online meetings, and simply get out of the house for a while.

Sub-segmenting portions of your lobby, bar, or banquet area into small workspaces with an office chair, enhanced technology, and access to food and beverage is a great use of empty space. Establish an hourly, half-day, or full-day rate and make it available to locals and guests as a service differentiator.

Rethinking and retooling operations to develop new revenue streams is hard work. It takes imagination and a willingness to break from typical norms. That said, there are some best practices that you can follow to increase your chances of success.

1. Resist the urge to go for the big win and instead take a layered approach by implementing multiple new streams that can each bring in smaller incremental increases. That way if one doesn’t work, you’ve got other programs already in place.
2. Always remember to focus on profitability and do a cost analysis beforehand. It’s far better to know if something is unprofitable before rolling it out.
3. Do sufficient market analysis to understand what people want and what’s currently missing in your offerings to ensure that you’re providing value
4. Remember to tell your story. If people don’t know about your new “thing”, don’t expect them to buy it.
5. Don’t forget that people want to create interesting and meaningful posts about their experiences… let them! When possible, put effort into designing guest-facing programs to be Instagrammable and benefit from shareable content.

By implementing these and many other options, you can make a big impact on your business results.

Questions? Have I missed any points? Need to brainstorm a topic? Share below in the comments — I’d love to hear them and help!

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Adam Knight is the Owner and Principal at Knowing Hospitality, a full service hotel management and consulting company that operates hotels on behalf of owners and lenders. Knowing Hospitality recently launched The Proven Principles Podcast, which aims to demystify the inner workings of hotels and share insights on the skills needed to be successful in any customer service focused business. Subscribe through your favorite podcast app.

Have a hospitality learning question? We’re always ready to talk.

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