Mr. Song

Revenue Management

Hotel Revenue Management in the Age of Airbnb

By Will Song, Co-Founder & Vice President of Revenue, Lights On Digital

Understanding Airbnb's Relationship to the Hotel Industry

Hoteliers today have a similar fear to that which the large hotel owners had just a couple of decades ago when OTAs arrived on the scene. With OTAs, it suddenly became possible for smaller, independent hoteliers to compete with the big guys. With Airbnb, it has suddenly become possible for single individuals who aren't even in the business to compete with actual hotels. Airbnb is to hotels as Uber is to taxis.

This prospect can seem a little worrisome for hotel owners who have worked tirelessly to distinguish themselves and attract guests in an already highly competitive and fluctuating market. In reality, Airbnb still only accounts for about 4% of total demand and 3% of total revenue market-wide. So it's not quite the apocalyptic threat as some would lead you to believe. However, it's still growing and worth watching if only for the market segments they are penetrating. Those include:

  1. Leisure guests travelling in larger groups
  2. Guests with longer lengths of stay (averaging 6.8 days compared to hotels' 3 days)
  3. Price-sensitive guests

With listings offering daily rates that are, on average, $16 lower than hotel daily rates, it's no surprise that the more price-sensitive customers are opting for Airbnb. However, Airbnb's market penetration is not strongest among only the price-sensitive. Here are some of the key Airbnb trends:

  1. Urban centers have more competition from Airbnb than suburbs and rural areas
  2. Boutique & lifestyle hotels are more directly impacted than corporate or traditional hotels
  3. A growing number of millenials are choosing Airbnb over hotels for the "authentic experience" of staying in a local's apartment
  4. Competition from Airbnb peaks on high compression dates

Despite this competition, hotels still dominate when it comes to occupancy rates. This is primarily due to the instability of Airbnb's supply. That instability is due to the fundamental nature of Airbnb.

New listings tend to flood the site right around peak demand dates. If there's a major festival or event happening in the area, locals will use the opportunity to make some extra cash by putting their apartments up on the site. A significant number of those listings are then abandoned once the event has passed. This means the website is pretty well saturated with inactive listings. Moreover, many of these units will never actually rent, active or otherwise. Supply fluctuates rapidly and there is, as of yet, no meaningful way of regulating availability or standardizing quality so that customers can be assured of a consistent level of cleanliness, safety, and service.

Step #1 Data, Data, Data

The first step is to figure out exactly what's going on. There is an enormous amount of data available today, so all you have to do is go out there and get it. By get it, I mean monitor and measure it. Using this data can help you learn a number of things about your business. That includes exactly how much Airbnb is impacting your business and exactly where the impact is occurring.

You can get the data you need about Airbnb from meticulously scraping the hosting service's website by yourself. If that does not sound appealing to you, you can check out Airdna which provides Airbnb analytics. Compare this data with data about your own performance.

Step #2 Analyze

Armed with the data you need, it's time to engage in some deep analytics. The exact trends, measures, and information that you are looking for will vary depending upon your particular circumstances. However, the general goal here is to: a) figure out just how much Airbnb is impacting your business and, b) identify exactly where and in what ways your business is being affected. With that in mind, here are a few ideas of what you might want to do with the data:

  1. Chart your historical prices and supply. Find out if there has been any downward pressure on price and/or RevPAR.
  2. Do a side-by-side comparison of your hotel's performance with Airbnb's performance in the same area. Remember to exclude the large number of inactive or "dormant" listings that crowd the website.
  3. Do a side-by-side comparison of pricing and booking trends for your hotel and the relevant Airbnb listings in your area. You will likely notice that Airbnb pricing is not very efficient. Again, remember to only look at active listings.
  4. Use predictive analytics tools to gain reliable, real time insights into that data and what it can tell you about future trends. This is something Airbnb is already doing with its new "smart pricing" algorithm that some hosts are using to set prices.

From this in-depth analysis, a clearer picture will emerge that shows you exactly how much of a competitor Airbnb really is for you, if it is a competitor at all. You can also start to identify where the pressure points are.

For example, there might be a significant number of listings in the same neighborhood offering a similar accessibility to the surrounding area. You might also notice a number of listings offering a similar sort of experience or comparable amenities. More likely, you will find that Airbnb is putting the most pressure on your booking trends during major events and other compression dates.

Once you know where your hotel is most vulnerable to Airbnb, you are one step closer to bracing yourself for the impact.

Step #3 Identify Your Strengths

After finding your vulnerabilities, it's time to find your strengths. There are many ways that hotels, in general, still hold a meaningful advantage over Airbnb. Those advantages include:

  • Consistent Quality - Rooms in a hotel are more standardized. Customers know that no matter what specific room they get, they can expect the same minimum level of quality that your hotel offers. Airbnb supply, on the other hand, varies dramatically and hosts are not subject to very strict quality control procedures.
  • More Facilities - hotels often provide conference rooms, hospitality rooms, meeting rooms, and many other facilities that a host on Airbnb cannot match.
  • Higher Standards of Cleanliness and Safety - Hotels have a housekeeping staff and more security measures like security guards, cameras, and alarms in place than an Airbnb host is likely to have. Customers who value the ability to come back to fresh towels and newly made beds each night will prefer your hotel. Customers with children or valuable items will appreciate the higher level of security you can provide.
  • Rate Discipline - Individual owners on Airbnb usually lack the business experience to develop a fully functional revenue management strategy. They also have more at stake because booking volume is always either 0% or 100%. As a result, they may lack the discipline to hold to the best price for any given date, particularly during low demand seasons.
  • More Visibility - Once a unit on Airbnb is booked, it's blacked out for those dates. Other visitors on the website would not be able to see it if their booking conflicts with the blocked out dates. This makes it difficult for any unit to cultivate a stronger brand awareness or customer loyalty. Hotels, on the other hand, continue to remain visible and available even after a booking.

In addition, your hotel will also have its own unique set of strengths. These are likely the strengths you have already been using to distinguish yourself from other hotels. Make sure that your hotel revenue management strategy is taking full advantage of the entire range of strengths you possess. Make sure that you are clearly communicating these strengths to your customers.

Step #4. Retroactively Address Missed Opportunities

As you analyze the data, identify pressure points, and determine your particular set of strengths, you are probably going to notice some missed opportunities in your historical data. That might be a bad review that you never addressed or a failure to predict high compression dates.

Once you've found each of the missed opportunities lurking in your historical data, use this opportunity to retroactively strategize. What could you have done to address the problem more effectively? How might you have taken better advantage of a major event that you missed? Think about the resources and tools you have available now and how you could have used them more effectively.

Step #5. Apply Retroactive Actions to Your Proactive Strategy Going Forward

You've probably heard the phrase "hindsight is 20/20." After you're done looking backwards and finding solutions for past problems, apply that perfect 20/20 vision to the future. Anticipate specific points of competition, whether that's a special event in the area or a particular market segment. Wherever you missed opportunities in the past, you can now make sure that you are prepared this time around.

The guiding question behind any adaptation you make should be "what can I do to get out ahead of the competition?" The solution should not just be dropping your prices. You don't need to embroil yourself in an endless price war that drives both you and your competitors to the bottom. If you go back up to the first section of this article, you'll remember that Airbnb is more than just a cheaper alternative to hotels.

Customers who choose to book with Airbnb have other reasons for making that decision. Find those customers. Find out their reasons for choosing Airbnb. Then, find ways to guide them back toward your hotel. This can all be accomplished with the more proactive data-driven approach to revenue management that began with the first step in this article. Bringing in a hotel revenue management consultant can help you jump start this. Customized consultation is often an important preliminary step in developing a more proactive approach like this because actually implementing it will require some training and reorientation from the top down.

Step #6. Take a Page Out of Airbnb's Book

The website is still growing and still working to make improvements that could turn it into a larger threat than it is now. However, many of those improvements are driven by changing demands and expectations that have already been present in the market. Customers increasingly demand flexibility and convenience throughout the booking process. That's exactly what Airbnb is striving to provide. However, there's nothing stopping other hotels from taking this cue to accommodate these same demands.

As a starting point, you need to make sure that your website is mobile friendly. Customers should be able to easily browse your website no matter what device they are using. More importantly, the booking process should be as simplified as possible with large input fields for mobile users to easily tap with their fingers.

Once your website is mobile friendly, get social. Airbnb thrives on the high level of engagement of its users. Guests and hosts alike leave reviews, talk about their experience to those in their network, and rely more on peer recommendations. Your brand can tap into this by becoming active on social media and sites like TripAdvisor. Take part in the conversation. Encourage customer engagement. This will help increase traffic to your website and, more importantly, generate more buzz around your brand.

Instead of allowing the emergence of Airbnb to be a source of panic, let it be a source of inspiration. Use it as an opportunity to deeply analyze your current hotel revenue management strategy and what you can do to be even better than you are. You don't need to wait for Airbnb to become a serious threat. With a more proactive approach to your strategy, you can make sure that you anticipate and address new trends and new sources of competition before they become real problems.

References:

Jessica Haywood et al., "Airbnb & Hotel Performance". STR Report. 2017

As co-founder and vice president of revenue at Lights On Digital, Will Song works closely with clients on a variety of revenue-management solutions. Mr. Song is a pricing expert with a passion for technology, bringing entrepreneurial insight in his ability to think outside the box on strategies to revive properties and tackle challenging situations. He has more than a decade of experience in revenue management, achieving record-breaking growth for clients in key hospitality metrics. Mr. Song previously served as the senior revenue manager at Aqua Hospitality, Hawaii’s fastest-growing hospitality chain, where he managed revenue strategy for 15 properties. His background also includes pricing strategy, marketing and product line management at several national and Hawaii-based technology companies. Mr. Song can be contacted at 808-213-3010 or will@lightsondigital.com Please visit http://www.lightsondigital.com for more information. Extended Bio...

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