Fee-for-service trend catches on among hotels

Hotels follow the airline industry into the 'fee' era… and that's not bad for revenue managers. Airlines and hotels are the two pillars of the travel industry, and they share many characteristics. They are heavily consumer-focused industry segments. They produce and sell two of the most perishable products in the history of economics: a seat on a flight and a night in a room. Their product is also dominated by an intangible experience component, the quality of which can accentuate or ruin an otherwise perfectly suitable product, ie, a safe trip, a clean and secure room. They both segment their products by class and charge for upgrades [first or business class on an airline, the suite or club level for hotels]. They rely on loyalty programmes.

The airline and lodging industry segments also feature a variety of auxiliary or ancillary services linked to the core product. Even in this, the options are similar; airlines offer food and beverage on flight, hotels have minibars, room service and restaurants. Airlines peddle personal in-flight entertainment, hotels offer "on demand" television. Duty free and SkyMall shopping are available on most flights, and most hotels have limited retail options, if not high-end boutiques on premise.

In terms of ancillary revenue sources, the difference between hotels and airlines is that airlines had traditionally bundled them into their core product while hotels had kept them separate. As airlines began unbundling the fare, they found some of those previously-included services could be sold for a fee – like the privilege to check a bag, are integral to the air travel process – which creates a steady revenue stream. Fees have become big business for airlines, while hotels have shied away from this revenue generation tactic.

Hotels around the world are beginning to emulate their airline brethren. The stories of luxury hotels installing motion-sensitive minibars that automatically impose a room charge if an item has been removed for a certain period, or of vague-sounding 'resort fees' on guests' final bills have been proliferating. There are a couple of perspectives on this new trend that should be given equal weight.

The first reaction, even from industry insiders that are at least sometimes regular travellers, is that such fee imposition is detrimental to customer perception. No one likes to be nickel and dimed. Of course, the airline industry's experience with compulsory fees refutes that; since 2008 when checked baggage fees became more or less standard across the major US carriers, revenue from fees rose to almost $2bn per year. But anecdotal perception of airlines is negative, and the hotel industry ought not to imitate the strategies that result in negative consumer sentiment.

On the other hand, though, fees can serve a productive purpose. The unbundling of the airfare exposed the airline's true core product – a seat and safe conduct. The most aggressive fee imposers among airlines like Ryanair and Spirit have changed their customers' expectation as to what a flight should be. And that has allowed consumers to build their own flight experience. Hotels, likewise, can benefit from this core-product focus.

From a revenue management standpoint, the stripping out of extraneous services and offering them for a fee can have positive effects on the basic rate. By enabling hotels to advertise a low basic rate, they can attract a wider array of customers. The industry effect of this process is an increase of competition based on price, which can revitalise some stagnant markets. Conversely, the imposition of fees by some operators can allow others the opportunity to differentiate their products based on service, or on how "bundled" their rate is. In the airline industry, Emirates and Singapore Airlines have carved out successful and profitable luxury nichés by competing based on service.

Fundamentally, though, new hotel fees will only place emphasis on what really matters in a hotel – the room, and the customer service experience. No one is considering charging a fee for cleanliness, or courtesy. Hotels that continue to execute their central mission well will continue to thrive in a fee-for-service environment, just as high performing airlines like Southwest and Jet Blue have thrived in theirs. However, to avoid the negative perception that the airlines are experiencing due to their new fee structure, hotels must be transparent during the booking process as to what fees will be charged on top of daily room rate.

There may be some initial resistance to fees in the lodging industry, but ultimately if implemented correctly, they will not spell doom for the consumer-focused segment. In fact, they may present previously unlooked-for opportunities to increase hotels' revenues.

 

- The author is the CEO and co-founder of RevPAR Guru, a US-based integrated revenue management and pricing solution for the hospitality industry

 

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