Monetization: Measuring the ROI of service, product, and amenity upgrades

This post is an original commentary piece which appears on Hotel Executive.

Over the past decade, most assessments of guest satisfaction, whether publicly available or proprietary to the hotel brands that collect this information, show guest experience scores generally have risen year after year. There are several explanations for this:

• Social review sites like TripAdvisor place transparency on the guest experience – thus raising higher levels of accountability from the hotels.
• The available amount of information helps guests make better and more informed choices for their needs, thereby resulting in a more satisfying experience.
• Finally, and perhaps most importantly, hotel brands have engaged in a type of escalation where they have upgraded the quality of breakfasts, beds, showers, internet, and other features and amenities to one-up competitors.

Of course, it doesn’t take long until the competitors start to emulate each other, and the industry leaders are left to think about their next upgrade, enhancement, or innovation to make the guest experience even better.

While all segments engage in this type of escalation to one extent or another, it is especially apparent in the upper midscale and midscale segments. While these brands may lack the fancy lobbies and bar areas of their upscale counterparts, hotels in these segments have gone from offering a stale croissant and cold cereal to offering a very nice hot breakfast, often with a made-to-go option. The complimentary internet has gone from slightly better than the old dial-up speeds to some of the fastest available. Beds, showers, and furnishings have all been improved. Large flat screen, high-definition television screens are now standard. Even the quality of the shampoo and conditioner has gotten better.

Thinking back to this evolution, at some point, hotels were faced with the decision to stand pat or raise the quality of their service, product, and amenities. A hotel brand that fails to continually evolve risks being left behind, because an experience or hotel feature that exceeds guest expectations today may be commonplace tomorrow, and sub-par not long afterward. Competition among hotel brands is often seen as a race, but more often, resembles a treadmill. One brand’s product enhancement may give it a momentary advantage, but competitors can quickly expand their own product and service offerings. A brand needs to improve just to stay in the game.

Being an Early Adopter Can Be Risky

Efforts to integrate Amazon Echo’s voice technology into hotel rooms have not gone particularly well. After some headlines last year about privacy invasions, pilot tests saw hotel guests disconnecting the device because they didn’t want Alexa listening to them in their rooms. Alexa would also sometimes activate in the middle of the night unprompted, waking up guests. Several years ago, an upscale brand featured self-service check-in kiosks to add convenience for guests during the arrival experience. Perhaps the idea was ahead of its time, as this is becoming a common feature in today’s hotels, but the kiosks did not last long before they were removed.

Certainly, there is always the cost-benefit equation to consider. About a decade ago, this author conducted a study with a well-known hotel chain to monetize the potential increase in average daily rate (ADR) through adding certain features and amenities. At the time, having a 42-inch flat panel, high-definition television in room was determined to be worth a premium of almost $19 in ADR. Today, there would be no additional premium since these televisions are standard in rooms. In fact, if the same study were conducted today, it is likely that not having this type of television would result in a perceived loss of potential ADR.

Making the right decisions regarding investments and upgrades becomes critical in the evolution of hotel brand standards. To maintain brand integrity, if upgrades are not implemented universally across hotels, the entire brand becomes vulnerable to perceptions of inconsistency. This potentially represents a source of contention among hotel owner/operators who might need a bit of persuading, particularly if significant investments need to be made in the form of capital upgrades, service enhancements, or even surrendering previous sources of incremental revenue because the competition is now giving these things away for free.

In making investment decisions, it is important to think about the service, product, and amenity features within the context of five distinct buckets:

• Cost of entry: These are features that are widely expected and considered basic to the experience. While these often represent significant cost to the hotelier, these features are generally taken for granted by guests and only represent a source of dissatisfaction if they are not present or available.
• Satisfiers: These are areas that are generally expected as part of the hotel experience but still get noticed when present or absent, and either contribute to guest satisfaction when present or dissatisfaction when absent.
• Delighters: These are areas that exceed basic expectations and have a positive impact on guest experience when present, but won’t create dissatisfaction if not present.
• Detractors: These are features that when present, detract from the experience and represent sources of dissatisfaction. These might be things like outdated decor, worn bedspreads, and carpet stains. Exterior corridors are often seen as a detractor for many guests.
• Indifferent or unimportant attributes: These are items that may or may not be expected, but which have little or no impact on guest experience and get little attention either way.

A key truth is that features can shift categories rapidly. At one point, getting a free hot breakfast at an upper midscale hotel was a delighter. Then as it became more common, it shifted to be a satisfier, something which guests still appreciated and contributed to their overall satisfaction, but which also started becoming more of an expectation. It’s fair to say that, in the current environment, having a hot breakfast is an expectation at an upper midscale hotel and guests would be greatly disappointed if it were not available during their stays.

Free internet access is another example of something that has shifted categories within the past several years. Upscale hotels used to charge between $15-$20 a night for high speed internet access – now it is commonplace to offer it for free. Sometimes upgrading your offering doesn’t mean simply adding something new, but giving something for free for which you used to generate revenue.

How Can a Hotel Brand Make Wise Choices About These Matters?

Early adopters and innovators have the advantage of offering something that will be a delighter and cause them to stand apart from others. In this circumstance, they stand to make a premium by offering hotel features that set them apart. However, if these features are not really all that compelling or useful to the guest, what was intended to be a delighter, can instead be something to which the guest is indifferent and therefore, adds cost but no extra value. While being an innovator is risky, if a hotel enters the game too late, they still must make the investment in upgrades, but will gain little or no extra profit as a result – they will simply need to catch up to stay at pace with the competition.

The Value of Strong Market Research and Business Intelligence

A type of study that customer experience researchers have used for years is called Kano research, named after the Japanese market researcher who devised this methodology. Kano research asks key questions that include:

• Do you expect to see this feature?
• If a hotel has this feature, would you be pleased, displeased or indifferent?
• If a hotel does not have this feature, would you be pleased, displeased, or indifferent?

From these questions, you can easily bucket existing features and potential upgrades into the five aforementioned categories. If a feature is considered either cost of entry or a satisfier by more than 50% of your guests, you should quickly move to upgrade, implement or retain the feature. If a feature is considered a detractor by 30% or more, it represents a situation where an upgrade should be considered by renovating or taking out the feature.

Regarding the delighters, adding a feature that guests don’t expect, but makes them happy if present, is a great way to add value for your customers. If 30% or more of your guests consider a feature to be a delighter, it is certainly worth considering. However, guests may like a feature that competitors don’t have, but it might not make economic sense to add if people aren’t willing to pay for that extra value in the form of increased ADR, or at least an increased likelihood to stay with you.

Judicious decisions are required to determine whether there will be enough return to justify the investment. In this case, the extra step of investing in choice-based research (e.g., conjoint, discrete choice) using price point as an attribute, will produce a theoretic value to determine how much adding the feature is worth to a customer just as it was determined the flat screen TV was worth an additional $19 a decade ago. If you calculate the cost of implementation and use current average rate and occupancy in the equation, you can determine the point at which you would break even and begin realizing a premium return on your investment.

If you are a brand leader, the extra step of conducting this market research will enable hotel brands to provide evidence to their hotel owners and operators to support the decision to upgrade or stand pat.