In golf, a handicap is a numerical measure of a golfer’s potential ability that levels the playing field for everyone and allows players at different levels to compete fairly against each other. With this in mind I finally came up with an explanation to our latest market share results that would surely satisfy my GM; Our hotel is simply put a mediocre amateur golfer and our competitive set is comprised of Tiger Woods and Jason Day. No wonder we never win – We need a handicap!
Before we get to it, a quick recap on the 3 different KPIs we use to benchmark hotel performance: Market Penetration Index (MPI), Average Rate Index (ARI) and Revenue Generation Index (RGI), comparing your occupancy %, average rate and RevPAR compared to the average of a competitive set. The competitive set is decided on before hand, usually made up of 4-7 hotels identified by people in the hotel who “know” the market.
So why is market share performance causing some hoteliers sleepless nights? Well, it probably determines part of your yearly bonus. Also, owners attach utmost importance to them and ownership companies even use them to decide whether a property is worth investing/divesting in. Nevertheless, it seems very little scrutiny has been given as to the accuracy and “fairness” of the metrics used to determine what’s a fair achievement. We have found 3 particular points come up over and over, which made us start thinking about golf (and handicaps).
1. The curse of gut feeling
The basis to any successful benchmarking model is undoubtedly a relevant comparison or competitive set as its referred to in the hotel industry. The problem we have is that the process of choosing the set is often entirely subjective, in most cases decided based on the gut feeling of a Sales Director or GM after several hours of discussion among the hotels executive team. Nowadays, with all the information at hand, wouldn’t a data driven selection process seem like the more rational alternative? All though far from complete, a starting point could be the competitor suggestions on the OTAs. Another is evaluating potential competitors’ services based on guests’ online reviews as opposed to gut feeling.
2. Size Matters
Which of the below hotels would you prefer to manage? Mine is the one on the right. Lowest occupancy, never reaching its fair share in volume. Strange, considering it generally sells more rooms than the competition, almost every day. The issue is that MPI looks at % of sold rooms instead of actual sold rooms. This makes total sense in theory, but not always practically. In the below example, my hotel has clearly the lowest occupancy and would reach an MPI of around 90%, despite capturing most demand. In fact, our big hotels will struggle to ever reach an MPI at “fair share” during medium and low demand. During high season the problem disappears, but unfortunately, in our market, we have significantly more low-level demand days, making the problem not only urgent but also frequent.
The question arises, should one not benchmark based on actual room nights sold, compared to the average captured in the market instead of occ. %?
3. …and then there is quality
These days we can within seconds get access to thousands of customer reviews and scores on the quality and perceived value of our product, straight from the heart of the actual customer. We also have this data for our competitive set, giving us a very strong indication of our hotel’s natural positioning. From a very basic “quality is king” perspective, this means we essentially have an indication of which of our hotels should be performing well and which ones not.
To find out if quality is really king for our hotels, we plotted 30 of them on two axes; RGI and Quality Index (QI). Below is what we found:
- Not surprisingly a strong positive correlation between quality and market share; the higher QI, the higher RGI, suggesting quality is in fact king.
- All hotels that were able to get a QI above 100 also achieve a RGI above 100 (Which makes sense – if your hotel has superior product it should also have a strong share of the market – Right?)
- Hotels that were able to get an RGI above 100 without a positive QI typically had a well-balanced business mix, robust online visibility or generally a strong sales team. Arguably these hotels are the strongest performers of all, as they in fact, were able to achieve very good market share results with a mediocre product.
Now, look at the green circle in the lower left quadrant of the graph. Should this hotel be considered a poor performer? Actually its RGI is in line with its relative quality – So shouldn’t the performance therefore be considered acceptable, or at least expected? Again, this brings up back to the concept of handicap. Should all hotels strive for a share of 100? Or shall rather not goals be set according to quality and expected performance?
What are your thoughts on market share and these benchmarking challenge? Does your hotel deserve a handicap or are you generous enough to admit your competitive set needs one?