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Gross Profit Margin in the Hotel Industry


hotel room ratesA recent article in the NY Times reviewed various consumer surveys on hotels.  The article has a lot of interesting findings about how people rate their hotel stays and talks about why some hotel chains are more successful than others in satisfying their customers.  But I found the article particularly interesting because of its financial implications.

According to a J.D. Powers survey cited in the article, "noise and a bad Internet connection are two of the most common problems guests experience,"  but customers are more likely to complain first about a spotty Wi-Fi signal.   These days, particularly for business travelers, reliable hotel Wi-Fi service has become as necessary as the air we breathe.  So whenever I have to pay for this service, it almost seems insulting.  Perhaps you feel the same.  In fact, other surveys cited in the NY Times article indicate that "a high Internet charge, inaccessible or inadequate electrical outlets and a slow Internet connection were business travelers' top three hotel pet peeves."

For purposes of analysis, consumer surveys divide up hotel chains into a number of basic categories.   Consumer Reports uses four categories: Luxury, Up-scale, Moderate, and Budget. Have you noticed that luxury and up-scale hotels usually charge a premium for a Wi-Fi connection, while moderate and budget hotels usually provide it for free?  Speaking for myself, this makes having to pay for the Internet particularly irksome.  Paying $19.95 for "24-hour" Wi-Fi service at a hotel that costs $350 a night while getting a free Wi-Fi service at a hotel that costs $89.00 a night seems totally unfair.  I'm sure the hotels know it, so why are they doing this to their most important segment:  business travelers? I believe some information shared with me by a retired senior executive of a major hotel sheds some light on this apparent marketing paradox. He tells me that the gross profit margin earned by a moderate or budget hotel is usually higher than the gross margin earned by a luxury or upscale hotel.  This is because the costs to run the luxury and up-scale hotels are very high relative to their average room rates. Because the expenses of luxury and upscale hotels are much higher than for moderate and budget hotels with a comparable number of rooms, they also have lower operating profit margins than their low-end counterparts. Therefore, the high-end level hotels need high margin products such as Internet services to boost their overall margin.  This is the "coffee and dessert" that I talk about in the audio that you're able to download for free from this site.

How long will this annoying (as well as costly) practice go on by the luxury and upscale hotels?  I suspect not much longer.  Eventually, one of them will start cutting the price in order to gain a competitive price advantage not so much against the other hotels, but more against the rising tide of usage by business travelers of the telecom wireless connections available on their smart phones and tablet PCs.  This often happens in the world of technology. AT&T and Verizon don't compete against each other in international voice service, they both compete against Skype.  In the end Kodak and Fuji didn't compete against each in selling film as much as they both had to compete against digital images.  







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