Why Are Do it Yourself Franchisees Costing Themselves Money?

Hotel operators must understand rate management for it to be effective. Lack of such understanding can also cost franchisors money. Four top multi-property revenue management veterans we interviewed agree that chain rate management (RM) improves rate-setting that maximizes RevPAR. However, further examination revealed that many operators ignore their chain's optimized pricing guidelines. The group focused on why franchisees often ignore centralized rate management and shared three tactics that chains can use to overcome operator resistance and boost revenue for their properties. Contributors are:

  • HVS Technology Strategies VP & Chief Strategist Elizabeth Ivey

  • Thoughtmill Travel and Retail Services Vice President and former VP of Intercontinental and Omni Hotels Rick Warner

  • Manugistics Chief Scientist and Director of Operations Research Jon Higbie

  • Sentry Hospitality Chief Financial Officer Tom Steinberg.

Why do properties ignore chain rate guidelines?

These experts feel that many franchisees ignore their chain's rate optimization suggestions and lose revenue because property managers take rate setting into their own hands. Reasons include:

  • A lack of trust in chain RM recommendations because operators do not understand how chains calculate rates

  • A franchisee belief that corporate rate managers are not familiar with their local market and booking channels; and

  • A conviction by operators that they can do better at optimizing rates than their franchisor.

The experts recommend that to overcome these property-level challenges and put centralized rate management back to work for franchisees, chains must:

  • Understand their operators' positions on pricing strategy

  • De-mystify the price calculations and rate setting process for franchisees so they will trust their chain's price optimization process and use its rates; and

  • Add channel booking costs into rate calculations.

Heavily franchised chains have a huge problem convincing owners that their flag adds value to their properties. Chain rate management credibility is part of the problem. Unless a chain teaches franchisees that its rate management recommendations are effective and based on real-world market factors, many operators will continue to ignore them at their own expense. Thoughtmill executive Rick Warner says, “Chains need to remember GMs are often incentivized on profitability factors by their owners, so they frequently ignore franchise rate guidelines and handle pricing themselves. The best rate management technology cannot replace a good human with 10 years of experience in a market, but not many of these are around anymore. Centralized chain rate management works, and a computerized corporate RM system will usually give GMs a foundation for what their gut tells them if chains can just get them to use it.”

According to Manugistics executive Jon Higbie, major chains that use his company's rate management system “have spent considerable time working with us to ensure that relevant pricing factors like historical data, competitor rates, guest segmentation, seasonality, projected incremental revenue, regional market forecasts and unconstrained demand influences are included in their rate optimization calculations.” Higbie also says effective RM tools have proven they increase rates and RevPAR, but until chains understand why their operators mistrust centralized RM guidelines, revenue will be lower for franchisees who do not apply chain pricing.

Chain to-do: De-mystify the rate setting process

HVS technology expert Elizabeth Ivey says most operators mistakenly believe they can hire a “sales-savvy” person to handle the calculations. “Modern RM systems are effective at raising rates and most owners believe their franchisor should provide this service, but they may doubt the system because they do not think chain RM addresses regional factors,” she adds. Most chains value their operators' market knowledge but must strike a balance between honoring franchisees' pricing abilities and mandating that RM-generated chain rates be applied.

Factor in channel costs

The third challenge to chain RM adoption is channel costs. Every booking channel has fees that affect rate profitability. Since properties pay these out of their own pocket, they're aware of the cost, but chains are just beginning to factor fees into RM calculations. “Operators know that a property's rates should be based on a variety of factors, including channel fees,” Higbie says. “Manugistics rate management calculations can include channel costs as well as forecasted incidental revenue from f&b and outlets, like spas. The major chains are starting to focus on 'yielding' by channel now because franchisees are asking them to include it.”

Chain RM increases owner property values

Chain rate management works, but many operators are losing money by ignoring franchisor pricing guidelines. Industry veterans agree that franchisors can improve chain pricing adoption by understanding their operators' rate-setting concerns, educating them on how chains arrive at rate guidelines and factoring channel booking fees into their calculations. “Most owners base their franchise decision on how much a flag will add to the value of their property investment in the long term and the revenue it will generate to pay for operations along the way,” says Ivey. “If a chain can teach franchisees to apply its RM guidelines and increase the likelihood of owners being able to sell high without increasing the cost of the franchise, then it is supporting its owners' investment objectives.”

Michael Squires is president and CEO of Softscribe, Inc. Reach him at www.softscribeinc.com.

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