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When hotels become generic, they start the race to the bottom

17 November 2022
An investment in building or buying a hotel is a huge decision. Financial advisors spend months calculating the potential ROI based on assumptions about how the market for overnight accommodation will develop over at least the next twenty years. The major part of the investment is in building and interior design. However, a tiny amount of the total investment is in people, processes, and systems that will turn the investment into a success.

Hotel owners trust the mega-brand hotel management companies and other companies operating hotels that they have all knowledge and skills needed to make the hotel a successful financial investment. However, the owners are too focused on physical assets while downplaying the human aspects of the guest experience while staying in a hotel. Real estate tends to be transactional and driven by financial KPIs such as return on investment, while authentic hospitality is about human interaction, service, and making the guests happy.

Hotels have become generic

Hotel owners with financial investment and transactional perspectives have slowly pushed the industry to become generic. Hotel rooms are the same generic rooms regardless of the branding. In a market with generic products, the consumer cannot see any significant difference in the product, service, brand/marketing, or anything else. The only remaining differentiator is the price. The consumer will always go for the lowest possible price because there are no differences in the product. What is the difference other than the price when buying water, electricity, soda, sugar, petrol, eggs, an airline seat, or a hotel room? None! Over time, these and many other products have become generic, and most consumers only purchase at the lowest price.

Profits start to decrease

Once a product has started to journey from differentiated to generic, the profitability will decrease, leading to cost-cutting that will make the product even more generic. The best example from the travel industry is the development of air travel. All airlines with the same generic economy seat have raced to the bottom with less and less service and the lowest possible price. Consumers are frustrated and do not even care which airline they use for transportation as long as the price is right.

Hotel rooms and airline seats

Will hotels follow the airlines in stripping their services and rooms and become even more generic over time? The short answer is that this is highly likely since investors and owners drive hotels towards a transactional business model, away from a business model where guests pay for excellent experiences. Mega-chains work for investors and owners, so they will all agree to be monitored by transactional and capacity KPIs. Productivity KPIs will become even more critical since they will ensure that the hotel operator produces a healthy profit and a return on investment. Improving productivity KPIs tend to replace humans, which leads to automated service with low human interaction. The future hotel will be an automated bed factory as exciting as the economy airline seat, but it will come with a low price tag.

There is another way

The generic, low-cost strategy is only one possible strategy to become successful. The other primary strategy is differentiating the product and service away from the mass market. The more generic hotel rooms there are in the market, the more opportunities to differentiate open up. Consumer groups will revolt against bland hotel stays and search for alternatives. The hotel owner that differentiates the hotel concept, service offering, and total guest experience will attract guests that are prepared to pay a premium rate to be seen and experience genuine hospitality.