Why pay attention to Profit Contribution?

Focus on profit contribution will substantially increase profits

The next step in managing revenue in a hotel is moving from the traditional approach of revenue management that focus on top-line revenue to a more holistic discipline of revenue strategy that focuses on profit contribution. 

Pricing and inventory adjustments can only produce marginal gains in occupancy and top-line room revenue. This focus can, however, miss the opportunity to substantially increase the profit by targeting the optimal business mix for the hotel. This is a mix of channels and segments that will yield the best net revenue and therefore the highest profit.

On average a hotel spends between 15 and 25 percent of guest-paid revenue to acquire its guests and the cost is expected to increase the next couple of years. It can only be managed by understanding the profit contribution from each segment and source.

Profitability is eroded and profits are going down. The hotel has to cut cost and reduce staff, leading to poorer service quality, bad reviews, and ultimately a smaller number of bookings and lower revenue. Lower profitability reduces the hotel's ability to make the necessary investments to stay competitive in the market.

Common problem root causes

  • The hotel lacks a solid distribution strategy and/or it was based on inadequate data.
  • The hotel has no strategy to drive revenue from low-cost channels
  • Lack of understanding of profit contribution
  • Missing data/reports to quantify and visualize how customer acquisition cost erodes the profitability
  • Difficulties in calculating the profit contribution due to lack of knowledge or lack of data
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How you can fix it

The first step is to calculate the profit contribution for each segment and source. Unless you have a grip of the total dollar amount and the profit contribution percentage of room revenue in your hotel, you have nothing to manage and you will just see your profits decrease.

The second step is to analyze the profit contribution based on a number of variables, such as distribution channel, feeder market, rate code, segment, corporate contracts and marketing campaigns. Now you are getting closer to understand how to manage the profit contribution and the acquisition cost.

The third step is to set a strategy to find the revenue with the highest profit contribution calculated as revenue – customer acquisition cost. Finally, you will be able to focus on the most profitable revenue and start to increase your profits.

Do you want a higher profit contribution?

If you are struggling with getting a grip on the profit contribution, we would like to suggest a meeting to discuss how we may be able to address your issues and what is causing them in order to be able to plan for how you can increase your profitability.

 

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