The hotel business is unique in many ways, as exemplified by the unique KPIs we use, from revenue per available room (RevPAR), to average daily rate (ADR), occupancy, and everything in between. We can thank the advent of yield and revenue management that came to our industry in the 1980s for much of these metrics.
But another metric that more hoteliers are talking about recently is NOI (Net Operating Income). Owners and asset managers are now looking to the revenue management team for ways to boost NOI. In this article, we will discuss how new technology is unearthing NOI-friendly revenue sources.
Depicting Profitability
Traditionally, RevPAR was the gold standard metric to apply to revenue KPIs. It was and still is used as the measure of financial market strength. While RevPAR is a good depiction of profitability when the market is in a “typical” state, it can obscure a hotel’s performance when it veers away from the norm – a condition the industry hasn’t seen since early 2020.
On the other hand, net operating income (NOI) is a metric that can show a more accurate depiction of profitability no matter the market conditions. NOI is calculated by subtracting gross operating expenses from the gross income; it can quickly reveal the amount of money left after you have paid out all of your expenses.
Property owners and asset managers focus on this metric because it tells them much about their commercial investment. It provides a picture of the cash flow, or more specifically, it measures a property’s ability to generate a positive cash flow from operations.
NOI impacts financing costs like mortgage payments since banks and lenders want to know that there’s enough income to cover interest payments. It shows how well the hotel operates from a total revenue and expenses standpoint. Ultimately it determines the profitability of their asset, the value, the potential rate of return, and the potential risks.
Understanding NOI, and how to grow it is critical to the success of a hotel investment.
How to Influence Your Hotel’s NOI
Recognizably there are external factors that influence NOI that you can not necessarily control, such as its market segment, age, amenities, location, etc. – all things that affect a property’s income potential and overall cost structure. What a hotel can control is its revenue growth or reduction of expenses.
Controlling variable costs and streamlining operations will have the most significant impact on expense reduction. Hotels are well accustomed to making do with less. But you can only cut expenses so far because of fixed overhead costs. And in this era of guest review sites, aggressive cost-cutting that negatively impacts guest experience can have devastating downstream effects.
On the revenue side, your sales, marketing, and revenue management departments are presumably already on the case and are ‘peddling’ as fast as possible. So, where do you look to improve NOI? Focus on the department overlap areas. Specifically, there is a tremendous opportunity where revenue management meets operations. There you find the unloved revenue generator that falls between the cracks of departmental responsibility – upselling.
Upselling is a very attractive way to boost NOI. For example, every revenue channel carries costs, whether commissions, fees, or negotiated rates ranging from 10 to 50 percent of revenue – but not upgrades. Upgrades are pure profit – 100% high margin revenue. They are effectively the lowest-hanging fruit in upselling with the quickest impact on NOI.
But operationally, they have been challenging because of how rooms are managed. It has been hard to determine if upgrades are safe to sell until the very last minute. That makes it tough for marketing to sell anything in advance of arrival. And revenue management, while doing a great job of yielding pricing for reservation acquisition, has done little to nothing to optimize upgrade pricing.
Increase NOI with Automated Upsell
Automated selling has come to the rescue. Truly intelligent upsell automation software, such as ROOMDEX, forecast operational availability in advance while pricing upgrades (which are, after all, room product) dynamically based on demand. Then it is powerful enough to write the upsell transactions back to the PMS.
Automated Upselling delights guests (no more waiting to see if their “request” will ever be granted), increases your property’s average guest spend without overburdening your team, and helps balance the house –especially valuable in times of tight budgets and hotel staff shortages.
The net impact is that the nearly 100% profit upsell revenue is optimized and consistent and simultaneously reduces operational costs. More revenue + less expenses equal NOI growth!
The pandemic has made hotel profitability, NOI, a big challenge. Every traveler has a maximum value they can offer your hotel, and upselling can help capture as much of this value as possible. Automation provides a real tangible way to drive consistent, reliable incremental revenue while increasing your hotel’s guest experience quality and profitability.
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