Smart contracting: Building better base business

As a former revenue manager myself, I often found that hoteliers were excited to talk about more complicated topics, but often had trouble addressing the more mundane topic of base business. Hoteliers were typically eager to talk about things like

• Optimizing channel mix to reduce reliance on highest-margin channels.

• Perfecting the pricing curve in the lead-up to major events.

• Running a displacement analysis for competing RFPs and picking the one that is most perfectly optimized.

But often, upon closer inspection these very same hoteliers were struggling with more basic problems: low occupancy, losing market share in ADR, or sub-optimal pricing strategies.

An unspoken secret is that while the fancier topics that are listed above are important, they make up a relatively small portion of what we as commercial strategists do on a day-to-day basis, and many of us would be better off focusing on building and maintaining occupancy first.

One place that many hoteliers would be better off emphasizing is optimizing their base business strategy, an often-overlooked foundation for any successful hotel. Having a strong and solid ‘base’ of guests is a core building block that later allows you to address the ‘finer points’ we mentioned above.

In this blog, we will give you all the keys to help you understand what base business is, some actionable examples of base business that you can pursue today, methods for evaluating base business, and how to use this core component to build toward better profitability and more revenue growth.

First, let’s start with the basics, and get a working definition of exactly what we mean when we talk about ‘base’.

What is base business?

‘Base business’ is hotelier-shorthand for those regularly recurring rooms that we can rely on day-in and day-out to fill at least a sizable portion of our rooms.

Base business isn’t just extended stay

Extended stay guests can certainly comprise much of our ‘base’, but length-of-stay is not what determines whether a piece of business is base business. Even short one night stays can be included in our base business if they occur regularly enough.

In fact, it's exactly this reliable and recurring nature of certain stays that qualifies them as base business.

What are some examples of base business that aren’t extended stay? Consider a flight attendant that stays almost every Thursday through Sunday at your hotel, or the traveling nurse who comes in 2 weeks every month, or even your reliable business-transient guests with local negotiated accounts that come rolling into the lobby every Monday afternoon for their mid-week stay.

Why do hoteliers call it “base”?

The term has simple origins: it’s likely just an allusion to a literal base, or foundation that you build on top of. If building the perfect revenue strategy were like building a skyscraper, your base business is the solid concrete foundation - without it your other strategies won’t stand up.

But, if base business is so crucial, you may wonder why hoteliers don’t simply fill their whole hotel with this kind of business and stop worrying about all this revenue optimization nonsense?

As you may have guessed, there are tradeoffs to base business.

First and foremost, base business can be difficult to acquire; it takes many months, or even years, to build. Even if you are able to fill your hotel with base business, there is a strong chance that there is a long line of hungry competitors, eager to offer a lower rate to your negotiated accounts and steal them away to their hotel. The constant tug-of-war for lucrative base business is struggle many revenue managers know well.

Another consideration is that, even if you could entirely fill with base business, it is typically lower rated than other business. This means that the more base business you take, the lower your ADR performance when benchmarking against your competitive set. There are exceptions to this, but as a general rule of thumb, expect lower rate performance (ARI) from a hotel filled to the brim with base business.

The balancing act is: filling your hotel with a sufficient amount of base business to allow for more predictable room revenue flows and easier forecasting, while also allowing for some vacant rooms to really push rate on when the time is right by selling to transient guests.

How to build base business

Building up a reliable base is a fundamental function of hotel sales. A good salesperson is always working on drumming up new business for their hotel, but also maintaining relationships with existing clients.

Sales people do this by completing RFPs (requests for proposals), visiting local businesses, CVBs, and acting as the public face for the hotel with prospective groups and other sales inquiries.

Building base business is a cross-functional exercise though, so if you are a revenue manager don’t assume that sales will be able to build your hotel’s base business completely independently.

Find relevant demand drivers that are producing room nights in your market

Here is a quick list of some excellent demand drivers that can be used to help you start building base business. While some of these may require a more formal RFP process, in many cases a more informal approach can work as well. Sales and revenue can work together using a mixture of market intelligence and open source data in identifying if any of these may impact your hotel.

Military bases / Government facilities

These government-segment demand drivers often generate large amounts of hotel stays throughout the year either for official training, contractors, or any other number of purposes. There are some upper-constraints to what you can charge these guests due to rules with Government Per-Diems and stipends, but the length-of-stay and steady demand these facilities offer can often be worth it for hoteliers who want to capture this segment.

The negotiation process for capturing this kind of business usually requires a formal RFP, often through a governmental agency or online portal.

Airports + Flight schools

Airports are a great demand driver for developing base business, and close proximity to an airport will almost certainly guarantee a certain level of baseline demand, but there are other levers you can pull to get the most out of being near one. For larger hotels with capacity to spare (especially with those that offer shuttle service or transportation to and from the airport), participating in a distressed passenger program can ensure that you capture a few rooms during inclement weather events, and other unexpected periods.

Also, setting up a corporate account with a flight training program or flight school can often be a lucrative arrangement. Students usually need lodging for several weeks at a time, meaning their longer lengths of stay benefit your shoulder nights.

Construction projects

Construction projects (such as new datacenter construction, or other commercial and industrial projects) bring in all sorts of specialists looking to stay for extended periods of time (often weeks or months at a time). The process of landing this kind of business ranges from highly informal word-of mouth all the way to formal RFP agreements, but construction has always been an excellent way to add base business for hotels.

Wholesalers

Working up a contract with one of the major wholesalers or bed banks can be a way to boost occupancy - typically you set a dedicated allotment at a fixed net rate for different seasons throughout the year and then the wholesaler will sell those rooms to various travel agencies on your behalf. This can be a beneficial occupancy booster in low seasons, but can also be tricky to manage in high season.

Law offices / court cases

Being near a major courthouse / legal administrative center can have benefits during particularly long and complicated court cases and other legal proceedings; stenographers, jurors, attorneys, and more are just a few of the professionals who often require convenient, reliable accommodation within close proximity.

Insurance Company / Relocation

Unfortunately natural disasters, and other problems related to insurance claims, arise - when they do, temporary housing needs to be provided for homeowners and others who need lodging. Often, insurance companies and travel agents that interface directly with insurance companies are looking for competitive rates they can offer, and contracting with them can be an excellent way to build longer length of stay base business.

Vocational training schools

Vocational schools and training programs often require that students travel and stay near the facility during the entirety of the training program. Consider negotiating a rate with the various vocational schools near your hotel to capture some of the longer length of stay guests coming in for training. While the room night volume may not be massive, remember that base business is more about building a snowball of momentum rather than landing one massive account.

Critical considerations

When going after new business to build base occupancy, it’s important not to accept anything just because it’s new. Be sure to critically assess each agreement to make sure that it is profitable, and achieves your goals of boosting occupancy consistently.

Here are some of the most important factors to consider:

Cost per occupied room (CPOR)

The absolute basic evaluation of whether you should take a piece of business or not is whether its rate exceeds your cost-per-occupied room. Theoretically, anything higher than your cost per occupied room will net you some room revenue, but you will want to evaluate and make sure that you are considering all of the potential costs that might make the deal a no-go.

For example, airline crews may stipulate that they need on-demand shuttle service, or a grab-and-go breakfast for all crew members. They may also be primarily 1-night stays which means higher turn costs for your housekeeping department - keep this in mind before racing to offer a rate that is near your CPOR, and be sure to build in some profit margin when bidding on base business like airline crew.

Stay Pattern

Stay pattern should always be top of mind when evaluating whether or not to add a piece of base business at your hotel. Not all accounts and RFPs are built equally - if your hotel is already running 95% occupancy on the Tuesday and Wednesday midweek peak, a piece of crew business looking for a 10 night room block hold for every Monday, Tuesday, and Wednesday night may not be worth considering unless there would be ADR benefits.

By contrast, base business that positively impacts Thursday and Sunday nights can be especially attractive for hoteliers looking to boost shoulder night occupancy.

Keep in mind that good base business requires work and is comprised of a patchwork of different guests - there is very rarely a ‘perfect’ piece of base business that is highly rated with a desirable stay pattern - and if you do find such a piece of business, it is very often much shorter in duration than you’d like it to be!

Base business requires constant replenishment as the various pieces of business that comprise your ‘base’ come and go - If left unaddressed, your base business will dwindle to virtually nothing.

Account performance

It’s important to occasionally review those pieces of base business that you have negotiated to review their account production, and ultimately have a formal, yearly re-negotiation process. This signals to the client that you value their business, but also that you are also monitoring production; effective hoteliers use their own internal data to help negotiate an appropriate rate if the room night production with an account falls or grows over a certain period.

An example: At the start of the year your sales person negotiates a $119 flat rate with a local account contingent that the account produces 500 room nights in the calendar year. As the end of the year approaches, revenue management alerts sales that the account has only produced 414 room nights with two months left in the year.

This would be a great time to circle back with the client, and make sure that they are still planning on keeping travel strong through the end of the year, and if not, starting the conversation about how next year's rates may need to change. Starting proactive sales conversations like this remind the client that you not only care about the relationship, but also that you’re watching their production!

Conclusion

Capturing and optimizing base business is a complicated and involved part of hotel commercial strategy that relies on revenue managers and sales people coming together to create the best possible outcome. Reliable data and reporting is crucial for evaluating base business, and then optimizing business mix when you’ve attained a reliable base. Lighthouse Performance is exactly the kind of tool that hoteliers use day-in and day-out to review their base business performance, evaluate negotiated accounts, and report to internal stakeholders on the state of their hotel performance.