Hotels Want You To Pay More To Make Up For Their Losses Over The Past Two Years

A reader explains why hotel guests are unreasonable, and we should be more sympathetic to hotels that are cutting services, containing costs, as they try to ‘make up’ money they lost during the pandemic. Here’s why that’s exactly backwards.

My hotel is a self managed single luxury hilton property. During covid my hotel alone (again, owner only owns one hotel) lost $10 million.

We’ve had a little bit of help but do you really think 2 years has remade $10 million? Plus with costs increasing and labor increasing, certain changes have to be made. And im sure other owners etc are going through the same thing.

Hence [Hilton CEO] Nassetta’s way of giving franchisees some relief. Of course guests aren’t happy about it, but im realizing more and more guests are getting harder and harder to please. And their expectations are that things are the same as pre covid. And they just aren’t.

Why should a hotel owner be entitled to make up for all of their losses, without providing service to customers in order to do so?

Hotels lost money because they had made bets on fixed costs, and the product they were offering wasn’t as useful to customers during the pandemic who weren’t traveling (for good reason). Capital was mis-allocated for a period of time. Yet the predicted commercial mortgage apocalypse didn’t come.

Hotel REITs and trusts made big money before the pandemic. Then they lost money. And now they’re largely making money again. Customers shouldn’t feel guilty about those losses. Some hotel ownership groups wanted you too – and even asked guests for donations.

The way that hotels are going to earn profits going forward is by delivering value to customers.

  • They have to compete with Airbnb, so they need to differentiate their product and offer services that Airbnbs do not.

  • They have to compete with each other, so have to do a better job meeting customer needs than other hotels in their neighborhood.

A hotel can make money as the low cost provider of rooms, so they can offer the cheapest rates and earn a return. Or they can offer services and experiences that guests are willing to pay a premium for.

Hotels aren’t entitled to make money. They have to earn it by delivering a product consumers want to buy.

Individual hotels can make money from guests who expect services, based on the hotel brand, while not delivering those services. That works for awhile, and makes sense for an individual hotel owner. But it degrades the brand itself as guests start to realize the hotel brand doesn’t signal the services, quality, cleanliness or experiences that they used to think it did.

That’s why chains have brand standards. Individual properties have an incentive to underinvest, profiting from the brand without incurring the costs. While the chain benefits from hotels that deliver, burnishing the brand reputation, and leading customers to continue to trust and frequent the brand.

Hotel chains have been relaxing their brand standards, allowing hotel owners to defect from the service levels guests have learned over time to expect. That’s good for owners in the short term. It’s good for hotel chains in the short term because it helps them compete for franchise revenue (since owners might otherwise defect to another chain which allowed them to skimp, in a race to the bottom). But it comes at a cost to the hotel brand, which means that the Hiltons and Marriotts of the world are positioning themselves to earn less over time.

Hilton and Marriott have brands, they have loyalty programs, and they have hotel management businesses which some of their owners use. They deliver customers to hotels through the brand (customers know what to expect at a Hilton) and through the loyalty program (they’re invested in Honors or Bonvoy). But when the brand doesn’t mean what it used to it’s no longer as sticky, no longer delivers customers, and hotel owners will no longer benefit as much or be willing to pay as much to fly the chain’s flag.

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