Hotel_Management_and_Operations_by_Denney_G_Rutherford,_Michael

331Section 7.3 ᭿ Consumer Decision Rules and Implications for Hotel Choice

performance and/or marketing on a single at- Shannon Clarke is a chocolatier operat-
tribute may be inadequate for some segments ing a small chocolate store in Knowlton, Que-
of travelers. A hotel would then benefit from bec. This year, she is planning to attend the
creating a level of “at least acceptable” attri- Sixth Annual Chocolate Show in New York
butes in addition to providing stronger pack- City. Shannon has carefully considered vari-
ages of the same attributes offered by ous transportation options and decided to
competitors targeting the same market seg- travel by car. She is now considering a num-
ment. Overall, knowing how consumers make ber of accommodation alternatives. Shannon
decisions should help hotel managers to de- knows very well what characteristics are
sign better properties, packages, and services, salient to her regarding hotel choice. For ex-
and help them market those offerings to their ample, low rates are significant, as Shannon
respective target segment(s), thereby improv- has a limited budget for traveling expenses. It
ing competitive position. is also imperative that the hotel offer free
parking and be located not too far from the
᭤ COMPREHENSIVE Metropolitan Pavilion on Eighteenth Street,
EXERCISE where the Annual Chocolate Show will take
place. To keep in touch with her business
Understanding consumer decision-making while staying in New York, Shannon would
also like Internet access from her room. On
rules enables you to make strategic and mar- the other hand, she does not require the hotel
keting decisions, thereby effectively targeting to offer a nice restaurant, as she will go out on
segments with varying goals, using multiple the town each night to have dinner with fel-
criteria, and following different decision rules low chocolatiers. Other attributes considered
when choosing hotel venues. This exercise in the hotel choice of small business owners
gives you an opportunity to review the con- attending trade shows and conventions in
sumer decision-making rules discussed in this New York are noted in Table 7.2.
chapter and demonstrate the strategic impli-
cations of these rules for marketers in the Shannon identified four hotels in an
hospitality industry. online search. The information provided
online makes it easy to determine what ser-
vices are offered at what rates for each of the

Table 7.2 Shannon’s Salient Attributes

Attribute Hotel Park Hotel Union Hotel Chelsea Hotel Lion
ei biP biU biC biL

Low rates ϩ3 ϩ2 ϩ2 ϩ3 Ϫ1
Location ϩ3 ϩ2 ϩ3 ϩ2 Ϫ1
Free parking ϩ2 ϩ3 ϩ2 ϩ1 ϩ2
Internet access ϩ1 Ϫ1 ϩ2 ϩ1 ϩ3
Fitness facilities Ϫ0 Ϫ1 ϩ1 Ϫ2 ϩ3
Nice restaurant Ϫ1 ϩ1 Ϫ0 Ϫ2 ϩ2

332 Chapter 7 ᭿ Marketing and Associated Activities

properties. Shannon now must decide which AHotel Park ϭ (ϩ3)(ϩ2) ϩ (ϩ3)(ϩ2)
of the four hotels she should choose. Table 7.2 ϩ (ϩ2)(ϩ3) ϩ (ϩ1)(Ϫ1) ϩ (0)(Ϫ1)
shows relevant attributes, evaluation ratings, ϩ (Ϫ1)(ϩ1) ϭ 6 ϩ 6 ϩ 6 Ϫ 1
and belief ratings to be taken into considera- ϩ 0 Ϫ 1 ϭ 16
tion in Shannon’s decision-making process.
AHotel Union ϭ (ϩ3)(ϩ2) ϩ (ϩ3)(ϩ3)
Use the information provided above to ϩ (ϩ2)(ϩ2) ϩ (ϩ1)(ϩ2) ϩ (0)(ϩ1)
answer the following questions: ϩ (Ϫ1)(0) ϭ 6 ϩ 9 ϩ 4 ϩ 2 ϩ 0
ϩ 0 ϭ 21
1. Calculate the overall brand attitudes for
all of the brands using the weighted addi- AHotel Chelsea ϭ (ϩ3)(ϩ3) ϩ (ϩ3)(ϩ2)
tive/linear compensatory model. ϩ (ϩ2)(ϩ1) ϩ (ϩ1)(ϩ1) ϩ (0)(Ϫ2)
ϩ (Ϫ1)(Ϫ2) ϭ 9 ϩ 6 ϩ 2 ϩ 1
2. According to beliefs and evaluations ϩ 0 ϩ2 ϭ 20
shown in the table above, which hotel is in
the best competitive position? Which ho- AHotel Lion ϭ (ϩ3)(Ϫ1) ϩ (ϩ3)(Ϫ1)
tel is in the worst competitive position? ϩ (ϩ2)(ϩ2) ϩ (ϩ1)(ϩ3) ϩ (0)(ϩ3)
ϩ (Ϫ1)(ϩ2) ϭ Ϫ3 Ϫ 3 ϩ 4 ϩ 3
3. Describe three strategies the hotel with ϩ 0 Ϫ 2 ϭ Ϫ1
the lowest overall attitude rating could
use to improve consumer attitudes. 2. If the weighted additive/linear compensa-
tory model is used, Hotel Union is in the
4. Which hotel would be chosen using a lex- best competitive position because its
icographic decision rule if Shannon overall attitude rating (ϩ21) is higher
Clarke considers low rates most impor- than its competitors’. Hotel Lion is in the
tant? worst competitive position because its
overall attitude rating (Ϫ1) is lower than
5. Which hotel would be chosen using the its competitors’.
conjunctive decision rule with a cutoff
value of 0? 3. Strategy 1: Hotel Lion could attempt to
change the perceived relevance of some
6. Given the lexicographic decision rule of the attributes. It could stress the im-
with “nice restaurant” as the most impor- portance of a good restaurant and excel-
tant attribute, what should Hotel Chelsea lent fitness facilities for a hotel in which
do? What should Hotel Lion do? businesspeople stay while attending a
trade show or conference. The drawback
7. List salient attributes not included in the of this strategy is that some of its com-
table that could be considered for hotels petitors could also benefit from it. Strat-
catering to small business owners attend- egy 2: Hotel Lion could improve its
ing conferences and trade shows in the performance on some of the attributes
New York area. considered important by consumers in
this target segment, thereby increasing
8. Using the elimination-by-aspects rule, the strength of consumers’ belief that it
which hotel would be chosen given a cut- possesses these attributes. More specifi-
off value of ϩ2?

Answers to Practice Questions

1. The overall brand attitudes are calculated
using the formula Αinϭ1 eibi.

333Section 7.3 ᭿ Consumer Decision Rules and Implications for Hotel Choice

cally, Hotel Lion could lower rates if fi- restaurant quality; it would also be possi-
nancially feasible, or provide better free ble to strengthen consumers’ belief that
parking. Strategy 3: Hotel Lion could Hotel Lion offers an excellent restaurant
encourage consumers to consider other by increasing marketing communica-
relevant attributes when choosing accom- tions. It is important to note here that un-
modation for trade show visits or confer- derstanding the consumer decision-
ence attendance. These attributes should making process is crucial in devising a
be associated with a strong performance successful marketing strategy: Only if a
by Hotel Lion and a weaker performance substantial (in terms of number of cus-
by other competitors. For example, Hotel tomers and/or profit potential) market
Lion might introduce a shuttle service to segment is using the lexicographic deci-
important conference and trade show lo- sion rule based on positive evaluations of
cations to make it convenient for business a nice restaurant in choosing a hotel does
travelers and conference participants to it pay to improve the restaurant (for Ho-
reach their destination; they could also of- tel Chelsea) or to maintain a nice restau-
fer a coffee shop for short breaks and rant offering (for Hotel Lion). If the
breakfast suited for their target segments’ targeted segments rely primarily on a
busy schedules, and/or introduce secretar- compensatory decision rule using impor-
ial or other business services for travelers. tance weights described in Table 7.2
above, then establishing or maintaining a
4. If a lexicographic decision rule were used, nice restaurant may be counterproduc-
with low rates as the most important at- tive, as these consumers do not positively
tribute, Hotel Chelsea would be chosen. It value that attribute (ei ϭ Ϫ1). In this
scores highest on this attribute (blow rate C case, creating a strong belief that a nice
ϭ ϩ3). restaurant is offered decreases overall
evaluations of the hotel—and is opera-
5. Hotel Union would be chosen because it tionally expensive and time-consuming—
is the only hotel in the consideration set that is, when targeting customers like
meeting the cutoff value of 0 on all salient Shannon, offering a great restaurant will
attributes. not increase Hotel Lion’s likelihood of
being chosen. The hotel could, however,
6. Assuming that a lexicographic rule in this benefit from its strong performance on
instance is looking for positive belief rat- attributes like “nice restaurant” or “fit-
ings on nice restaurant (i.e., evaluation ness facilities” not valued by the current
score is now positive), Hotel Chelsea market segment through changing its tar-
must improve its restaurant offering in get marketing strategy. A property could,
terms of food, beverage, and service. for example, target business travelers for
These changes must be fairly substantial whom exercise and fine dining are more
in order to affect consumers’ impressions important than low room rates or central
of the restaurant. It is thus likely that a location.
considerable amount of time and money
will have to be spent to rethink the 7. The following is a (nonexhaustive) list
restaurant concept and offerings. Hotel of additional attributes hotels might
Lion should maintain its high level of

334 Chapter 7 ᭿ Marketing and Associated Activities

consider that might be salient for en- Chelsea stay in consideration based on
trepreneurs attending trade shows and beliefs about those brands regarding the
conventions: access to fax and copy ma- equally important attributes of low rates
chines, secretarial services, complemen- and location. The next most important at-
tary breakfast, cable TV, including tribute is free parking, and we are left
channels covering business topics, com- with hotels Park and Union in considera-
plementary newspaper, and shuttle ser- tion after eliminating Hotel Chelsea. Fi-
vice to train station or airport. nally, we eliminate Hotel Park and select
Hotel Union based on the Internet access
8. Using elimination by aspects (cutoff attribute (lowering the cutoff value to
value ϭ ϩ2), we initially eliminate Hotel ϩ1).
Lion and see that hotels Park, Union, and

7.4 H O T E L P R I C I N G

Marta Sinclair and Carl R. Sinclair

᭤ TRADITIONAL APPROACH pancy. Although popular in its day, the calcu-
lation of cost was commonly misunderstood
The single most important criterion of success (see Hanson, 1995). Another widely used
quantitative method was the Hubbart For-
in any business, including hotels, is profit. The mula, developed in the late 1940s as a
purpose of this article is to discuss the impor- guideline issued by the American Hotel Asso-
tance of hotel pricing and its influence on ciation. It focused on computing an average
yield or revenue management, especially in room rate that would cover operational costs
terms of profit generation, and because of in-
herent dangers to the industry worldwide, in- Figure 7.3 Three Forces of Pricing
tegrity of the established pricing structure.
Historically, price has been determined by the COST DEMAND
triangular relationship of cost and demand in
the context of competition (see Figure 7.3). PRICE
The actual pricing structure is developed with
one of these three components as the decid- COMPETITION
ing factor while the other two play supple-
mentary roles.

The traditional pricing strategy was
largely cost-driven. Many hotel operators
tended to favor the rule-of-thumb method.
This approach, also called the $1 per $1,000
rule, states that hotels should charge approxi-
mately $1 per night for every $1,000 of room
cost, based on an average 70 percent occu-

335Section 7.4 ᭿ Hotel Pricing

and yield a reasonable return on investment act but, by being competition-oriented, they
(ROI). These quantitative methods are fairly offer more flexibility. The Pied Piper or
static and therefore suited for a stable eco- Follow-the-Leader method uses competition
nomic environment. Qualitative pricing ap- as the basis for rate setting, while the Gouge
proaches, such as percentage increase of ’Em approach tries to lure business away
previous-year rates adjusted for inflation, from other properties by undercutting their
payroll increases, and new cost of supplies, prices. If there is no competition to speak of,
reflect more realistically the projected cost. Hit or Miss fluctuation of rates tied to prof-
itable occupancy levels could be employed.
Other qualitative techniques are less ex-

Table 7.3 Traditional Room Rate-Setting Methods

Quantitative Methods Qualitative Methods

$1 Per $1,000 • Determine the cost of the property Gouge ’Em • When demand is low, set rates
• (building, furnishings and equipment). Hit or Miss • below the market level.
• Divide the total by number of rooms. • When demand is high, set rates
• Divide the calculated cost per room Percentage • at a premium.
• by $1,000. Increase
• Estimate at 70% average occupancy. • Record occupancy at each
Pied Piper • pricing level.
Hubbart Formula • Calculate operating expenses. • Analyze the collected
• Add taxes and insurance. • information periodically to
• Add expenses for asset depreciation. • determine which level was most
• Deduct income from sources other • profitable.
• than room revenue. • Set the rate at the most
• Divide the total by number of rooms • profitable level.
• in the hotel.
• Adjust the calculated room rate for • List the rates that were charged in
• estimated occupancy. • the previous year.
• Calculate rate of inflation,
• payroll increase, the new cost
• of supplies.
• Convert the increased cost into
• percentage increase.
• Increase previous year rates by
• the calculated percentage
• increase.
• Set rates according to what
• other hotels in the area are
• asking for comparable
• accommodation.

Source: DeVeau, L.T., P.M. DeVeau, N.J. Portocarrero and M. Escoffier. 1996. Front Office
Management and Operations, pp. 83–91.

336 Chapter 7 ᭿ Marketing and Associated Activities

The drawback of competition-driven pricing ᭤ PRICING: WHO IS
is its sole focus on rate comparison, ignoring IN CHARGE?
differences in operating expenses and cus-
tomer-perceived value. An effective ap- While independently owned properties make
proach, therefore, calls for a mix of methods
adjusted for different situations (see Table their own pricing decisions, in case of a chain
7.3). The fundamental question remains: What it is usually corporate headquarters (HQ) that
should be the driving force in formulating a sets pricing guidelines. Often, individual prop-
sound pricing strategy? In today’s dynamic erties are still responsible for the actual pric-
business environment, which discards the tra- ing. Because they are held accountable, they
ditional view that market demand for room must balance corporate guidelines with their
rates is largely inelastic, demand orientation autonomy to set their prices. Caroline Shin,
seems to provide the best fit. member of the revenue management team at
Starwood Hotels and Resorts Worldwide,
᭤ CURRENT PRICING which operates a number of upscale brands,
CRITERIA such as Sheraton and W Hotels, stresses the
cooperative nature of this relationship. Suc-
“Our pricing is market-driven, not cost- cessful pricing strategies arise from an ongo-
ing interaction of both sides. Corporate HQ
based,” says Scott Farrell, corporate director provides sophisticated tools and in-depth mar-
of distribution with Fairmont Hotels and Re- ket analysis that would be beyond reach of in-
sorts, a Toronto-based chain of luxury proper- dividual properties. Property managers, on the
ties. When the chain is setting its prices, it other hand, offer their experience and knowl-
starts with comprehensive market research. edge of regional specifics that may have gone
Based on the data, the correct price for each unnoticed by the corporate team. “The people
marketplace is determined. If there is a major who have been in the property understand the
shift in a market, then the prices will adjust dynamics of that market, and they have devel-
for that. However, if there is a major shift in a oped pricing intuition,” explains Shin. Some
demand curve, then a shift of price may have experts view intuition as a valuable part of the
no effect. It may actually leave more money pricing mechanism, and even managers who
on the table. For example, if the airlines go on are technically savvy check the numbers
strike, a significant shift in the demand curve against their gut feeling.
would result. Under such conditions, decreas-
ing the rate by $50, for example, would only ᭤ PRICING: SCIENCE,
result in a $50 loss. If there is an opportunity ART, AND INTUITION
to go after a new targeted market with a spe-
cific offer, enabling the chain to capture a Pricing distribution and revenue manage-
greater market share, then lowering the rate
serves its purpose. Generally, however, lower- ment techniques are a mix of science and art.
ing rates across the board is not the preferred Recent research shows that two-thirds of
pricing strategy. managers making strategic decisions under
pressure and time constraints use a combina-

337Section 7.4 ᭿ Hotel Pricing

tion of analysis and intuition (Sinclair, 2003). and get solid results. Even though intuition is
The advent of modern technology, such as a part of this process, it is based only on a hy-
yield management software packages, has fur- pothesis that could have been triggered by a
ther strengthened this link. “Even the most discussion with a customer, knowledge of
sophisticated analytical model for forecasting, what is happening in the marketplace, or his-
may it be for hotel pricing or for thermal dy- toric trends. That is why pure intuition is not
namics of a nuclear plant, still needs variables sufficient. “Managers must have reliable data
based upon assumptions,” says Shin, who used to support their hunches,” cautions Scott
to work as a nuclear engineer. The more busi- Farrell.
ness-savvy hotel management becomes and
the more they understand the hotel dynamics ᭤ CUSTOMER NEEDS
and the market, the more can be gained from
training them how to define their experience- Customer satisfaction is a crucial part of mar-
based intuition and put it into numbers. In
this respect, an interaction between the cor- keting, pricing, and yield management. Any
porate revenue management team and indi- pricing strategy established by the hotel man-
vidual hotels is paramount. “Every time I go agement must attract customers willing to pay
out to a property, I learn something new. It the specified rate. While price is a determina-
only helps me when I build my analytical tor of the customer profile the hotel is looking
models to almost translate what they know for, it is also an indicator of the quality of
into numbers,” confirms Shin. The better ho- services and the market segment the hotel is
tels can do that, the better models they can competing in. Therefore, yield management
develop. Nonetheless, inaccurate historical uses information about targeted customers’
data remains a major limitation. purchasing behavior and product sales to de-
velop pricing strategy together with inventory
No model is ever going to be perfect, control that delivers products that are better
though. What seems to work best is to teach matched to customer needs, create greater de-
hotel managers how to use the model and to mand, and, on that account, produce greater
understand the direction of the pricing deci- revenues. Lieberman (1993) states that yield
sions they need to make. That is the scientific management is the process of maximizing
part. The art piece comes into play when they profits from the sale of perishable assets, such
infuse the model with their knowledge and in- as hotel rooms, by controlling price and in-
tuition. Staff training is an important part of ventory and improving service through sys-
this process. “We can’t just have Ph.D.s sitting temization. An exact definition of the target
in one room coming with all these models and market is essential. There is a definite and
we just roll it out. At the same time, we can’t firm perception in the psyche of the customer,
just have people with intuitions run around who views the price as the value forthcoming.
and set prices,” says Shin. Therefore, the eventual satisfaction of the
customer is the paramount task of the pricing
Revenue management teams must make mechanism. This is the make-or-break factor
sure that hotels understand how to employ of the entire hotel, especially if the value ex-
the models in their daily pricing decisions. pected does not match the price.
When science is applied, the revenue team
can go to their experts, ask probing questions,

338 Chapter 7 ᭿ Marketing and Associated Activities

᭤ ROLE OF TECHNOLOGY overbooking is ethical and, in some countries,
even illegal, better technology would defi-
While the approach to hotel pricing is still nitely improve the quality of service provided
by properties that engage in this practice.
ruled by supply and demand, speed and so-
phistication of room-rate yield or revenue Another area where technological ad-
maximization is now much increased due to vancement had a great impact on hotel pric-
two technological factors: yield management ing is the Internet. Its use as a booking tool
software and Internet bookings. has created a new level of pricing trans-
parency and tiered competition. It also pene-
Yield management software packages en- trated the negotiation of corporate rates.
able hotels to use a higher number of room- Many hotels see the effect of the Internet as
rate levels, or buckets, and to control both good and bad. The good side is that web-
inventory for rate availability in real time. site bookings are growing every day. As more
Each level may consist of several room rates customers become familiar with their favorite
open under given conditions to yield a maxi- hotel websites, hotel companies have started
mum profit. Traditionally, hotels used be- investing heavily in website development and
tween three and five rate levels; otherwise, upkeep, which gives them several advantages.
the adjustment became too complex for the First, the cost of online bookings is lower than
human brain to work with. The introduction for bookings made through other distribution
of software removed this barrier, and some channels. Companies do not have to pay com-
hotel chains now use up to ten rate levels. This mission because the booking is direct, circum-
allows implementation of much narrower venting all intermediaries. Online booking
ranges for each bucket, thus optimizing price also provides an opportunity to monitor in-
elasticity. This further means the software ventory in real time without reliance on a dis-
model recognizes the point at which the same tributor willing to share and regularly supply
number of bookings can be achieved at a data. Last but not least, it generates loyal cus-
higher rate. tomers by making them eligible for bonus
points, which they cannot earn if they use an
Online monitoring of room inventory in Internet intermediary.
real time facilitates the timing of the adjust-
ment. So far, the biggest limitation is the reli- That is exactly where the flip side of the
ability of historical data. Even in its imperfect Internet lies. The intermediaries are getting
form, the system has made a difference. How- more powerful and growing significantly in
ever, hotel managers are fully aware that it volume. Because most of them show all hotel
takes years to develop brand recognition and rates on their website, they make the infor-
quality but just a push of a button to damage mation accessible to any computer user. One
or even destroy it, if the pricing is not set up way to meet the challenge of more powerful
knowledgeably. As the technology becomes intermediaries, especially if hotels need to
more sophisticated, it will eliminate such move inventory, is to utilize auctions where
questionable practices as overbooking, which the name of the hotel is not disclosed to the
aims at compensating for last-minute cancel- customer until the transaction is finalized.
lations by taking in more than 100 percent Such action, however, calls for extreme cau-
reservations. Besides the question of whether

339Section 7.4 ᭿ Hotel Pricing

tion so that it does not damage a hotel’s rep- ᭤ LONG-TERM STRATEGY
utation or threaten its strategic partnerships. FOR THE INTERNET
As intermediaries become bigger, rate trans-
parency will increase to the point where it Because hotels cannot expect that Internet
will drive the market, especially when com-
puter literacy and Internet access become the distributors will go out of business, they
norm. smartly conclude that a partnership with the
devil is better than a fight with him. Besides
Moreover, the Internet allows non- using their own websites, hotel companies are
branded hotels to compete more heavily with also making sure that the cost of their trans-
the branded hotels because they can now be actions goes down continuously so they can
displayed just as readily. Without significant compete even at lower rates—while main-
advertising expense, they can compete on taining a good relationship with their care-
price. For some markets this does not matter, fully selected online intermediaries.
especially when the brand is powerful enough
to charge the premium and get the business. There is a large number of distributors to
In highly competitive markets, however, the choose from. On one end of the spectrum is,
competition creates an additional strain for for example, Expedia, which allows partici-
the individual property. Many branded hotels pating hotels to control their rates, meaning a
must now compete with other brands through hotel can change its rates any time it wants. At
the traditional distribution channels and with the other end are companies, such as Hotel
nonbranded hotels on the Internet, which, in Reservation Network (HRN), that bind ho-
principle, lowers hotel rates. A frequently tels contractually to a locked rate that cannot
adopted strategy is to invest heavily in web- be changed. Some hotel chains do not want to
site development and customer loyalty partner with these distributors because they
programs, assuring excellent website func- like pricing flexibility and want to make sure
tionality and that customers are rewarded for their rates yield as much as possible.
booking directly through the hotel website
rather than through the website of a third- Adaptation to new technology has been
party intermediary. Both Fairmont and Star- the biggest component of change for interme-
wood, for example, utilize their high-quality diaries as well. Companies that do not have
loyalty programs in this way. the most current technology working in real
time or allowing hotels to yield rates in real
Internet booking also changed the way time are usually not considered a suitable dis-
corporate accounts are negotiated. Because tribution partner for some chains. On the
many companies now require that their em- other hand, companies that invest in real-time
ployees make business travel arrangements technology to yield rates are ideal partners
via the corporate website, the placement of a because, as the industry sees it, they work
hotel or a brand on this booking tool is of with, not against the industry by permitting
strategic importance. Being listed first in the hotels to raise or lower rates in real time.
accommodation section, for example, may “They work with us,” says Caroline Shin.
bring in a higher volume of business and thus “They give data to us very frequently so that
substantiate a lower negotiated rate. we understand the travel pattern bookings on

340 Chapter 7 ᭿ Marketing and Associated Activities

their website. Then we compare it with what is In a sluggish economy, some hotels start
happening on our website and also what we paying attention not only to profit as the bot-
are getting outside the Internet to make sure tom line but also to revenue. This means they
that our market mix is set appropriately.” monitor closely the accrued cost as well as the
Pricing flexibility, compatibility with the de- generated revenue, thus achieving the maxi-
sired hotel image, and protection of its strate- mum yield. Interestingly, contemporary price
gic partnerships, together with cost, play leadership may take different forms. It could
important roles in selecting an intermediary. mean, for example, elimination of smoking
rooms throughout the property. Many U.S.
᭤ THE ROLE OF CREATIVITY motels are revamping rooms, ripping off ciga-
IN PRICING rette-damaged furniture and carpets, and des-
ignating them as nonsmoking. This saves on
Creativity, either of an individual or a team, maintenance and adds to overall packaging
flexibility when the business is hurt by lacklus-
can and often does lead to innovative pricing ter demand. This tactic means drapes, carpets,
ideas. However, its application must be spe- bedding, and other furnishings must be re-
cific, not just directional. It is not enough to placed less frequently; it also mitigates fire risk
state, “We have to do something about our oc- and enhances cleanliness and overall safety.
cupancy level.” A pricing campaign must tar-
get a number of sold rooms or generated ᭤ THE ROLE OF HUMAN
revenue that is required in order to break RESOURCES IN PRICING
even or to do better. This specific approach
injects efficiency into allocating marketing Some large chains recognize that pricing is a
money to areas where it is most effective and
in periods when it is desired. If there is no task complex issue and that they need to get better
direction or overall pricing leadership, the at it. There is a new focus on analyzing the cul-
most creative idea may book only ten room- ture of pricing (how it is being done) and how
nights instead of one hundred. It may gener- it can be improved. This approach is reflected
ate more customer loyalty, but that is even in the kinds of people chains are hiring.
something the hotel may not need at the mo-
ment, although it could be an acceptable out- Although the majority of staff involved in
come in a low-season month. Pricing strategic pricing are in the hotel industry and
leadership helps team members understand have a background in revenue management,
the hotel’s current situation and direct money others are in the airline industry and have in-
and creativity to do exactly what is needed. depth travel revenue management experience.
Creativity comes up with the idea, which Some chains have sought access to this experi-
serves as a vehicle, but spending marketing ence by hiring from outside the hotel industry.
money the smart way is a matter of experi- This is to encourage diversification of thinking
ence in innovation, which turns the idea into a and new ways of thought—completely out of
successful product. Creativity also plays a the box, as the traditional team members are
large part in employee satisfaction, and it low- joined by researchers doing a different kind of
ers turnover. optimization analysis. The goal could be as
radical as trying to manage risk or optimize to-

341Section 7.4 ᭿ Hotel Pricing

ward the railroad industry and its scheduling. both an asset and a liability. It is human na-
On the surface, these tactics have nothing to ture to take for granted the way things are
do with revenue management per se. A lot of done after being in the same environment for
experience in optimizing difficult travel, how- a while. Therefore, hotel chains are continu-
ever, can only be gained by bringing in people ously creating and refining pricing strategies
with different backgrounds in consulting or to accommodate not only different market
with in-depth Internet experience. In order to segments but also different situations a hotel
move pricing and revenue management to a may face based on occupancy levels.
different level of thought, a new mix of people
is necessary. For this approach to work, ade- Corporate HQ tries to identify these dif-
quate training must be in place. ferent situations and associated variables. “It
is almost like a bag of goods, a bag of pricing
In this respect, basic HR functions, such strategies that should be tested,” says Caroline
as hiring and training, have an impact on pric- Shin. Hotels are given the full menu and en-
ing. What is necessary is not only to train per- couraged to try a certain strategy if they are in
sonnel in quantitative core skills but also in a specific situation. Depending on the region,
strategic thinking. For example, when a hotel an individual property may use one set of
does not want to take a specific piece of busi- strategies more than another. In a weak econ-
ness, it must ask such questions as: What is the omy, however, the chains have to work harder
revenue? What is the rate? What am I dis- and be more flexible because the market is
placing by this decision? Where do I think this overflowing with demand. Adapting step by
will go? How does it help my RevPAR? step, a hotel may apply a different strategy
every week. The problem for the corporate of-
Hotel managers must become more ana- fice is to identify situations a hotel might be in
lytical so they can use all the new tools now and seek remedy. For example, if group book-
available. When reports are created, team ings are low this week but competitors are full,
members must be taught how to use them. A how can the property make up the difference
lot of training must be provided for corporate with transient or leisure business? The general
executives, general managers, and regional manager may ask the corporate team, “What
revenue directors as well. They all must be pricing strategies can I use in order to fill my
trained to think more strategically and to un- house?” Then he or she may ask, “What else
derstand analysis and the reports so they can worked before for other hotels, and what may
help their individual properties. work for me based on my market specifics and
market characteristics?” That way he or she
᭤ DIVERSIFICATION: THE can test each strategy using the provided tool
IMPROVEMENT OF THE and personal experience.
PRICING PROCESS
᭤ PRICING: SUPPORT
As noted, exclusive hotel industry experience AND PROTECT

may lead to ossification due to one-sided The corporate pricing structure is also in
judgment and the inability to see beyond the
familiar. From this perspective, experience is place to support and protect members of the

342 Chapter 7 ᭿ Marketing and Associated Activities

chain in a number of areas including pricing The corporate pricing guidelines follow
and partnerships. The corporate office sets two main criteria: to maximize revenue and to
guidelines for hotels in terms of pricing struc- protect key partnerships. While the hotel sales
ture and the market segments they deal with. force negotiates contracts with key partners,
Fairmont Hotels and Resorts, for example, fo- such as longstanding corporate accounts or
cuses on four segments: transient leisure wholesale volume accounts, they make sure to
travel, group travel, business travel, and protect these partnerships and provide them
wholesale. The corporate structure provides value. At the same time, they take every op-
guidelines about how the segments fit with portunity to maximize revenue. One cannot
each other, how they cross over, and where survive without the other, reiterates Scott Far-
they reside in the overall pricing structure. rell. However, it is up to the hotels them-
This information is necessary because every selves, with guidance and additional research,
segment acts differently. Most market seg- to determine in their marketplace what their
ments are dynamic and require frequent rate pricing structure should look like.
adjustments. One exception is the wholesale
market, where pricing is still largely done the A diversified corporate team, with a mix of
traditional way: A wholesaler provides a net people with a hotel industry background and
rate, marks it up, and sells it to the general others skilled in optimization modeling, fulfills
population. There may be a hidden cost, how- an additional function. It acts as a risk preven-
ever, if the distribution chain includes an op- tion mechanism, a necessary prerequisite for
erator acting as a middleman between the managing the risk inherent in pricing. Any
wholesaler and the supplier. chain with a wide variety of hotels must make
sure the properties are covered in all kinds of
When setting up the overall pricing struc- situations. One risk containment scenario
ture, one starts with the retail rate, which is a might be that the chain, in response to a chang-
bucket of premium or best available rates ing demand curve, acquires a type of business
(BAR) charged on the open market. They that the brand has not catered to traditionally.
usually do not carry any restrictions, such as Caroline Shin explains, “Sheraton did not take
cancellation fees, and they are fully billable. on airline crew business because we did not
Depending on the level of occupancy, one of want crew members lingering in the lobby; it af-
these rates is available on any given day when fected our brand image. But we thought maybe
the hotel is not fully booked. It is up to the we could start taking that when our RevPAR
yield management system to identify which index or occupancy slips to a certain point. So
BAR to offer. All other rate types, such as dis- we are trying to change the standards of differ-
count rates and prenegotiated rates, are de- ent market segments we are willing to take.”
termined in relation to the retail rate. For
instance, a corporate rate for a high-volume On the international scale, another risk
client will be probably set lower than the management plan would be analyzing opera-
BAR rate that is estimated to sell most during tional cost and determining whether to close
the period when the contract is in place. This down part of the hotel if market research
way the rates are nested within each other in shows occupancy will not be high enough.
a manner that makes economic sense. When PESTEL (political, economic, sociocul-
tural, technological, environmental, legal)

343Section 7.4 ᭿ Hotel Pricing

analysis indicates demand will drop precipi- site it does not mean a chain can use it and ad-
tously for an extended period (due to political vertise a lower rate, which would undermine a
unrest, economic crisis, or health scare, for ex- partnership of many years. In terms of cost,
ample), instead of hoping for the best and the chain must review its pricing strategy not
running a full house with a full staff, the hotel only by market segment but also by distribu-
may decide to shut down floors or restaurants tion channel. “Several years ago, we would
and save cost until the market picks up again. not consider the cost of distribution in our
Selection of the appropriate strategy will de- ROI. Today we do,” concedes Scott Farrell.
pend on the market specifics and protection
of the image. A property may opt to close Another challenge is to keep up with new
down several floors over the weekend if it Internet sites. The chains must reevaluate
caters mostly to business clientele staying constantly and prioritize their yield so as to
during the week. It would not, however, sus- choose which channels to keep or drop. Fair-
pend room service, although unprofitable, if mont Hotels and Resorts, for example, applies
that is considered an integral part of the of- the 80–20 rule. They focus on the 20 percent
fered product. In a worst-case scenario, the of the online wholesalers that capture more
chain may decide to sell properties in global than 80 percent of the business. As Scott Far-
risk areas when it determines the external cir- rell puts it, “Why would I play with the other
cumstances make it difficult to raise occu- 10–12 percent? I only have so many hours in
pancy on an ongoing basis. a day to manage. I may as well work with the
lion’s share.”

᭤ BETTER UTILIZE YOUR ᭤ QUALITY ABOVE ALL?
DISTRIBUTION
CHANNELS Criteria for selecting an online distribution

The Internet creates a new level of trans- partner vary by price levels as well. Budget
and economy properties are driven mostly by
parency as it allows the opportunity to maxi- financial considerations, while upscale and
mize profitability. There is now a multitude of luxury hotels are more concerned with com-
channels to choose from. Understanding the patibility. As for chains, they ask two basic
cost of each channel in relation to the value of questions: (1) How can the partnership in-
provided service has an impact on the quality crease our brand recognition or a brand
of pricing decisions. Therefore, it is necessary reach, and (2) How much is it going to bring
to determine how much revenue bookings us in terms of revenue or profitability? Their
through an Internet intermediary generate choice has to match the brand first, and then
and whether or not they justify the accrued it has to drive the revenue. If the brand is
cost. There is also a tremendous risk involved. equaled with quality, online providers that
As discussed earlier, one of key guidelines of project a connotation of cheapness will not be
corporate marketing is that partners are pro- considered at all. The quality image refers not
tected. Just because there is a new Internet only to the hotel asset itself but also to how
and where this asset is sold.

344 Chapter 7 ᭿ Marketing and Associated Activities

Fairmont Hotels and Resorts, as a quality auction. The South African hospitality group
brand on the luxury side, cannot compete on Protea (2000) was among the first in the in-
price. The quality of their product and the dustry using this method by offering their
offering of the experience must be considered prospective guests the opportunity to bid on a
by the customer at the price being offered. limited number of weekend getaways in their
When their hotels play with price, the corpo- properties that needed to boost occupancy.
rate office watches closely. Scott Farrell By setting a minimum bidding price, the in-
explains, “If our property wanted to shift their tegrity of the hotel image was protected. Sim-
rate by $50, I would ask why? Give me the ilar auction systems, used to encourage
case behind it and tell me what you are going room-night sales during slow periods, are
to do to make up the additional $50 you are nowadays available in the United States and
going to lose. If they come back to me and say Canada via several Internet intermediaries.
they are moving their rate from $300 to $250
while driving a certain volume, I would make For chains in particular, a long-term strat-
them go through the process of determining egy in distribution pricing is paramount. It
what incremental volume they will need to stipulates the criteria and accepts or rejects
make up for the $50 in loss.” In other words, short-term adjustments depending on what is
pricing decisions must be driven by ROI, not happening in the industry, what is new in the
only a feeling. Feelings and experience may technology, and who the new players are. In
be involved, but properties must present a terms of corporate hierarchy, pricing is for-
strong case based on the estimated ROI and mulated and executed on three levels: (1)
what they plan to get out of the proposed strategy, (2) tactics and execution, and (3)
strategy. It allows them to go into the pricing measurement. Strategy comes first, followed
change with their eyes open. They also must by tactics meant to support that strategy and
consider how the competition will respond. A their execution. Finally, the achieved outcome
carelessly lowered rate may lead to a price is measured against the set benchmarks. If the
war. strategy is sound, it will last longer than the
other two steps. Frequently, new tactics must
᭤ SPEED AND STRATEGY be implemented; these drive the execution
and the measurement. This requires a devel-
The speed and immediacy of exposure via the opment of proprietary criteria for measure-
ment and their continuous adjustment to
Internet have reshaped how marketing cam- changing conditions.
paigns are conducted. Having eliminated the
delay of exposure to marketing collateral ma- ᭤ PRICE ELASTICITY
terial, such as brochures or newspaper adver-
tisements, hotels can conduct targeted Contrary to the traditional view that hotel
discount mini-campaigns on their own web-
sites when the yield management system indi- rates are, in the long-term, generally inelastic,
cates a drop in occupancy for specific dates. In price elasticity is receiving a lot of attention
a similar manner, brand recognition can be nowadays thanks to yield management. Its
enhanced by a carefully orchestrated online goal is to take advantage of and to cover the
entire spectrum of the customers’ ability to

345Section 7.5 ᭿ A Day in the Life of a Regional Revenue Manager

purchase. Price elasticity allows hotels to cap- ᭤ NEW AREAS OF
ture customers who do not mind paying the PRICING AND YIELD
high rate as well as those who are more price- MANAGEMENT
conscious. This can be done in a number of
ways. By using different room categories, a Hotel pricing strategies traditionally have
luxury hotel can have on the same day suites
available at $500 and entry-level rooms at been limited to setting and adjusting room
$200. Every room rate category has a differ- rates and other ongoing activities. In order to
ent value proposition associated with the in- survive in the current dynamic, competitive,
cremental revenue. If the variance between a and even dangerous global environment, ho-
standard room and a deluxe room is $75, the tels and resorts are taking on other types of
latter should provide an adequately greater business, some of which are one-time projects.
value to the customer. The result is a clear Organizing shows, festivals, and conferences
product differentiation, which can be also or undergoing renovations requires a new
achieved by stay restrictions or by the use of type of core competency. Therefore, in addi-
fencing. Examples of physical differences, or tion to mastering current pricing strategies,
fences, are room type, view, amenities, and lo- hotel practitioners must acquire project man-
cation. Nonphysical fences may mean differ- agement skills, such as those that are taught
ent customers, transactions, or consumption and practiced by Project Management Insti-
characteristics. These bear many similarities tute (pmi.org). Mastering these skills will
with airline pricing strategies, which differen- make hotel team members capable of maxi-
tiate the product by, for example, cancellation mizing yield from project-type functions the
restrictions or last-minute availability of a same way as they optimize revenue from
prenegotiated corporate rate. The result is room rates.
nested pricing, allowing properties to have a
very high rate available on the same day as a
rate that is more attractive to the lower-end
customer.

7.5 A D AY I N T H E L I F E O F A R E G I O N A L
REVENUE MANAGER

Paul Chappelle

As the sun rises, so does the stack of reports attempts to explain the basic numbers perti-
on my desk. Every morning I am greeted with nent to the smooth function and revenue gen-
the accomplishments of the day, week, month, eration of a hotel. Although I enjoy the
and year before, all in the form of paper-and- development and success of the latest revenue
ink reports roughly 2 inches thick. Each report management systems, I still prefer to do things

346 Chapter 7 ᭿ Marketing and Associated Activities

the old-fashioned way. These reports are my some form or another in person or over the
comfort food for revenue management. phone for all the hotels I oversee.

The first meeting of the day is the revenue ᭤ RESPONSIBILITIES
maximization meeting, or revmax for short.
The meeting consists of the hotel’s revenue The daily, weekly, monthly, and yearly fore-
manager, general manager, director of rooms,
and the entire sales and catering staff. We dis- casts are the most important responsibility of
cuss what happened the day and night before, a revenue manager. I am responsible for fore-
and we evaluate sales leads from the previous casting the number of rooms and the rate at
day. As a group, we decide what our approach which the guest will pay for a given period. I
is to each lead. We evaluate whether we will generate these forecasts based on many criti-
pursue the lead or refer it to a nearby hotel cal factors and some less critical. History is al-
within the company. The revenue manager ways a good indicator of what the future will
upholds any decisions made regarding the hold for hotels. The correlation between what
rate strategy for that day and for the next few happened last year on this day in this month
days, which are set at that time. Any changes to what happens today can be between 60
that need to be made are communicated percent and 80 percent.
throughout the day.
What is going on in the area can have a
The next meeting of the day is the rev- huge impact on the occupancy and rate of a
enue management meeting. This meeting, fa- hotel. Local events such as festivals, races, and
cilitated by the revenue manager, happens tournaments can all affect the number of ad-
once a week and is attended by the general ditional persons in the city who need hotel
manager, controller, director of sales and rooms. The competition can negatively affect
marketing, director of rooms, reservations your hotel by running a special promotion.
manager, and most operations managers. In On the other side of the coin, the competition
this meeting, similar to the daily revmax can and will create a positive situation for
meeting with the sales team, we go over the your hotel when they have abysmal service or
numbers in much greater detail and for a a ramshackle product.
much longer time. We look at the number of
room-nights and rates generated through the Other factors that may contribute to a
different revenue channels, trends both good forecast are additions to the supply of hotel
and bad, upcoming marketing strategies, and rooms in the area, weather, seasonality,
the results of past marketing strategies, and pickup and departure patterns of conven-
we talk about anything and everything that tions, and the ever-changing local and re-
may affect the number of room-nights and the gional economies. However, when it comes
rate the rooms are sold at the hotel for the down to it, a forecast is exactly that—it is a
past year and as far out as one year. guess of what we think may happen or what
we really want to happen.
After the leadership team has identified
our opportunities, we discuss a plan for how Once the forecasts are completed, they
we are going to exploit these opportunities are used to project the amount of variable
and how we are going to measure whether costs associated with running a hotel—for ex-
what the team decided was an effective strat- ample, labor, or how many housekeepers,
egy. Each of these meetings is repeated in front desk clerks, and hash slingers we are go-

347Section 7.5 ᭿ A Day in the Life of a Regional Revenue Manager

ing to need for a given period. Goals are set it was GDS that was the most critical. In our
for sales and catering managers based on the chains, in 2004, Internet channels generated al-
forecast. The quarterly and annual forecasts most twice the volume of the GDS. However,
are reported to the corporate offices for the the GDS is still crucial for the survival of al-
purpose of forecasting the entire company’s most every hotel. It is the system that travel
projected revenues and expenses. In turn, that agents and some of the Internet sites use to
information is put out to the stockholders and make reservations at my hotels. It contains in-
others with a financial stake in the company. formation about rates and availability at a ho-
tel. It must be checked daily and routinely
Forecasts and tracking of how we did maintained. The scary thing about the GDS is
compared to the forecast take up 75 percent that most hotels don’t know they have a prob-
of my time. The other 25 percent is spent ex- lem until several months down the road. As
ploring new opportunities for revenue technology grows and more and more people
growth, maintaining the various revenue stop calling and start booking through their
channels into the hotel, managing the reser- travel agents and directly over the Internet, so
vations department, acting as the liaison be- does the need to understand the GDS and ex-
tween the sales department and operations, actly how it affects the hotel. When one of our
and having fun. competitors initiated a cleanup of their GDS,
it resulted in several million dollars in addi-
Additional duties include exploring new tional revenue in six months.
revenue channels for the hotel. I have been
known to visit the local competitor on a par- Managing the reservations departments is
ticularly busy day and offer a shuttle to our the easy part of my job. Interacting with peo-
hotel and a no-line guarantee—this as the line ple is always easier than trying to interact
behind the front desk stretches out the front with numbers and reports. The staff must be
door and halfway to the street. I am responsi- kept up to date on changes in strategic goals
ble for researching the demographics of the of the hotel and changes in marketing the dis-
travelers coming to the area. Why are they count and frequent-stayer programs. I am re-
coming? Are they traveling because of busi- sponsible for ensuring that the training of the
ness, conventions, leisure, or are they part of a reservations staff and anyone else who takes
contract piece of business? How often do they reservations is consistent and current, com-
come? How long do they stay? How much do plete with ongoing positive feedback.
they spend when they come? Where are they
coming from? It is key that a revenue manager be
skilled in the art of diplomacy. As the liaison
The most important thing I do as a rev- between the operations and sales depart-
enue manager is to ensure the different rev- ments (see Waller, 7.2), I sometimes must me-
enue channels are set up and functioning diate any challenges that may occur. Part of
properly. These channels include the hotel the diplomacy is understanding each depart-
brand’s generic toll-free vanity number and ment’s strategic goals and how both depart-
central reservations office, the convention and ments depend on each other for their own
visitors bureau, the local hotel’s reservation survival. The easiest and simplest approach to
and front desk, the Internet, and the global serving as a liaison between the two depart-
distribution system (GDS). The most critical ments is facilitating frequent, open, and
of these channels is the Internet, which in- honest communication between all parties.
cludes the brand website. Only a few years ago

348 Chapter 7 ᭿ Marketing and Associated Activities

Having fun is one of my key goals in of the hotel is that it is open 24 hours a day
working at a hotel and in a regional capacity. and 365 days a year. Anything that can hap-
It is important to maintain a balanced ap- pen to a person on any given day can happen
proach to work in a hotel. It is easy to get at a hotel as well.
burned out trying to do too much. The nature

7.6 H O T E L S A L E S O R G A N I Z AT I O N A N D
OPERATIONS

Margaret Shaw and Susan V. Morris

᭤ SALES AND MARKETING a macro perspective, this planner has selected
the city and is searching for full-service lodg-
Sales and marketing are related concepts, ing accommodations for 200 TI sales represen-
tatives for a five-day conference. From a micro
and each is an art and a science. Sales flow perspective, he or she visits several hotel alter-
from marketing. Marketing, well stated by natives and meets with the hotel sales repre-
Lewis et al. (1995), “is communicating to and sentatives to find the best “fit.” Various
giving target market customers what they aspects of the meeting being planned are dis-
want, when they want it, where they want it, cussed including dates, rates, guest room ac-
and at a price they are willing and able to commodations, function room requirements,
pay.” The primary focus of sales is on the com- food and beverage services, and so forth. It is
munication aspect of marketing. It involves the job of the hotel sales manager to learn the
direct personal selling to potential customers specific needs and wants of the planner and
that you and your organization have the right “create” the right product, place, time, and
product, in the right place, at the right time, price for a successful conference.
and at the right price—be it a hotel, a restau-
rant, a casino, or contract food services. A successful conference is what the plan-
ner is really buying, not bricks and mortar.
Marketing is getting and keeping a cus- Thus, successful selling is understanding the
tomer, a macro approach to managing a suc- real needs of the buyer, communicating how
cessful business. In a broad sense, marketing is your product and service can best respond to
the development and delivery of a successful those needs, and then delivering it. In another
product, that is, the development and delivery context, McDonald’s Golden Arches markets
of a satisfied customer. Hotel sales comprises fun, simplicity, good service, and a good price.
finding that customer and matching his or her McDonald’s sells friendly service, good value
specific needs with the right product offering, for price paid, convenient locations, and those
a micro or one-on-one approach to customer delicious golden chicken nuggets on which
satisfaction. For example, a meeting planner many of us grew up. Ronald McDonald is an
from Texas Instruments (TI) is planning an an- ancillary product, a public relations endeavor,
nual sales meeting to be held in Dallas. From

349Section 7.6 ᭿ Hotel Sales Organization and Operations

which augments and supports the idea or con- quested by a guest. Sales is the sommelier in a
cept of kids and why they are special. gourmet restaurant recommending wines to
complement an entrée choice. Sales is the
Public relations, advertising, and special front office cashier saying, “Thank you for
promotions often support the selling effort. staying with us. We hope you enjoyed your
Advertisements for the Ritz-Carlton Hotel stay.” It is amazing how a simple thank-you
Company are directed to their business trav- can express appreciation for a customer’s pa-
eler clientele. Such advertisements incorpo- tronage and bring them back.
rate both the selling and marketing aspects of
this upscale hotel chain. The company is si- All client-contact personnel of a hospital-
multaneously selling hotel rooms to busy ity organization perform personal selling ei-
business executives and marketing a hotel ther consciously or unconsciously. This
that “remembers your needs,” and is hall- includes staff who does not regularly have
marked by the vision implicit in their slogan guest contact, such as the credit manager. One
“ladies and gentlemen serving ladies and gen- of the authors nearly lost a $100,000 annual
tlemen.” A travel agent, a corporate travel account when a poorly trained credit man-
manager, or a secretary, however, may have ager called the client to collect a payment that
handled the actual purchase of the hotel had not yet been billed. A well-trained and
room. Thus, the Ritz-Carlton advertisements motivated employee who understands how a
support the sale, but they do not actually hotel works is key to successful selling. This is
make the sale happen. accomplished through the hiring and training
process, and although the many facets of hu-
᭤ SALES AND OPERATIONS man resources are beyond the scope of this
chapter, its importance to guest satisfaction
Sales is the critical link between marketing cannot be overstated.

and operations. While hospitality profession- In this particular context, however, the
als may espouse marketing, all too often it be- hotel’s human resources department can per-
comes ignored in the daily hustle and bustle form services on behalf of the sales depart-
of operations. It is the role of sales to help ment by recruiting sales associates who
bridge this gap and find ways for the key understand the nature of the hotel industry
customer-contact members of the hotel to and its place in the broader category of the
keep the promise of marketing. services segment of business. Services are dif-
ferent from products and require specialized
Selling starts by the professional sales knowledge and training to be competitive.
managers prospecting, making contacts, es-
tablishing relationships with clients, uncover- Because hospitality is very much a part of
ing their specific needs and wants. But it the services industry, it is useful to understand
doesn’t end there. Sales is also the host or how services differ from products. Those
hostess greeting restaurant patrons. Sales is characteristics that are unique to the services
the front desk clerk welcoming a guest at the industry product include perishability, simul-
local Holiday Inn or at the Waldorf-Astoria in taneity, heterogeneity, and intangibility.
New York City. Sales is the housekeeping
staff delivering the extra set of towels re- Perishability refers to the short shelf life
of the hospitality product. If it is not sold to-
day, the potential revenue from the sales of

350 Chapter 7 ᭿ Marketing and Associated Activities

that product is gone. A hotel room has a 24- in service operations is dealing with reality.
hour shelf life. A restaurant seat has a two- Mistakes will happen. But more importantly,
hour shelf life. Manufactured goods have a mistakes can be addressed. Often a simple
much longer period of durability. If a televi- apology can win back a customer regardless
sion set is not sold today, it can be sold to- of who was at fault when a mistake happens.
morrow or next week. The potential revenue
from the sale of that product is not lost. But a Intangibility is a fourth major characteris-
Tuesday-night hotel room cannot be resold tic of service businesses. Some consider it the
on Wednesday. Tuesday has come and gone. If most important component to recognize. In-
the hotel guest room goes unsold Tuesday, the tangibility refers to the highly intangible na-
potential revenue lost from that vacant room ture of the service product offering.
cannot be recouped. Intangibility is a feeling; it is having a sense
about something that one cannot fully articu-
Simultaneity means that production and late. The intangible nature of the service prod-
consumption occur at the same time. How can uct cannot be prejudged. Consumers cannot
you produce a guest experience without the really see, touch, smell, hear, or taste a service
guest? Our customers, in a sense, are part of product prior to consumption. They can only
the assembly line. They need to be present for anticipate. One can test-drive a car before an
final production of the product offering. A va- automobile purchase is made to see what it
cant guest room produces nothing. Yes, the feels like to drive. But a hospitality customer
carpeting is installed; the bed is made, the cannot test-drive a hotel weekend package or
bathroom plumbing works. But it all just ex- a restaurant meal prior to consumption. The
ists until a guest arrives to use it. Simultane- intangibility aspect of hospitality emphasizes
ous production and consumption is a unique that service delivery is critical to customer sat-
challenge for successful operations in hospi- isfaction. Most customers have an idea of what
tality management. The guest needs to be to expect. But, in the end, they are really not
present, because many of the facets of the sure of what they are buying until the hospi-
service involve performances by hotel staff. tality experience actually takes place. Finally,
after the service has been consumed, the guest
A related service characteristic in hospi- has only the memory of the performance.
tality is heterogeneity. Heterogeneity refers to
the variability of service delivery. Guest ser- The foregoing unique characteristics rep-
vice agents have their moods. Customers have resent the foundational challenge to the ho-
their moods. All have personalities of varying tel’s sales staff: they must find a way to
shapes and sizes. Hospitality is a very people- promise performance and experience in such
oriented business. Service personnel change a way that the hotel’s operations departments
from shift to shift, typically on an 8-hour can deliver on the promise. If the essence of
schedule. Though operational manuals exist marketing is finding and keeping a customer,
in most hospitality establishments, rarely are then the sales promise is fundamental to that
policies and procedures followed in an exact effort. Operations’ most important role is the
manner. Guests’ “personalities,” too, can keeping of that promise to the customer—
change throughout their stay, and it may have having that customer walk away with a posi-
nothing to do with how they were treated by tive and memorable experience and want to
service personnel. Dealing with heterogeneity return again.

351Section 7.6 ᭿ Hotel Sales Organization and Operations

᭤ MANAGEMENT OF THE well. These are important issues in hospitality
SALES PROCESS sales management, and following is a more
detailed discussion of each.
Sales management is effectively directing the
᭤ Departmental
personal selling efforts of a hospitality estab- Organization
lishment. It involves managing the sales
process from both an individual and team Organizing a sales department means deter-
perspective. In other words, sales manage- mining who is going to do what. Sales solicita-
ment addresses the logistics of sales solicita- tion needs to take place, administrative tasks
tion and the development of sales account need to be completed, and managerial deci-
executives to enhance their sales productivity. sions need to be made on a regular basis. In
Sales account executives need to manage medium- to large-size hospitality establish-
their day-to-day activity, sales teams need to ments, a director of sales and/or a director of
coordinate their efforts, and customers need marketing coordinates these efforts. In
to feel that they are working with a profes- smaller operations, it is not unusual to have
sional and well-managed organization. one individual responsible for all of the
above. For most bed and breakfast operations
There are several components to hospi- in the United States and Canada and the
tality sales management. These include sales small boutique hotels in Europe, for example,
organization, sales account management, re- the owner and/or manager of the establish-
cruitment, training and development, goal ment typically handles sales activities.
setting, and performance appraisals. Sales or-
ganization refers to departmental and indi- Figure 7.4 is a sample sales organizational
vidual organizational issues and inventory setup for a midsize urban hotel targeting busi-
management. The following section focuses ness clientele. The sales managers in this ex-
on the sales organization aspect of hospitality ample are organized by target market and by
sales management. geographic territory. Sales manager 1 is re-
sponsible for corporate accounts located in
᭤ SALES ORGANIZATION the immediate downtown and surrounding
area. Sales manager 2 is responsible for na-
Sales organization can be viewed from three tional corporate accounts. This refers to com-
panies based in other areas that conduct
perspectives. These include departmental or- business or have the potential to conduct
ganization, individual planning of sales activ- business at the hotel. Both of these sales man-
ity, and inventory management. A sales agers solicit group and transient business
department needs to be organized, and sales from their account base.
managers within that organizational setup
need to coordinate their efforts. Sales man- Sales manager 3 targets meetings and
agers need to plan or organize their individual convention business from national associa-
activities on a daily, weekly, and monthly ba- tion accounts. This business may include exec-
sis. Allocating the sale of inventory to various utive board meetings, committee meetings,
customer segments needs to be managed, as regional conferences, and annual conventions.

352 Chapter 7 ᭿ Marketing and Associated Activities

Figure 7.4 Organization of an Urban bookings, verbal definites, cancellations, etc.
Hotel Sales Department (Verbal definites are bookings where clients
have verbally committed their meeting or
General Manager function to the facility but a signed contract is
not yet in hand.) In other words, sales man-
Director of Sales and Marketing agers share with each other progress reports
on various accounts they are currently work-
Sales Manager 1 ing on. Thus, each team member gets an up-
Corporate Market to-date informal report on the status of all
current sales activity.
(Metropolitan)
For example, one sales manager may be
Sales Manager 2 working on a tentative booking but considers
Corporate Market it weak because of strong competition for this
particular account. Call this Group A. An-
(National) other sales manager may have a new prospect
with similar space requirements interested in
Sales Manager 3 the same dates. Call this Group B. Assume,
Association Market however, that the property has the capability
of booking only Group A or Group B over
(National) the same dates because of space limitations.
When these types of issues surface at sales
In this example, once group events have meetings (which they frequently do), discus-
been booked they are turned over to the con- sion will occur raising the following types of
ference services department for service deliv- questions:
ery. Both the sales managers and director of
conference services report to the director of • What is the likelihood that either group
sales and marketing. The sales team meets will eventually book its business at the
weekly to discuss issues pertinent to achiev- property?
ing the department’s sales objectives.
• What is the estimated profitability and/or
Weekly sales meetings are very much a contribution margin for each group?
part of a sales department’s organizational
structure, be it a sales force of two or twelve • Is either group a regular client?
sales account executives. They are critical for
effective communication within the depart- • What is the likelihood of repeat business
ment. At these meetings, each team member from either group? In other words, what
highlights his or her weekly activity with re- is the long-term profitability for each?
gard to new prospects uncovered, tentative
• Can either group consider alternative
dates? (A very important question.) What
would incite them to move dates?

• Do convention history reports match
their current space allocation requests?

These are just a sampling of questions
that need to be raised and answered. It is a

353Section 7.7 ᭿ Putting the Public in Public Relations: The Case of the Seattle Sheraton Hotel and Towers

never-ending process in hospitality sales man- self-confidence, high energy, empathy, enthu-
agement to search for the best fit for both the siasm, and a sense of self-worth.
buyer and seller.
This chapter introduces the foundation
᭤ CONCLUSION for hospitality sales and marketing. First and
foremost, sales flow from marketing. If man-
The organization of sales management is the agement doesn’t have a marketing mindset,
then sales efforts will be all for naught.
process of directing the personal selling ef-
forts of a hospitality establishment. It involves Marketing is giving the targeted cus-
effectively managing the sales process from tomers what they want, when they want it,
both an individual and team perspective. where they want it, at a price they are willing
Sales or account managers need to manage and able to pay. Sales is direct communication
their day-to-day activity; sales teams need to with potential customers letting them know
coordinate their efforts. Sales account man- we have what they want. In many respects,
agement involves developing, maintaining, sales is the link between marketing and oper-
and enhancing customer relationships. Sales ations. Operations is essentially the delivery
managers develop expertise for specific mar- component of marketing and the final deter-
ket segments, industry segments, and/or cus- mination of a happy (or unhappy) customer.
tomer accounts, and common traits among
successful sales account executives include Marketing begins, transcends, and ends
with the consumer. Sales makes sure it
happens.

7.7 P U T T I N G T H E P U B L I C I N P U B L I C
RELATIONS: THE CASE OF THE SEATTLE
SHERATON HOTEL AND TOWERS

Louis B. Richmond

The powerful world of nonprofit organiza- convention hotels usually rests on the ap-
tions can make or break a hotel. This is a very proval of large associations, meeting planners,
strong statement when you consider our pub- Mobil and AAA awards, and myriad corpo-
lic relations firm, Richmond Public Relations, rate decisions, nonprofit organizations defi-
represents the Seattle Sheraton Hotel and nitely play a role in a hotel’s financial success.
Towers, a hotel that has potential revenues of The time and effort that hotels allot to public
$80 million to $100 million a year in rooms, relations and nonprofits can profoundly influ-
food, and beverage and employs more than ence destination decisions of meeting plan-
600 people. Although the fortune of large ners and major associations.

354 Chapter 7 ᭿ Marketing and Associated Activities

᭤ DONATIONS, cause of its donation to his child’s school. Be-
DONATIONS cause we were the only hotel to donate a
room to his child’s school auction, he felt an
Every day the Sheraton receives three or four obligation to have his guests stay at the Sher-
aton. Therefore, his company was moving
letters from local organizations soliciting do- from another hotel to ours because of a dona-
nations of cash, rooms, and meals for benefits, tion that in actuality cost about $35. The po-
auctions, and raffles. These seemingly simple tential revenue from his account was valued
requests add up to approximately 1,000 re- in the thousands of dollars. Additionally, his
quests every year. All of these organizations company is a member of trade associations
have nonprofit status and are doing valuable that hold numerous regional and national
work in the community. They range from the conventions that can also influence business
symphony, opera, and ballet to large hospitals to the Sheraton.
and universities. The smallest of preschools
and local grassroots citizen activist organiza- Other benefits linked to this donation
tions are also regular solicitors. Each of these were that the Sheraton’s name was seen in
organizations has a mission and purpose, that, print on more than 1,000 raffle tickets, and
if realized, could make the community a bet- people who attended the drawing were made
ter place in which to live. Because mostly aware of the Sheraton’s contribution. The re-
every request is valid, how does the hotel or turn on investment from this one donation
public relations firm go about deciding which was enormous in direct revenue alone and
organizations to support? Each decision must also generated an excellent amount of good-
be based on a benefit to the hotel. will in the local community. All of this rev-
enue and potential revenue was due to one
Let me give an example of how working small donation!
with the community has, indeed, benefited the
hotel. One such request was a handwritten ᭤ ASSOCIATIONS,
note from an elementary school student re- NATIONAL MEETINGS
questing a complimentary room for her
school raffle. We were promised in the letter When large associations choose Seattle as
that the hotel would be mentioned in the raf-
fle and given as much publicity as possible. the host city for their national conferences,
This school was located 20 miles from the ho- the individual hotels bid on being the host ho-
tel in a small town that, on the surface, did not tel. The host hotel is in a favorable situation
seem it could provide a lot of return benefit to concerning room rate and food and beverage
the hotel. Due to the sincerity of the request, functions. A well-thought-out public relations
we decided to donate a room package. About program can play an important role in an as-
four months after the donation was made, our sociation deciding which hotel to use. Work-
firm received a call from someone who ing with the sales staff, the public relations
worked for a very large company in Seattle firm can obtain as much information about
wanting to make room reservations. He called the association as possible and decide how
me rather than the hotel because he wanted they can influence the association to use the
me to know he was booking the Sheraton be- Sheraton.

355Section 7.7 ᭿ Putting the Public in Public Relations: The Case of the Seattle Sheraton Hotel and Towers

A major southwestern association was the hotel in the future by booking rooms for
in the process of deciding which hotel to use other events. Most members of the boards of
for its Seattle conference. With research, we directors of nonprofit organizations are lead-
found that this particular organization sup- ers in the community and business world.
ported a major national charity that was also Their recommendation can go a long way to-
supported by the Sheraton. We contacted the ward securing a favorable image for the hotel
director of the local charity organization, in the local market.
who, in turn, phoned his counterpart in the
southwestern city. He was informed of the In dealing with social catering events for
Sheraton’s sponsorship of his nonprofit and nonprofit groups, we always inform organiza-
that one of his large corporate sponsors was tions that the hotel staff will work closely with
looking for a hotel to use in Seattle. The di- them to ensure the success of their event.
rector of the southwestern nonprofit called However, the nonprofit must clearly under-
his contact in the corporation and apparently stand that the hotel is a for-profit business. We
did a good job of convincing him to use the have to strike a deal that is good for the or-
Sheraton. Whether or not the decision was ganization and, at the same time, good for the
made directly because of this call or the com- hotel. The organization is helped to under-
bination of other sales efforts, most of the stand that the more profitable the hotel, the
sales and marketing staff concurred that the more support can be provided for the non-
hotel’s support of the local nonprofit organi- profit organization. If the hotel does not
zation was instrumental in securing a major make a profit, it cannot continue to offer its
piece of association business. We have found support. By offering the organization special
that the nonprofit world will go all out to help services rather than lowering the price to the
corporations that help them. In addition, non- point where the hotel will not make any
profit organizations can effectively utilize this profit, we ultimately help the organization
win-win model of partnership between busi- raise even more money for their event. We
ness and nonprofits to solicit help from other have come up with many creative contribu-
companies and businesses. tions to nonprofit organizations that not only
increase their potential for raising money but
᭤ SOCIAL EVENTS AND also favorably highlight the services of the
FUND-RAISERS hotel.

The social catering business is fiercely com- One of the hotel’s most popular dona-
tions to nonprofit organization auctions is a
petitive. Nonprofit organizations are always series of cooking classes for ten people that
seeking the lowest possible rates and prices, includes a kitchen tour and lunch. This item,
but because of their standing in the commu- usually set at a minimum bid of $500 to $700,
nity, they sponsor important events at hotels. enables a group of people to combine their fi-
The more prestigious the organization, the nancial resources for a potentially higher bid.
higher the ticket price and the more potential The cooking classes also enable the hotel to
that the attendees can generate revenue for highlight one of its chefs and give people a
back-of-the-house view of the kitchen. We
have tracked the success of these cooking
classes and found that almost every one of the

356 Chapter 7 ᭿ Marketing and Associated Activities

participants has booked reservations in the ᭤ HOLIDAY CARD
hotel restaurants. What is given away as a do- PROGRAM
nation comes back many times over in in-
creased business and greatly enhances the Another significant community contribution
perception of the hotel’s goodwill in the
community. we make is our annual holiday card. Each
year we select a different organization to be
Another innovative donation was a tour the beneficiary of this program. We print the
with the hotel’s curator of the corporate art Sheraton corporate holiday card and then
collection. The Sheraton, well known for its provide the organization with an extra 10,000
art collection, employs a professional curator. cards for its own fund-raising campaign.
Most of the major social service organizations These cards are printed at no charge to the or-
and nonprofit organizations show an interest ganization as long as they provide us with
in the arts, and this type of donation stands original artwork. The organization that is cho-
out from the overnight accommodations typi- sen is always selected so there is a return to
cally offered by other hotels. the hotel. The organization chosen in 1987
had previously held a major event at another
The hotel’s limousine can also play a part hotel. We informed them that if they switched
in the donation program. The use of the lim- to the Sheraton, they would be the beneficiar-
ousine always adds a prestigious quality to a ies of the 1988 holiday card campaign.
gift and raises more money for the organiza-
tion while costing the hotel only a minimal la- ᭤ CONTROL
bor and operating cost.
The hotel has certain prerequisites in making
Making a major donation to social cater-
ing fund-raisers that are booked in the hotel donations to nonprofit organizations.
helps ensure the event will be rebooked the
following year (assuming the food and service 1. The organization must be a 501(c)3 or-
are high quality). The ability to predict annual ganization recognized by the Internal
bookings provides savings in sales staff time Revenue Service.
and marketing efforts.
2. A request must be received in writing on
When major social catering events are the organization’s stationery.
held in other hotels, the Sheraton also makes
significant donations to show organizations it 3. The organization must return to the hotel
is interested in supporting their cause no mat- written notification of the donation
ter where their event is held. Of course, the through a raffle advertisement, program
hotel remains interested in having the group book, or announcement.
book their event at the Sheraton next season.
However, our agency always encourages the 4. The donation must be in a live and not a
Sheraton to purchase a table when events are silent auction whenever possible.
hosted in another hotel, for several reasons: to
show support for the organization; to let the 5. All responses are filed, and when a re-
staff see how the event is managed at another quest for next year’s gift arrives, we check
facility; and to compare quality of service and to see if we received the recognition we
food. required.

357Section 7.7 ᭿ Putting the Public in Public Relations: The Case of the Seattle Sheraton Hotel and Towers

Different levels of donations are awarded • Major, alternative, and community the-
based on the event and the amount of recog- ater companies
nition received. The Sheraton has donated gift
certificates to the dessert buffet and a dinner Health Organizations
for 100 people in Fullers, the hotel’s award- • Hospitals
winning restaurant. • Medical schools
• Research centers
Our commitment to the community is
based on the belief that each member of the Educational Organizations
organizations we support can act as a public • Alumni associations
relations spokesperson for the hotel. When • University and college fund-raising cam-
businesses help organizations, their members
and volunteers usually develop a loyalty to paigns
the giver. Our goal is to infiltrate the commu- • High school and PTA organizations
nity aggressively as a good corporate citizen. • Preschool and private school fund-raisers
At the same time, we want the community to
know that we need their business. The more Religious Organizations
business they give us, the more help we can • Churches
return to the community. • Synagogues
• Religious schools and camps
᭤ CLASSIFICATION OF • Adult religious community organizations
ORGANIZATIONS
Social Service Agencies
The nonprofit world can be divided into six • United Way
• Community charity groups
general areas, as set out below. For each clas- • Neighborhood grassroots organizations
sification, major examples of the many possi- • Charities such as Easter Seals and March
ble representative organizations are listed.
of Dimes
Cultural Organizations • Food banks
• Cystic Fibrosis Foundation
Most of these organizations have a large and • Juvenile Diabetes Foundation
prestigious board of directors. There is a • Boy Scouts of America
tremendous amount of potential room busi-
ness and catering functions from the organi- Social and Fraternal Organizations
zations and their board members. • Rotary
• Kiwanis
• Symphony orchestras, opera companies, • Elks
ballet companies, chamber music organi- • Shriners
zations, and presenting organizations, as
well as campus cultural organizations

• Art museums, museums of history and in-
dustry, science museums, and craft and
folk art museums

358 Chapter 7 ᭿ Marketing and Associated Activities

᭤ MARKETING newsletter will go a long way in justifying
APPROACHES your investment. If you are trying to attract
the organization, it must have an audience
Before you approach an organization, you that is part of your marketing mix. Calculate
what it would cost to advertise in their pro-
need to have a plan that puts you on the of- gram book throughout the season. Bargain
fensive rather than the defensive. Many times with the organization for a complimentary ad
hotels find themselves responding to people for the amount of the donation you are mak-
asking for money rather than actually going ing. Other possible returns for your donation
to the organization to tell them they are there include:
to help them. The more creative you can be,
the easier it will be for the organization to • Having the organization give the hotel
work with you. Your plan should include re- complimentary tickets that can be used by
searching the following items: the staff for entertaining clients. This
strategy can be effective if concerts are
• The members of the board of directors sold out and your hotel is in possession of
and their company affiliations the only tickets.

• The needs of the organization • Asking the organization to give you ac-
cess to their mailing list. This strategy can
• Their budget—easy to do because they be crucial in trying to publicize a new
are a tax-exempt organization weekend program or the opening of a
new food and beverage outlet.
• Past catering functions—where they were
held, prices, and number of attendees • Requesting the organization to commit to
a two-year contract. This strategy not only
• Housing needs of the organization and makes it easier for the organization to
how you can help plan ahead but helps the hotel in project-
ing revenues.
Read newspapers about the organization
and totally familiarize yourself with their • Donating meeting rooms to the organiza-
goals. Make sure you meet with a major staff tion for seminars and retreats if food and
member and a board member. To meet with beverages are ordered. Most organiza-
just one or the other simply means you will tions have to pay for meeting facilities.
have to hold another meeting to review what
you discussed at the last meeting. The most One of the most important aspects of any
important overall consideration is to under- donation is the follow-up. Make sure you are
stand the nonprofit organization’s needs and aware of the news created by the organization
to work together with their representatives you are helping and make them feel they are
for a win-win solution. part of your organization. If major events
take place, have the hotel’s general manager
Make sure you work out before the event send a congratulatory letter. If someone has a
how the hotel will be credited and recognized. birthday, have your pastry chef send over a
Recognition of the hotel’s contribution is of- birthday cake. If you can help them publicize
ten assumed, forgotten, or left to chance. The their events in your newsletter, work with
hotel can be recognized in many ways. A com-
plimentary ad in a season’s program or

359Section 7.7 ᭿ Putting the Public in Public Relations: The Case of the Seattle Sheraton Hotel and Towers

them and inform them you are giving them win-win situation, the symphony supporters,
complimentary publicity. Work together all their board of directors, and their musicians
the time so that each organization receives act as public relations spokespeople for the
something from each other, if possible, on a Sheraton. In many ways, the results of this
fairly regular basis. strategy have ensured several hundred people
working on our behalf.
᭤ CASE STUDY
᭤ PRESS AND MEDIA
Our firm approached the board of directors
It is important to remember that the people in
of the Seattle Symphony in hopes that they
would move a major luncheon to the Shera- the press are also part of the community. Ul-
ton. We told them we would be happy to offer timately, donations to nonprofits will touch
complimentary room accommodations for many press and other media people in per-
the conductor and his wife for the duration of sonal ways by helping their local organiza-
the symphony season if they would help influ- tions, such as schools, hospitals, and social
ence their women’s organization to use the service and cultural organizations. They will
Sheraton for their luncheon. By hosting the be especially interested in publicizing events
conductor and his wife in the best available with personal impact. It is also important to
room, we not only built up a good relation- realize that hotels with many events create a
ship with the conductor but also showed the buzz that generates more local press activity.
board of directors we were very interested in Organizations like to be involved in active
supporting the symphony. and exciting hotels. If a certain number of
events are in one hotel and twice that amount
By proactively informing the board of di- are in another hotel, the more active hotel is
rectors that the Sheraton was committed to bound to have more requests for events.
the symphony, we, at the same time, helped
them understand our need for their board ᭤ COSPONSORSHIP
members’ business so we could continue our
support for them. Donating to significant cul- Another effective way to maximize public re-
tural institutions is often a sound business de-
cision because most members who serve on lations in the area of nonprofit donations or
boards of large cultural organizations are the charities is to cosponsor events with radio sta-
community’s business leaders. They know the tions or newspapers. The exposure that can be
wisdom of a sound decision, and, indeed, con- provided through this medium not only
tinue to offer ongoing support to the Shera- places your property with other responsible
ton. As a result of the Sheraton donating a companies but helps spread the word of
room to the conductor and his wife, the sym- your company’s involvement automatically
phony moved the luncheon to the hotel. The through the media.
hotel maintains a strong relationship with the
conductor, and the symphony continues to Take advantage of your local and regional
use the Sheraton for their room, food, and radio stations to develop joint promotions.
beverage business. In a classic example of a Work with the promotion director to find out

360 Chapter 7 ᭿ Marketing and Associated Activities

how the hotel can help the station’s favorite Identify corporations that have branches
charity. Donate the ballroom or smaller meet- in feeder cities with ties to major nonprofit
ing rooms for dances, parties, etc., with a guar- organizations. Any time your property can get
antee of a no-host bar. The radio station acts its name across to the public in a major feeder
as a free advertising service to draw people to market, you reinforce advertising dollars or
the event. It is in their best interest for their actually save them. Remember, the return on
advertisers to draw large audiences. Have the investment, if carefully monitored, can be
nonprofit organization receive an admission significant.
charge to the event so that it is up to the non-
profit organization to also try to draw a large ᭤ CONCLUSION
audience. By working with the radio station
and the charity, the hotel not only maximizes The more times your hotel property is written
its exposure but also increases its potential
revenue. and talked about, the more people automati-
cally identify it with positive community ac-
᭤ REGIONAL tivity. It is eventually in the best interest of a
ORGANIZATIONS community to ensure the business success of
your hotel when it knows you will help its fa-
Identify major nonprofit organizations in vorite charities or organizations. In order to
work with the community, you must educate
feeder markets and work with them in their the community to work for and with you. The
major fund-raising events. This will help in- best recommendation is that made by the
crease weekend business and act as a rein- public, and only when public relations truly
forcer to advertising placed in those markets. works with the public can the property bene-
The impact of regional organizations can be fit. By putting the public in public relations,
just as strong as your local organizations. If the public speaks for you and your property
your property has a strong regional weekend and results in profits through public relations.
market, this program can be an effective way
to increase room business.

7.8 M I N I C A S E : R E VA M P I N G T H E
MARKETING RESEARCH DEPARTMENT

You’re the new director of marketing re- of 38 independently owned and operated ho-
search for the Mississippi Region Affiliated tels has become a major player in its regional
Resorts (MRAS), located along the length of competitive marketplace. As part of the com-
the Mississippi River from Minneapolis to pany’s strategic plan, however, it has been de-
Memphis. This branded distribution company termined that the structure of the market is

361Section 7.8 ᭿ Mini Case: Revamping the Marketing Research Department

changing, and the general future direction of lucrative conventions and meetings market
the hotels will be toward more sales and ser- with the hard-flagged chains.
vice to the conventions and meetings market
that has become increasingly important be- This strategy and capital investment re-
cause of the central location of the chain. quires a consequential change in research
paradigms. As the director of marketing re-
To become more competitive in this bur- search, you’ve been requested by the com-
geoning market, the company has undertaken pany president to propose a completely
and encouraged an ambitious remodeling revamped research department that will re-
program among its members that has up- flect this new strategy and be designed to help
graded the furnishings, fixtures, and equip- the independent member hotels market their
ment of the hotels. The hotels are also new facilities most effectively.
committing to a minimum of the following
capital investments: Propose a model marketing research de-
partment for your firm that will produce the
• 60,000-square-foot ballroom sorts of data that hotels in the chain can use to
help compete with the national chains. In-
• 30,000 square feet of meeting and break- clude in your proposal what new sorts of data
out rooms would be most useful, where those may be
found, and how they might be specifically use-
• 15,000-square-foot registration and pre- ful to reflect the new mission.
function areas

With these upgraded facilities, the com-
pany feels it can compete effectively for the

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SUGGESTED READINGS

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NJ: Waterbury. Cornell Hotel and Restaurant Administration
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ning the Market Share Game.” Cornell Hotel
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NY: Delmar. 27(3):73–79.

Kotler, Phillip, John T. Bowen, and James C. Mak- Levitt, Theodore. 1981. “Marketing Intangible
ens. 1996. Marketing for Hospitality and Products and Product Intangibles.” Cornell
Tourism. Upper Saddle River, NJ: Prentice- Hotel and Restaurant Administration Quar-
Hall. terly (August):37–44.

Kudrie, Albert E., and Melvin Sandler. 1995. Pub- Lieberman, Warren H. 1993. “Debunking the
lic Relations for Hospitality Managers: Com- Myths of Yield Management.” Cornell Hotel
municating for Greater Profits. New York: and Restaurant Administration Quarterly
John Wiley and Sons. 34(1):34–41.

Lewis, Robert C. 1989. Cases in Hospitality Mar- McCleary, Ken. 1993. “Marketing Management.”
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ley and Sons. Tourism, Mahmood Kahn, Michael Olsen, and
Turgut Var (eds.). New York: Van Nostrand
Lovelock, Christopher, and Lauren Wright. 1999. Reinhold.
Principles of Service Marketing and Man-
agement. Upper Saddle River, NJ: Prentice- Morgan, Michael S. 1991. “Travelers’ Choice: The
Hall. Effects of Advertising and Prior Stay.” Cornell
Hotel and Restaurant Administration Quar-
Lovelock, Christopher. 2001. Services Marketing: terly 32(4):41–49.
People, Technology, Strategy. Upper Saddle
River, NJ: Prentice-Hall. Nordling, Christopher W., and Sharon K. Wheeler.
1992. “Building a Market Segment Model to
Shaw, Margaret, and Susan V. Morris. 2000. Hospi- Improve Profits.” Cornell Hotel and Restau-
tality Sales: A Marketing Approach. New York: rant Administration Quarterly 33(3):29–36.
John Wiley and Sons.

SOURCE NOTES

Chapter 7.2, “Building Market Leadership: Mar- Chapter 7.4, “Hotel Pricing,” by Marta Sinclair and
keting as Process,” by Fletch Waller. Carl R. Sinclair.

Chapter 7.3, “Consumer Decision Rules and Im- Chapter 7.5, “A Day in the Life of a Regional Rev-
plications for Hotel Choice,” by Bianca enue Manager,” by Paul Chappelle.
Grohmann and Eric Spangenberg.
Chapter 7.6, “Hotel Sales Organization and Oper-

363Section 7.8 ᭿ Mini Case: Revamping the Marketing Research Department

ations,” by Margaret Shaw and Susan V. Mor- Chapter 7.7, “Putting the Public in Public Rela-
ris, adapted from Hospitality Sales: A Market- tions: The Case of the Seattle Sheraton Hotel
ing Approach, by Margaret Shaw and Susan V. and Towers,” by Louis B. Richmond.
Morris, Copyright © 2000 by John Wiley &
Sons, Inc. Reprinted by permission of John
Wiley & Sons, Inc.



chapter eight

FINANCIAL CONTROL
AND INFORMATION

MANAGEMENT

8.1 I N T R O D U C T I O N

This section on financial control and informa- departments have been reorganized so that
tion management was substantially reconfig- major portions of their functions are now re-
ured for the third edition. At the suggestion of sponsible to the controller’s office. The prime
reviewers and textbook users, articles were example of this is in the front office, where in
chosen to illustrate the relationships among the past the front office manager supervised
and between the activities that contribute to the activities of the night audit staff, cashiers,
the hotel’s profitability and operational suc- and other front desk clerks. Increasingly, hotel
cess through the managerial responsibility for firms are transferring the responsibility for
operational control. That philosophy is con- night audits and cashiers to the accounting of-
tinued in this fourth edition. fice, with the ultimate responsibility for these
information-gathering and controlling func-
As a department, financial management tions resting with the hotel controller.
in a hotel—called many things, but usually
controller—is far more important to the suc- It should also be noted that an increas-
cess of that hotel than the few readings in- ingly important department in hotels is the
cluded here would suggest. In most major one responsible for the swiftly changing
hotel firms, the chief financial officer or con- world of information management, or infor-
troller ranks among the top two or three deci- mation technology (IT). In many instances, IT
sion makers in the hotel’s hierarchy. The is now also the responsibility of the hotel con-
importance of this job can be established by troller. This recognizes the training and the
the observation that many traditional hotel ability of hotel controllers to provide for the

365

366 Chapter 8 ᭿ Financial Control and Information Management

structured accumulation, storage, and report- for a look at the chief financial executive’s job
ing of data in forms that are most useful to the in his “As I See It” essay. Pay particular atten-
operating departments and other executives tion to his war story about the budget-
of the hotel. ing process—and, yes, the lessons from the
embezzler.
In his lead article on the hotel chief finan-
cial executive, longtime contributor to this se- No discussion of financial and opera-
ries of books Professor Ray Schmidgall, tional control in a hotel would be complete
Hilton Professor with the School of Hospital- without attention paid to the extremely im-
ity Business at Michigan State University, re- portant function of purchasing.
views recent research on the hotel controller
and compares findings over time. This review In the past, when the bulk of a hotel’s pur-
presents a good view of the job and responsi- chasing revolved around food and beverage
bilities of this key hotel executive. Schmidgall items, the executive chef, chief steward, and
finds interesting differences in the groups other department managers usually devel-
studied over the years and provides a wider oped their own sources for the goods and
window for viewing the hotel controller as a services needed to effectively and efficiently
career path in management of a modern hotel run their department. In the modern context,
operation. In the past, students were merely however, with the vast and diverse needs of
instructed in the process of accounting and au- hotel operating and staff departments, this
diting and, for the most part, were unaware of practice is no longer advisable. Neither is it a
the sort of career that can result from a flair good idea from a control standpoint. Most ho-
for management, leadership, and number- tel companies have established a professional
crunching. purchasing function. If purchasing is not a
whole department, it is the responsibility of at
In Schmidgall’s companion piece written least one highly experienced individual.
with Agnes DeFranco, the critical practices of
budgeting and forecasting are examined. The purchasing director or manager typi-
While this is only a sampler of the critical du- cally is a person who knows a great deal about
ties of the hotel’s financial function and its departmental operations in every phase of
leadership, in today’s business environment the hotel. He or she is able to discuss and an-
the accuracy of forecasting and budgeting alyze intelligently the needs of all department
may indeed be the difference between profit managers. This individual is expert in the
and loss. markets where hotels purchase goods and
products essential to accomplishing the de-
If the Schmidgall and DeFranco pieces partment and hotel missions. The purchasing
represent the academic side of examination director is familiar with variety, quality stan-
of the hotel’s financial leadership, Mike dards, style, and methods of packaging. Such
Draeger is the chief financial executive who arcane technical details as chemical composi-
lives the theory on a daily basis. After a sig- tion, fabric and furnishing lifetimes, and other
nificant career with Four Seasons Hotels and details too numerous to mention here are also
Resorts and the Cal-Neva Lodge, he now the responsibility of the purchasing manager.
serves as the controller for a company operat-
ing a number of casinos in Nevada. Join Mike Lee Evans, who held corporate executive
positions in purchasing with Station Casinos,

367Section 8.1 ᭿ Introduction

Westin Hotels and Resorts, and at the hotel ponent. In the last edition of this book, I in-
level, offers the reader real-world insights cluded an article about data warehousing. In
into the duties, responsibilities, and interac- the words of the author (Griffin, 1998), “data
tions of the hotel purchasing director. His es- warehousing” represents a “central informa-
say provides rich detail and examples of tion storehouse designed to answer business
how a hotel’s purchasing director fulfills the questions.” This usually involves a company-
purchasing requests of numerous hotel de- wide database system designed to provide in-
partments. Evans is currently director of pur- formation to all corporate components. In a
chasing for the Oasis Resort, Casa Blanca Spa way, information has become a commodity,
and Golf Resort, and the Virgin River Hotel and data warehouses are designed to most ef-
and Casino in Nevada. ficiently manage this new commodity. Well,
maybe. According to the “Data Mining. . .” ar-
Few people in this day and age would dis- ticle included here by Magnini and his coau-
agree that the management of data and infor- thors, identifying important variables in these
mation in all its forms is critical to business warehouses can be a daunting task; hence the
success. As recently as 1995, the year the sec- need for data mining. Their article discusses
ond edition of this book was published, the this new development.
Internet and World Wide Web were still
pretty much off the radar screens of most Because this area is so volatile and devel-
businesses. Well . . . now it seems that the opments in IT happen so swiftly, it is probably
pace of technology and the means and neces- best for the student to develop broad, general
sity to manage huge volumes of information outlines of what is possible rather than, in the
are as common as any other aspect of busi- context of this textbook, to focus on details of
ness in the twenty-first century. In other current technology. As we’ve seen, progress in
words, “What did we ever do without it?” even our desktop computers has been so
rapid that any current writing will probably
That’s why I am hesitant to include too be outdated by the time this book reaches
many readings here about IT and information print.
management—it will be old news in a couple
of years, or maybe even a couple of months. I The articles included in this section are
bought a new PDA last summer (2004), and it designed to help the reader gain knowledge
is already out of date! about and appreciation for the range and
realm of activities, largely behind the scenes,
The success of any hotel firm in the mod- that contribute to the financial and opera-
ern era will depend on how well it manages, tional health of the hotel. These activities are
controls, and utilizes the available informa- often overlooked by those of us who focus
tion. This is true for current operations, but as our attention on the more public aspects of
managers develop new—unheard-of now— hotel management, but they are, nonetheless,
sources of information in the lodging business critical to any hotel’s success.
environment, the information will have to be
managed like any other asset or product com-

368 Chapter 8 ᭿ Financial Control and Information Management

8.2 T H E L O D G I N G C H I E F F I N A N C I A L
EXECUTIVE

Raymond S. Schmidgall

Chief financial executives of lodging opera- certifications bring immediate recognition to
tions are given various titles including these professionals in the hospitality industry.
controller, chief accounting officer, vice
president–accounting, and chief financial offi- ᭤ PAST RESEARCH
cer. The most common title, at the property
level, is controller. Who are these people? Over the past 20 years, several studies have
What are their skills? What responsibilities do
they have? Answers to these questions and been made of HFTP members. Geller and
many others are provided in this chapter. Schmidgall conducted one of the first studies in
1984.They surveyed 1,000 HFTP members, and
The lodging financial executive histori- 311 lodging financial executives completed
cally was viewed as a mere bookkeeper—that questionnaires covering education, skills, au-
is, he or she prepared financial statements. thority, responsibilities, salaries, and involve-
Research shows that the lodging controller ment with committees of their properties.
has evolved into a full-fledged member of the
management team of a lodging property. Geller, Ilvento, and Schmidgall replicated
this study in 1990, mailing the questionnaire
Considerable research has been con- to 750 members of the HFTP associated with
ducted over the past 20 years of the member- the lodging industry.
ship of the Hospitality Financial and
Technology Professionals (HFTP), formerly The DeVeaus surveyed the 291 CHAEs
known as the International Association of in 1988. Their survey covered the usual demo-
Hospitality Accountants. The results of this graphics of age, gender, title, compensation,
research form the basis for this chapter. The and education. They also addressed marital
HFTP was founded in 1953 for the purpose of status, hours worked, and community/indus-
advancing the accounting profession. Its chief try participation. This study included all
publication, The Bottomline, is published CHAEs, not only those in the lodging seg-
eight times annually (bi-monthly and two spe- ment of the hospitality industry.
cial editions). The HFTP currently has over
4,300 members in over 50 countries. The Tse surveyed the HFTP membership in
HFTP in 1981 established the Certified Hos- 1989, covering three specific areas as follows:
pitality Accountant Executive (CHAE).
Since that time, more than 840 hospitality ac- • Demographic information such as age,
countants have earned their CHAE. In 1994, gender, and educational level
the HFTP established the Certified Hospital-
ity Technology Professional (CHTP), and in • Professional activities such as position ti-
the past six years over 100 technology profes- tle, years in profession, and buying
sionals have earned their CHTP. These two authority

• Information about the respondents’
companies

369Section 8.2 ᭿ The Lodging Chief Financial Executive

Her survey was not limited to members ᭤ Gender
associated with the lodging industry, though
hotels and resorts employed over 65 percent The three studies covering age also included
(648) of the respondents. gender of respondents. DeVeau and DeVeau
reported 20 percent of their respondents were
Damitio and Schmidgall updated Tse’s female, while Tse reported 25.7 percent and
1989 study in 1996. Three hundred mem- Damitio and Schmidgall reported 28.7 per-
bers associated with the lodging industry cent. This trend of an increasing percentage of
responded. females is expected to continue, as a majority
of students in both accounting and hospitality
᭤ PROFILE OF THE programs at colleges and universities across
LODGING FINANCIAL the United States are female.
EXECUTIVE
᭤ Education
The demographic information of lodging
All five studies surveyed lodging financial ex-
financial executives includes age, gender, ecutives with respect to their levels of educa-
education, certification, experience, and tion, as shown in Table 8.1. The most common
compensation. degree in all studies is the four-year college
degree. The DeVeaus reported 68 percent of
᭤ Age their respondents have a bachelor’s degree,
while Tse reported a low of 55 percent. The
Three of these studies report the age distribu- DeVeau study was limited to CHAEs, while
tion of respondents to their studies. The De- the Tse study covered members of HFTP
Veaus’ respondents averaged 40 years old, from all hospitality segments. The DeVeaus
and the largest group of respondents (57 per- reported only 8 percent had earned master’s
cent) was between 30 and 39 years of age. Tse degrees, while later studies reveal master’s re-
reported that 25 percent of her respondents cipients in double digits and increasing to 14
were 31–35 years of age and that two-thirds percent in the most recent study by Damitio
were in the 26–45 age groups. She did not re- and Schmidgall. Increases in graduate degrees
port an average age; however, based on her can be expected to continue in the twenty-
reporting of salary by age, it appears that the first century.
average age was approximately 38. Damitio
and Schmidgall reported an average age of Three studies included the major of the
37, with 72 percent of the respondents be- college graduates. The Geller et al. studies re-
tween the ages of 30 and 46. Thus, the trend port that 55 percent and 56 percent, respec-
suggests a slight reduction of the average age tively, have degrees in accounting, while the
as the HFTP membership expanded from DeVeaus report only 37 percent. Another in-
1988 through 1995. This trend can be expected teresting statistic is the increasing percentage
to continue as HFTP’s membership grows. of financial executives with degrees in hospi-
tality education. Geller and his coresearchers,
in their 1990 study, suggest the dramatic

370

Table 8.1 Level of Education

Level of Education Major of College Grads
High School
Associate’s Bachelor’s Master’s Other Accounting Hospitality

Geller and Schmidgall 10%2 11% 61% 11% 2%2 56% 8%
DeVeau and DeVeau 12%1 11% 68% 8% 1%2 37% 7%
Tse 22%2 9% 55% 13% 1%2 — —
Geller et al. 15% 58% 13% 6%3 55% 17%
Damitio and Schmidgall 7%2 11% 58% 14% 2%2 — —
15%4

1The DeVeaus reported 12 percent as “none” but did not include high school as a level. Presumably these CHAEs have at

least a high school diploma.
2Tse reported 18 percent as having some college but less than an associate’s degree. This 18 percent is combined with the

4 percent with high school diploma to equal the 22 percent reported above.
3Geller et al. states that in most cases “other” represents multiple degrees, such as two master’s degrees.
4Damitio and Schmidgall combined 3 percent with high school diplomas with 12 percent of those with some college.

371Section 8.2 ᭿ The Lodging Chief Financial Executive

increase to 17 percent from only 8 percent in ᭤ Experience
1984 may be because students graduating from
hospitality programs are choosing to work in Several studies provide limited insight into
accounting or because lodging companies are the professional work of the lodging financial
beginning to recognize the value of hospitality executive. The DeVeaus reported that 53 per-
education for accounting positions. cent of the CHAEs have between 10 and 15
years of work experience and that the average
᭤ Certification is 16 years.

The DeVeau and DeVeau study focused on Tse reported that a plurality (24 percent)
HFTP members holding the CHAE. In addi- of lodging controllers had 11 to 15 years of
tion, they reported the highest percentage of work experience. Geller et al. reported a me-
certified public accountants (CPAs). The dian average of 10–12 years of hospitality ac-
other studies suggest an increasing percent- counting experience, while the median from
age of lodging financial executives earning the Damitio and Schmidgall study was 11–15
the CHAE from 8 percent in the Geller and years. Across these four studies, the average
Schmidgall study in 1984 to 20 percent in the years of experience (generally hospitality-
Damitio and Schmidgall study, conducted in related) is 10–15. The average years added to
1996. In addition, the total certifications in- an expected age of 21 or so at graduation with
creased from 21 percent in 1984 to 52 percent a bachelor’s degree suggests that most lodg-
in 1996, as shown in Table 8.2. By any meas- ing financial executives have spent most of
ure, this is a dramatic increase. This increase their professional years working in the hospi-
clearly supports Schmidgall and Kasavana’s tality industry, as their average age in the
conclusion regarding certifications: most recent study was 37.

“. . . initials after one’s name suggest excel- ᭤ Compensation
lence, failure to have earned the initials may
well lead one’s peers and supervisors to ques- A major element of each study is the compen-
tion not only one’s knowledge but also abili- sation of hospitality financial executives. Of
ties.” (Schmidgall and Kasavana, 2000) course, over time the average pay is expected
to increase. Table 8.3 addresses increasing
Most likely, lodging financial executives compensation. The Geller and Schmidgall
will continue to earn various certifications in
the future as proofs of their excellence.

Table 8-2 Certifications of Lodging Financial Executives

CHAE CPA Other Total

Geller and Schmidgall 8% 13% — 21%
DeVeau and DeVeau 100% 22% 18% 140%
Tse 15% 12%
Geller et al. 14% 14% 12% 41%
Damitio and Schmidgall 17% 12% 20% 43%
20% 52%

372 Chapter 8 ᭿ Financial Control and Information Management

Table 8-3 Compensation

Median Salary Bonus

Geller and Schmidgall $30,000–$34,999 9%–12% (median)
DeVeau and DeVeau $49,900 (mean) 44% received benefit packages including a bonus
Tse $30,000–$40,000 $2,000–$5,000 (median)
Geller et al. $40,000–$49,999 11%–20% (median)
Damitio and Schmidgall $45,001–$50,000 $6,100 (mean)

study conducted in 1984 revealed a median Other areas that more than 90 percent of re-
salary of $30,000–$34,999 and a median bonus spondents indicated were required skills and
of 9–12 percent of the controller’s salary. knowledge included cash management and
Based on this information, the average annual internal controls.
bonus approximated $3,400.The 1996 study by
Damitio and Schmidgall reported a median A study by Cichy and Schmidgall in 1996
salary between $45,001 and $50,000 and an av- focused on leadership of lodging financial ex-
erage bonus of $6,100. At the beginning of the ecutives. Financial executives not only must
twenty-first century, it appears lodging finan- know the numbers but must also lead, as they
cial executives’ median salaries are most likely supervise several employees. The 1996 Dami-
to be greater than $50,000, as the last study tio and Schmidgall study revealed that the
was conducted five years previously. number of employees supervised by these fi-
nancial executives varied from one to more
᭤ Skills and Knowledge than 30. Just over one-third (34 percent) man-
age two to five employees, while nearly an-
What skills and knowledge should the lodging other third (31 percent) manage six to ten
financial executive have, and how have these people. Another one out of five (22 percent)
changed over time? Geller and Schmidgall manage 11 to 30 people, and 6 percent man-
studied the technical skills and knowledge of age over 30 individuals. They found that lodg-
lodging financial executives in 1984, and ing financial executives are expected to have
Geller et al. repeated the study in 1990. Table skills and knowledge beyond the technical
8.4 reflects the results of these studies. The skills covered in the two Geller studies. The
1990 study included more skills, and the re- study of lodging financial executives covered
port provided results by type of controller. seven keys to leadership (see Table 8.5) and
As expected, the percentage of respondents 17 secrets of leadership (see Table 8.6).
with technology knowledge (computers) in-
creased, and most likely a study conducted to- Lodging financial executives strongly
day would result in a 100 percent response. agreed that four of the seven listed keys to
leadership were important to their own lead-
ership style. The most important key was
“trust your subordinates,” followed by “de-

373Section 8.2 ᭿ The Lodging Chief Financial Executive

Table 8.4 Technical Skills and Knowledge

Skills, Knowledge Corporate Division or Hotel Other Total 1984
Area Study
74% 69% 75%
Taxes 89% 77% 99% 95% 97% 60%
Computers 92% 96% 84% 77% 82% 70%
Personnel 81% 82% 94% 81% 91% 78%
Cash management 100% 89% 87% 77% 85% 89%
Capital budgeting 87% 89% 85% 71% 88% 80%
Statistics 68% 81% 87% 72% 84% 82%
Auditing 87% 96% 100% 94% 97%
Internal controls 92% 100% 14% 18% 18% †
FASB* rulings 28% 23% 36% 26% 36%
Risk management 55% 35% †

n/a
n/a

*Financial Accounting Standards Board
†In 1984, “auditing” and “internal control” were presented as a single item. Ninety-five percent of the respondents in

1984 indicated they possessed skills in those areas.

velop a vision.” Consistent with all other sur- not the most essential aspect of leadership.
veys of U.S. chief executive officers and pres- Nevertheless, “be an expert” received a score
idents in lodging and foodservice, “be an of 4.0, indicating that respondents believe
expert” was dead last. Leaders from all seg- that having relevant expertise is not unimpor-
ments clearly realize that being an expert is tant either. Rather, the survey results indicate
that these leaders believe it is more important
Table 8.5 Keys to Leadership to surround themselves with the necessary ex-
pertise than to have the expertise themselves.
Mean Level of
Importance* Of the 17 secrets of leadership, respon-
dents strongly agreed or agreed that leaders
Trust your subordinates 5.4 in their organizations must have 14 of them.
Develop a vision 5.3 At the top of the list were dependability, cred-
Simplify 5.2 ibility, responsibility, and accountability. At
Keep your cool 5.1 the bottom of the list was physical stamina,
Encourage risk 4.8 with a score of 4.4. (A score above 4.0 indi-
Invite dissent 4.5 cates inherent importance; in this case, the
Be an expert 4.0 low score for physical stamina is merely an
indication of its relative unimportance when
*The scale is from 1, “very unimportant,” to 6, “very compared to the other secrets of leadership
important.” presented to the survey participants.)

374 Chapter 8 ᭿ Financial Control and Information Management

Table 8.6 Secrets of Leadership ported 56 percent were authorized to make
purchasing decisions without the approval of
Mean Level of others. They indicated controllers were most
Agreement* involved with technology purchases (90 per-
cent) and, to lesser degrees, guest supplies (29
In our organization/company, leaders must possess . . . percent), furnishings and equipment (44 per-
cent), security/maintenance systems (43 per-
Dependability 5.6 cent), and fire/safety/energy conservation
Credibility 5.5 systems (30 percent).
Responsibility 5.5
Accountability 5.5 The expansion of authority based on the
Self-confidence 5.3 two Geller studies is the greatest for investing
Decisiveness 5.3 funds (from 2 percent to 46 percent) and to
Emotional stamina 5.2 set or change prices (from 21 percent to 41
Loyalty 5.2 percent).
Desire 5.2
Stewardship 5.1 Both the Tse and the Damitio and
Courage 5.1 Schmidgall studies covered hiring and firing
Empathy 5.1 authority. Tse found that more than 80 per-
Tenacity 5.0 cent of the respondents have the authority to
Anticipation 5.0 hire and fire either in their own department
Timing 4.9 or in their company. The percentage increased
Competitiveness 4.8 to 90 percent when only accounting personnel
Physical stamina 4.4 were involved. The 1996 study by Damitio
and Schmidgall revealed 76 percent have au-
*The scale is from 1, “strongly disagree,” to 6, “strongly thority to hire and fire within their own de-
agree.” partment, while 7 percent have no authority
to hire or fire.
᭤ Responsibility and
Authority Only the two Geller studies (1984 and
1990) covered responsibility, and the compar-
Four of five of the studies focused on author- ative results are shown in Table 8.8. Again, the
ity. Table 8.7 reveals the results of the two 1990 study provided detail by type of con-
studies (1984 and 1990) conducted by Geller troller and included areas not covered by the
and others. The 1990 study divides the re- 1984 study.
sponses by type of controller. The vast major-
ity (over 75 percent) of lodging financial More than 90 percent of the respondents
executives have authority to sign checks, ap- indicated they have responsibility for such
prove purchases, and extend credit. Tse found standard accounting functions as general ac-
that only 56 percent of hospitality financial counting, receivables, and payables. Other
executives have authority to approve pur- major areas of responsibility shared by most
chase decisions. Damitio and Schmidgall re- controllers (75 percent or more) include pay-
roll, night and income audits, computers in ac-
counting, and cash management.

There are indications that controllers are
becoming increasingly involved with the op-

375Section 8.2 ᭿ The Lodging Chief Financial Executive

Table 8.7 Extent of Authority over Specific Functions

Type of Controller

Functions Division or Area Hotel Other Total 1983 Study
Corporate
46% 2%
Invest funds 70% 46% 48% 30% 79% 87%
Sign checks 79% 85% 88% 59% 80% 85%
Extend credit 66% 85% 92% 63% 41% 21%
Set or change prices 26% 62% 48% 28% 20% 19%
Borrow funds 36% 27% 20% 10% 86% 82%
Approve purchases 83% 89% 94% 69%

Table 8.8 Controllers’ Responsibilities

Responsibilities Division or Type of Controller Total 1984 Study
Corporate Area Hotel Other

Hotel security 15% 27% 25% 18% 22% 9%
Receivables 89 89 100 73 91 95
Payables 89 92 99 77 92 93
General accounting 89 92 98 80 92 91
Payroll 85 89 95 68 87 89
Night auditors 60 85 94 60 80 83
Income auditors 57 81 89 60 77 79
Cashiers 43 65 77 47 64 63
Food controls 47 77 78 44 65 53
Computers: Accounting 83 89 95 73 88 *
Computers: Front office and reservations 49 77 65 44 58 *
Purchasing 32 62 40 60 50
Receiving 28 54 77 36 52 50
Storage (inventory) 23 58 66 39 52 34
Tax returns 70 58 66 54 61 n/a
Risk management 51 39 61 24 36 n/a
Cash management 85 81 37 51 77 n/a
Beverage controls 49 77 86 42 67 n/a
Investments 75 39 81 27 42 n/a
Internal auditors 47 62 40 31 44 n/a
46

* In 1984, a single question asked controllers about their computer-system (EDP)
responsibilities. Fifty-two percent of the respondents in 1984 had some responsibility for EDP.

376 Chapter 8 ᭿ Financial Control and Information Management

erational aspects of their hotels. More than 50 sharply. This trend can be expected to con-
percent of the respondents indicated that tinue into the twenty-first century.
their responsibilities included purchasing, re-
ceiving, food and beverage controls, and stor- ᭤ Committee Involvement
age (inventory). The number of respondents
responsible for the storage function increased Just how involved have lodging financial ex-
18 percentage points from 1984 to 1990, from ecutives been on committees of their lodging
34 percent to more than 52 percent, and a businesses? Both of the studies conducted by
purchasing function was claimed by 60 per- Geller and others reported over 80 percent of
cent of the respondents in 1990, which is 10 the respondents were members of the execu-
points greater than in 1984. Responsibility for tive committee, although the Tse study
hotel security, the least commonly shared showed only 71 percent (see Table 8.9). The
function among the controllers, more than difference may be that the Tse study covered
doubled in the last six years, growing from 9 all hospitality segments employing HFTP
percent in 1984 to almost 22 percent in the members, while the Geller studies were re-
1990 study. stricted to the lodging industry. In addition,
the involvement of financial executives from
The controllers’ role in electronic data 1984 to 1990 increased significantly on both
processing (EDP) and computer system man- the compensation and strategic planning
agement grew by leaps and bounds during the committees. The 1990 study by Geller and
1980s. In 1990, 88 percent of the respondents others also included involvement in train-
indicated responsibility for the computer sys- ing and risk management committees, and a
tems used for accounting functions. majority (66 percent and 72 percent, respec-
tively) of lodging financial executives re-
Additionally, 58 percent indicated re- vealed involvement.
sponsibility for front office and reservations
system computers—systems clearly not under A 1998 study by Woods and others sur-
the umbrella of traditional accounting func- veyed general managers of large hotels (500
tions. In the 1984 study, respondents were rooms or more). Eighty-one percent of the re-
asked just one question about responsibility spondents in this study reported that either
for EDP, and 52 percent of the controllers in- the vice president of finance or the controller
dicated that they had some responsibility for of their hotel was a member of the executive
EDP. It’s clear that, over the years, computer- committee.
oriented responsibilities have escalated

Table 8-9 Committee Involvement

Executive Compensation Strategic Planning

Geller and Schmidgall (1984) 82% 23% 41%
Tse (1988) 71% — —
Geller et al. (1990) 86% 75% 94%

377Section 8.3 ᭿ Budgeting and Forecasting: Current Practice in the Lodging Industry

᭤ SUMMARY are trusting subordinates, developing a vision,
dependability, credibility, responsibility, and
Considerable research has been conducted accountability.

over the past 20 years on lodging financial ex- Financial executives commonly have au-
ecutives. These studies indicate that the most thority to sign checks, extend credit, and ap-
common title is controller and the average prove purchases. To a lesser extent, they
age is the late thirties. Males are still domi- invest funds, may set or change prices, and
nant, though females are increasingly assum- borrow funds.
ing the top financial position with lodging
operations. The majority of these leaders have Their responsibilities range from manag-
bachelor’s degrees and majored in account- ing receivables, payables, payroll, general ac-
ing. An increasing number of lodging finan- counting, night and income auditors, cash, and
cial executives are certified and have 10–15 computers in accounting to hotel security,
years of hospitality accounting experience. risk management, investments, and internal
auditors.
The skill set of financial executives in-
cludes both technical and leadership skills. Finally, financial executives commonly
The technical skill set includes technology, serve on the executive, compensation, and
cash management, internal controls, and sta- strategic planning, training, and risk manage-
tistics. The most important leadership skills ment committees of their hotels.

8.3 B U D G E T I N G A N D F O R E C A S T I N G :
CURRENT PRACTICE IN THE LODGING
INDUSTRY

Raymond S. Schmidgall and Agnes L. DeFranco

Financial forecasts and budgets can programs, executive-compensation bonuses,
strengthen management’s control of hotel op- incentive-based management fees, and capital
erating expenses and help determine the expenditures (Temling and Quek, 1993).
profitability of the property (Chamberlain,
1991, 89–90; DeMyer and Wang-Kline, 1990, A major difference between forecasting
64; and Karch, 1992, 21–22). Specifically, fore- and budgeting is that budgeting is normally
casts give owners a projected level of sales, viewed as a process that covers a longer pe-
while budgets alert owners and operators riod of time than forecasting. Budgeting often
alike to significant expenditures that are on results in a formal, long-range plan, normally
the horizon or predictable shortfalls in rev- expressed in terms of dollars over time—for
enues. Used together, forecasts and budgets example, the predicted revenues and ex-
can provide a benchmark for sales-incentive penses of a hotel for 24 months (Schmidgall,
1997, 369–372, 411–413). On the other hand,

378 Chapter 8 ᭿ Financial Control and Information Management

forecasts are generally prepared by hoteliers The instrument. We designed a four-part
to establish staffing levels and may cover a questionnaire with the assistance of a number
period of just seven to ten days (Schmidgall, of lodging controllers and by modifying a sur-
1989, 101–2, 104–5). Long-range budgeting, vey previously used in 1995 (Borchgrevink
therefore, is a form of strategic planning. It and Schmidgall, 1995). We also employed a pi-
may entail several years’ financial projections, lot study in which other lodging controllers
a coordinated management policy, and a offered comments and allowed us to fine-tune
control-and-correction mechanism that al- the final survey. Part I of the questionnaire in-
lows actual results to be compared to esti- cluded six questions that collected demo-
mates and followed by corrective steps, if graphic data about the respondents and their
necessary (Coltman, 1994). lodging operations. Parts II and III consisted
of 14 questions regarding the procedures and
᭤ THE CURRENT STUDY methods used to develop an operations
budget, and about how the budget is used for
Our study serves the following purposes: financial control. Finally, the last part of the
questionnaire asked respondents to provide
• to determine the purposes, methods, and information regarding their various operating
procedures in performing an operations departments’ forecasting techniques.
budget,
Sampling. As mentioned, a simple random-
• to determine how an operations budget is sampling technique was used to select our
used in budgetary control, and study’s population. Six hundred financial ex-
ecutives who are associated with lodging op-
• to determine the techniques used in fore- erations were chosen from the 1997
casting revenues in the various operating membership list of the association of Hospi-
departments in lodging properties. tality Financial and Technology Professionals
(formerly the International Association of
Limitation. Our study used a random- Hospitality Accountants).
sampling technique to select 600 samples that
yielded 171 responses (almost 30 percent of Data collection and analysis. We first sent
the sample). As a result, there may be respon- the survey in October 1997 to each of the 600
dents who belong to the same national chain executives, requesting them to participate in
and thus represent the same set of corporate our study. To ensure a good response rate, we
operating procedures. In addition, with the sent a second copy of the survey to everyone
full-service and luxury segments of the hotel in January 1998, as a reminder. Data received
industry constituting more than 90 percent of were analyzed using the software package
our responses, the results are likely more ap- SPSS for Windows.
plicable to those two groups than to limited-
service hotels. Thus, although more than ᭤ RESULTS AND
one-quarter of the hotel executives solicited DISCUSSION
by this study responded, it may not be useful
to generalize the study’s results (particularly Of the 600 executives who received our sur-
beyond full-service hotels).
vey, 171 responded, yielding a 28.5-percent re-

379Section 8.3 ᭿ Budgeting and Forecasting: Current Practice in the Lodging Industry

sponse rate. The majority of the respondents Figure 8.2 Lodging Property Size, by
held the title of hotel controller (147, or 86 Annual Gross Revenues
percent), while the others reported such titles (1996)
as assistant controller, regional controller,
corporate controller, VP-controller, executive $5M–$10M, $10M–$15M, $15M–$20M,
VP-CFO, and director of accounting. Respon- 17.6% 18.2% 15.9%
dents were mainly associated with full-service
hotels (72 percent). Together with those from $3M–$5M, >$20M,
the luxury segment (21 percent), those execu- 7.1% 37.1%
tives constitute well over 90 percent of the re-
sponses. As for affiliation, the majorities (62 $2M–$3M,
percent) were part of a national chain, and 29 2.9% <$2M,
percent reported working for independent 1.2%
lodging properties. International chains ac-
counted for another 7 percent, while 2 per- Figures in U.S. dollars (millions). Profile of properties
cent of the responses came from franchisees. represented in this study.
Most of the properties reported having more
than 250 rooms (71 percent) and enjoyed of the respondents reported that they pre-
1996 annual gross revenues of at least $10 mil- pared an operations budget for the year—
lion (also 71 percent). Figures 8.1 and 8.2 only three reported not preparing a budget.
show the details of the lodging-property size. Moreover, almost 60 percent indicated that
they set a tentative financial goal prior to de-
Preparing the budget. The operations veloping the operations budget. The majority
budget is an integral part of the financial op- of those (64 percent) related that tentative fi-
eration of a lodging property, and virtually all nancial goals were based on either sales (33
percent) or net-income (31 percent) levels.
Figure 8.1 Lodging Property Size, by (In this case, sales equals revenues, while net
Number of Rooms income refers to the financial statement’s bot-
tom line.) Other financial executives’ finan-
251–500 >500 50–100 cial goals were based on gross operating
45.6% 25.7% 3.5% profit, net operating profit, EBITDA, debt-
service coverage, occupancy percentage,
151–250 101–150 RevPAR, or some combinations of those.
14.7% 10.5%
We presented five possible reasons why
Profile of properties represented in this study. an operations budget might be prepared, and
we also offered the fill-in-the-blank answer
“other.” When asked to give one major reason
why a budget was prepared, 45 percent se-
lected the option that stated “It is used as a
standard by which the lodging operation is

380 Chapter 8 ᭿ Financial Control and Information Management

managed.” Another 28 percent chose the an- executive committee, department heads, the
swer “It is a planning tool.” About 15 percent general manager (with input from the owner),
of the respondents gave more than one rea- or a budget team (for example, a team might
son, and their responses almost always noted comprise the general manager, owner, and
a budget’s value as a standard of comparison controller).
or as a planning tool.
While all but three of our 171 respondents
More than 90 percent of the respondents confirmed that they prepared an operations
reported that a co-operative effort among ho- budget for the year, less than half prepared a
tel departments was used to prepare the op- long-range budget (i.e., for more than a year at
erations budget. Nevertheless, 73 percent a time). Of those who prepared long-range
reported that the controller was the one who budgets, more than three-quarters used a five-
held the main responsibility for preparing the year time span for future planning.
operations budget using the input provided
by other department heads and the general Making adjustments. Only one in four of
manager. the respondents revised their budget at any
point during the operating year, with the most
Only five respondents indicated that the common frequency of change being monthly
controller prepares the budget with little in- (40 percent). Other responses to this question
put from others. Thus, in more than three- included “as needed” (21 percent), “quar-
quarters of the hotels surveyed, the controller terly” (16 percent), “semiannually” (12 per-
was primarily in charge of budget prepara- cent), “bimonthly” (3 percent), and some
tion. In another 5 percent, the lodging units’ combination of the above (4 percent).
controllers and general managers jointly pre-
pared it, and in 12 percent of the hotels, the ᭤ BUDGETARY CONTROL
general manager coordinated the budget-
preparation process with the various depart- The majority of the respondents who used
ment heads. Other responses indicated that
budget-preparation responsibility fell to an budgets declared that the operations budget

Table 8.10 Cost Tolerances Between Budget and Actual Costs

Food Beverage Labor “Other”
cost cost cost operating costs

Less than 1% 11.5 14.3 8.2 8.2
1%to 1.9% 33.8 33.3 26.5 16.3
2% to 2.9% 29.0 23.1 25.9 21.1
3% to 3.9% 10.1 13.6 16.3 14.3
4% to 4.9% 4.1 12.2 17.0
5% to 5.9% 6.1 8.2 6.8 17.0
More than 5.9% 6.8 3.4 4.1 6.1
Median 2.7
Median, 7996 Study* 2.2% 2.1% 2.6% 3.3%
1.9% 1.9% 2.8% 3.7%

*R. S. Schmidgall and C. P. Borchgrevink, 1996.