Fight Shrinking Profit Margins with Attribute-Based Selling

With Del Ross, Senior Advisor with McKinsey & Company

The Lodging Conference is this week, and whether or not you’re attending, I want us all to think like investors - because it will benefit both ourselves and the way we operate. I shared two episodes on this over the weekend that I encourage you to check out if you missed them:

Our guest today is a hotel investor who previously led sales and marketing for one of the biggest hotel companies in the world and now advises the top global strategy consulting firm. From all of this experience, one opportunity for hoteliers stands out above all - and today, we’re learning all about it.

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Fight Shrinking Profit Margins with "Attribute-Based Selling"

with Del Ross, Senior Advisor, McKinsey & Company

Del Ross

Del Ross is a longtime industry expert, innovator, and leader who currently serves as Senior Advisor with McKinsey & Company, the top global strategy consulting firm. Before that, he led sales and marketing for IHG in the Americas, delivering $12 billion dollars in annual revenue for them worldwide - drawing from his earlier experiences at the company leading e-commerce and distribution. On top of that, he's investing in hotels personally now, so he understands the industry from so many perspectives.

The challenge in hospitality today

The ability to generate [profits] is being threatened. It's eroding every single day and has been eroding for quite some time.

Del Ross

That’s for a wide range of reasons, Del says:

  1. Distribution Costs: Online travel agencies are charging higher fees for bookings than traditional agencies. As they grow in market share, their bargaining power increases, thereby raising the costs for hotels.

  2. Direct Booking Costs: The competition with online travel agencies also forces hotels to spend more on direct booking channels, further elevating costs.

  3. Technology Costs: Underlying technology required to support direct bookings also contributes to rising costs, impacting profit margins.

  4. Labor Costs:

    • Wage Rates: The average wages for housekeepers and other hotel staff have gone up, making it difficult to fill these positions.

    • Workforce Turnover: High attrition rates and a constant inflow of inexperienced workers since the pandemic contribute to increased labor costs.

    • Productivity: New workers need time to ramp up, affecting productivity and requiring more overtime and contract labor.

  5. Energy Costs: Energy costs have been rising steadily and are expected to continue to do so. Even expected cheaper energy sources, like a new nuclear plant in Georgia, have turned out to be more expensive than anticipated.

  6. Capital Investments: Investments in more efficient energy solutions, like smart HVAC units, require significant upfront capital and offer slow payoffs.

  7. Financing Costs: Interest rates have been rising, increasing the cost of borrowing money and thereby reducing the profitability of hotels.

  8. Risk-to-Reward Ratio: With all these factors eroding profit margins, hotels become less attractive investments compared to other less risky opportunities.

The opportunity: Attribute-based selling

The history of the travel industry offers valuable lessons for the hospitality industry, Del says - particularly from airlines that began unbundling services about 20 years ago. Airlines started charging separately for seat selection, added amenities, and boarding order, capturing what economists refer to as “consumer surplus” —the maximum amount consumers are willing to pay for specific features or services.

This model has proven successful for airlines, offering different pricing based on what customers value and are willing to pay for. The hotel industry could benefit from applying a similar approach to capture more value from guests because there is so much more to work with in hospitality.

A plane is like a bus - there's just only so much you can do in that experience.

Del Ross

The interesting thing is that attribute-based selling is not a new concept, and in my conversation with Del, we got into:

  • How attribute-based selling got started 10-15 years ago - 14:19

  • Why attribute-based selling didn’t live up to the hype then - 15:57

  • Technology to enable attribute-based selling today - 17:52

  • Opportunity for technology providers - 20:54

  • Opportunity for hotel brands - 24:28

  • Opportunity for third-party management companies - 27:01

  • Why attribute-based selling is not a "nice to have" - 30:52

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