Entrepreneurs do not need to go out on their own prematurely
The venerable institution of hospitality has been turning around over the past two decades. The combined impact of shifting demographics and new technologies are the primary catalysts for this metamorphosis. Artificial Intelligence, coupled with today’s advanced technologies, provides consumers with an opportunity to think of the hospitality industry components as commodities and makes it more difficult to differentiate most hotels as of today. Hotels, restaurants, attractions and spas have been lowering prices to gain a competitive advantage during slower periods, and a recession can create an even tougher environment. So, if you are thinking about starting a hospitality business, here is a summary of some foundations and strategies to make your venture successful.
A Quick Summary of Hospitality Pricing
Revenue management is the set of techniques that determine which reservation requests to accept and which to reject to optimize revenue. The principles of revenue management had their origin in the airline industry back in the 1970s, but the concepts are equally applicable to hotels, restaurants, attractions and spas. The airlines used mergers and supply constraints to avoid the commoditization dilemma. They simply owned the routes they wanted and pulled aircraft off the runways, which in turn filled flights. Hotel brands, led by Marriott and Hilton in the 1980s and 1990s, delivered a myriad of new brands such as Homewood Suites by Hilton, Hilton Garden Inn, Residence Inn by Marriott and Courtyard by Marriott. By the 21st century, every major hotel company had a verticality of brands from budget to full-service hotels. In 2025, each major brand has a product for every possible type of traveler and every budget!
Online Travel Agencies, (OTAs) began to sell hotel products at deep discounts and this led the brands to negotiate fees with the OTAs and agree to “rate parity.” Restaurant chains, from fast food to quick service to fine dining began price wars and attractions began pricing that included pay for a day, come for a year. It is time for the industry to price based on value perception and not price.
Know your Customers’ Behavior and Decision Process
Restaurants that price a la carte such as steak or seafood dinners for $59 with no appetizer and no dessert must win with popularity, location and high quality. That takes hard work and some luck with today’s fickle consumer. Packaging is the answer to the commoditization conundrum. The large amount of demographic and psychographic information available about the make-up of today’s traveler and hospitality user requires analytical skills and creativity to correctly respond to the marketplace. There are several risks that hospitality executives must overcome to achieve success in the marketplace:
- Performance Risk – the chance that the product may not satisfy the consumer
- Financial Risk – the monetary loss from a wrong decision
- Physical Risk – the likelihood of illness or injury to a guest/customer
Loyalty to a chain is a major factor in product choice by consumers. Airlines, hotels, restaurants, spas and many attractions allow guests to accumulate points that may be exchanged for free passes, guest stays and meals. The consumer’s perception of the hospitality company and what it stands for is paramount to the success of the venture. Product quality must be exceptional, service must be at the level of “wow” and there must be a compelling value proposition for the consumer to choose your business.
Sample Formulas for Success
My father, Richard Rauch, Ph.D created a multivariate model of consumer behavior that applies here. Key facets of this model from his work in the field of retailing in the 1990s: A = B x W x N
A – Attitude toward the business
B – Belief of a consumer that the business possesses a particular desirable attribute
W – Weight of importance of the attribute to the consumer
N – Number of attributes important to consumers
A number of years ago, I listened to a presentation by the late Martin Sklar, former President of Walt Disney Imagineering. He told us about Mickey’s Ten Commandments, and they hold true today:
- Know your audience
- Wear your guests’ shoes
- Organize the flow of people and ideas
- Create a visual magnet
- Communicate with visual literacy
- Avoid overload – create turn-ons
- Tell one story at a time
- Avoid contradictions – maintain identity
- Ounce of treatment – ton of treat
- Keep it up (maintain it) Martin added some more comments like “leadership is earned and must be exercised daily” as well as “be optimistic because if you are not positive, who will be?”
Time vs. Money
So, what are the pitfalls of “bootstrapping” a business or starting up a new business while you are employed by somebody else? Moonlighting with a startup allows you to test a business idea without impacting your financial well-being. It allows you to be creative so that you can develop your business plan without worrying about paying rent.
As anyone bootstrapping a business on top of a day job will advise you, start-up capital isn’t the only requirement. It is time! Also, bootstrapping a business requires long hours and a strain on personal relationships is not uncommon. To avoid getting in trouble with your employer, check your employment agreement and employee handbook. Some companies have a no moonlighting policy. Others have “non-compete agreements” that prohibit you from doing your own business with their clients. Others–particularly technology companies–have policies that nab the intellectual property rights of anything you create in your own time. Be prepared to lose your job if you work on your startup on company time and resist the urge to use your work phone and e-mail to conduct a startup business.
Is Now a Good Time for Hotel Ownership?
According to Guy Maisnik, author of the article “So you want to own a hotel,” savvy investors know that they cannot time the market. By waiting, they know they will miss a key opportunity and then be left scrambling like the rest of the herd. “Hotel investors who delay investment for another year or two in search of the holy grail — the bottom of the market — or the “perfect” opportunity will surely kick themselves.” The combination of moderately high debt cost, values that are largely float and industry fundamentals do not make for a compelling story, but the timing is important. Buying after a long down-market cycle is always safer than jumping in at the top of the bubble.
The difference for the savvy investor is reasonable timing plus knowledge. Acquiring a quality project, in a good location, with solid due diligence and conservative buying standards is the key to success. Today, there are many owners sitting on hotels that have Commercial Mortgage-Backed Securities (CMBS) loans due later this year. This could mean that some owners will be selling, rather than refinancing.
“marketing is finding the wants and needs of people and selling it at a profit.”
Most important, it is essential to put a team of experts together to launch a new business of any kind. At the end of the day, whether we buy or build now or simply want to make the best of this opportunity, we must be creative by packaging our assets in such a way to appeal to as many guests/consumers as possible. As my hospitality school marketing professor, C. DeWitt Coffman once said, “marketing is finding the wants and needs of people and selling it at a profit.” If you’re still interested in bootstrapping your hospitality business, 2025 and 2026 will still be great years for the industry but it will leave some behind. Don’t be one of them!
