For hotels cutting back on services to trim costs, how far is too far?

By Lincoln Merrihew | May 1, 2009

Reading time: 7 minutes

Abstract

Results from a survey of prospective travelers show that some hotel amenities are more valued than others. As travel-industry firms look to cut costs, research can provide needed direction on where services can be reduced, re-priced or eliminated, as across-the-board changes run the risk of alienating large customer segments, possibly permanently.

Research Topics:: Conjoint Analysis/Trade-Off Analysis | Consumer Research | Customer Loyalty | Customer Satisfaction Studies | Demographic Analysis | Demographic Profiles | Market Segmentation Studies | Product Development Research | Quantitative Research
Industry/Market Focus:: Air Travelers | Airlines | Entertainment | Hospitality Industry | Research Industry | Tourism | Travel
Content Type: Research Methodology

Share Print

Knowing when to say when

Editor’s note: Lincoln Merrihew is senior vice president, business solutions at the Northborough, Mass., office of research company TNS.

For the first decade of this new millennium, the travel and hospitality industry has had a bumpy ride.

The terrible events of 9/11 created a mass aversion to air travel. A tsunami in Asia and hurricanes in the Gulf of Mexico created their own consumer anxieties. Gas prices rose inexorably throughout the decade until late 2008. Then they plummeted again, but only after our toxic debt fallout undermined the entire global economy. The financial services industry now teeters on the edge of implosion; easy credit has disappeared and corporate revenues with it. Corporate America is battening down the hatches, reducing labor forces and hacking away at discretionary spending.

One of the more notable measures of the net impact of recent changes is the Consumer Confidence Index - as gathered by TNS for The Conference Board - which is at an all-time low. At the time of writing in February, it stood at 25, down from 76.4 a year ago (1985 = 100).

Readily downgrade

Like almost every industry, the travel and hospitality industry has felt the impact of this recent economic meltdown, with fewer guests and lower revenue. In many ways it has been affected more because it is an industry based largely on discretionary spending. Consumer and business customers can readily downgrade travel arrangements, such as staying at lower-tier hotels or replacing overnight travel with day trips. They can also postpone trips or even cancel travel entirely. Veteran road warriors are setting aside their executive platinum cards and reverting to conference calls, videoconferences and cheaper flight and hotel alternatives. Sales conference attendance is being scaled back and events are being held at more modest locations.

The cuts are driven by the need to reduce expenses as well as to set an example. After all, what public company executive in this environment wants to be seen as sponsoring “boondoggles” when consumers are outraged by perceived corporate irresponsibility and expressing their umbrage to anyone who will listen?

With fewer travelers and lower revenue, hotels have had to quickly trim expenses. Since fixed assets (such as rooms) are not a viable option to cut, the reductions have to come primarily on the service and amenities sides.

However, just slashing the biggest costs can be more damaging than doing nothing at all. Consumer attitudes, wants and needs should guide the hand that wields the scalpel. Specifically, the industry needs to understand which things it can reduce or cut that have the smallest impact on customer hotel choice. The skill is in finding the most effective way to cut with precision, and that comes through research and analytics within the context of both the industry and the recession.

Impact their choice

To assess the safest places hotels could cut costs, TNS surveyed 2,500 U.S. adults in February 2009 to identify how changes in hotel services would impact their choice of a hotel. The survey included both negative and positive impacts, because in today’s business climate some consumers may view a company trimming costs as a positive and responsible act. Choices were limited to following:

• reduced entertainment (such as fewer free TV/movie channel options or pay-only Internet service);

• reduced to-door services (such as having to go to the lobby to get a free newspaper and not having in-room automatic checkout on day of departure);

• reduced personal assistance (such as porters and concierge staff);

• reduced free amenities (such as only shampoo and soap available for free);

• reduced hours for services (such as room service, restaurants; hotel store and business center open for significantly fewer hours).

The results show that the safest area in which to make changes is to reduce to-door services and reduce personal assistance (Figure 1). Those two areas have the highest share of “no impact” results and have positive impacts nearly equal to the negative impacts - suggesting a nearly net neutral impact overall. Both changes have staffing elements and implementation could mean staff reductions. In response, guests might have to pick up their bills and newspapers at the front desk rather than having them delivered to their doors. The biggest area of risk would be cutting free amenities. Over a third of respondents reported that fewer amenities would negatively impact their hotel choice.

Note that the results above are across all respondents. Slicing the results by segment or demographic cohort revealed actions potentially better-aligned with a hotel’s core customers and targets. For example, younger respondents reacted the most negatively to reductions in free amenities (Figure 2). Nearly half under the age of 30 reported a negative impact from reduced amenities compared to fewer than a third of the oldest respondents. This suggests that hotels with an older clientele face less of a risk on cutting costs in this area than do those with a younger clientele. It is likely that results for the other choices (such as reduced entertainment) will vary as well, with potential variations by age, income, the extent to whether travel is for business or pleasure, etc.

Best positioned

The magnitude of the recession, coupled with the discretionary nature of spending, means that the travel and hospitality industry needs to act quickly and decisively. Still, industry executives must walk a fine line and achieve operating efficiencies while avoiding alienating customers. Accomplishing this feat could mean that when the economy does rebound, they will be best positioned for a rapid and cost-effective recovery.

While the before-mentioned results indicate suggested actions for the hoteliers, a similar research approach can be used for other facets of the travel and hospitality industry. The data-gathering mechanism could include additional choices and should include open-ended questions.

Also, as noted in the research, expected results can vary based on consumer segment. Research on the impacts of cost-saving measures needs to ensure that responses from the target audiences are isolated; this will be pivotal in making the right choices. Note also that the research included all adults and did not exclude anyone who, for example, had not traveled in the past 12 months.

A logical next step would be to compare the risks of reducing expenditures on any of the above with the related potential cost savings. For instance, if a greater cost savings is realized by reducing personal assistance than by reducing to-door services, cutting personal assistance would be the logical first choice. Each hotel needs to identify the correct ranking for their brand and category and then compare the net impacts to their specific costs.

Broader research effort

The above results are informative but directional. To maximize actionability, the questions should be included as part of a broader research effort which would include differentiating responses for leisure travelers from business people and comparing the results for near-term travelers with those whose travel is farther in the future.

The questions could also include elements of price sensitivity, such as the extent to which consumers would accept changes based on accompanying changes in price. For example, the same questions could assume no change in room rate and then be compared with different increments of lower room rates. The opposite is also true: the research could explore how much customers would be willing to pay extra to keep certain services that might otherwise be cut.

Questions also need to include the impact of brand and brand image. Consumers may be more willing to accept reductions in services from some brands than from others based on how they assign what TNS calls brand permission, which refers the extent to which consumers will allow a brand to stretch into new areas based on their perception of it. (For example, while consumers may accept that dollar-menu items are consistent with the brand, they would most likely not accept $30 porterhouse steaks from McDonald’s.) In other words, budget hotels may have greater leeway in cutting certain services than do premium hotels.

Massive shifts

TNS research across several industries in the travel and hospitality space has shown that the changes are broader and deeper than many may realize. This includes massive shifts in consumer choices, including not only how they spend their travel and hospitality dollars but also where those dollars are spent. While hotels are addressing ways to cleverly reduce costs, they need to recognize that they are aiming at a moving target, thanks to the rapid changes in customer bases. For just as companies may lose some customers who move down-market, they may gain new customers who defect from up-market rivals.

Unfortunately this means that even off-the-shelf research may have limited applications - at least until the economy stabilizes. Any new research should include questions designed to increase the shelf life of the responses and incorporate modeling that allows the assessment of what-if scenarios to help manage the business while the recession lingers and also as the economy starts to recover.

Must rethink

As the travel and hospitality industry regroups, executives must rethink how they operate across several areas. They need to connect with and optimize revenue from customers who are changing grades. At the same time, they need to keep current customers engaged to prevent them from defecting. Key action areas include:

• innovation: new products and services and refinements to current ones;

• communication: messaging that reacts to and reflects changing customer needs and motivations;

• acquisition: ensuring that the reservation process and experience is consistent with changing customer needs;

• satisfaction: refining satisfaction and loyalty-driver measures given the fluctuations of customer types and market conditions.

As painful as the current situation is, companies that address the areas above and make the effort to stay in touch with the needs of their various market segments, while offering new and compelling reasons to choose their brands over others in a crowded marketplace, will be ideally situated when the rebound arrives to build brand, capture greater market share and operate in a more customer-focused manner.