HB ON THE SCENE: Do Comp Sets Matter?

WASHINGTON—At the fifth annual Revenue Strategy Summit, held here at the Renaissance DC Downtown hotel this week, Kalibri Labs CEO and co-founder Cindy Estis Green posed a question: How much do comp sets matter anymore?

“I’ve had quite a few owners come to me and say, ‘It’s just not working anymore to look at some of our traditional RevPAR metrics because comp sets don’t even make sense anymore,’” she said, adding that the merger between Marriott International Inc. and Starwood Hotels & Resorts Worldwide Inc. complicated matters—many traditional comp sets had to be changed to make them legal comp sets, and as a result, hotels were added to comp sets that didn’t necessarily make sense.

“It got me thinking about what needed to be looked at in terms of some of these metrics,” she explained. “Beyond net revenue, do comp sets make sense anymore? In this age of big data, can we do something a little more effective and customized for an individual hotel?”

The CEO—along with Mark Lomanno, a partner and senior advisor at Kalibri Labs as well as the inventor of comp sets—came up with a list of problems with competitive sets: They were created at a time when there were few intermediaries and customer acquisition costs ran between 5-7%; they measure top line revenue performance based on the average results of a group of competitors; comp sets are chosen based on proximity and hotel collected ADR, but more granular data points are not available; averages are calculated on 100% of the business of four to six competitors and there’s no ability to filter by customer segment or week part; mergers create anti-trust issues; and performance tests in management agreements dictate creation of a comp set, which results in a “box check” attitude.

Green noted that this has created a generation of C students, and it’s been acceptable to be average. “Can we do better than that? We’re in the digital age and we’re competing with A-plus technology,” she said. “Benchmarking our performance is a really important factor because the way you look at how you’re performing and compare yourselves to others really drives how you spend your resources, how it drives funding for additional projects—it drives a lot of decisions.”

She added that if there’s one more major merger, the old math might not work anymore to create competitive sets. “Maybe we shouldn’t be so focused on just looking at the guy next door… Maybe we need to expand our horizons and use data in more effective ways. Instead of benchmarking against the average of four or five hotels—who may or may not be good operators—maybe we should benchmark against our own optimal—the best that we can achieve.

“Maybe we should be looking at our competitors in a more granular fashion,” she continued, noting that perhaps hotels shouldn’t look at 100% of another hotel’s business—which they may not compete on with all of their group, corporate, leisure, weekend and weekday business—and instead, weight the segments in which they do compete with other hotels, which could mean a comp set of 12 or more hotels, but a better competitive alignment.

“And maybe we should take the cost of sales out before we evaluate the revenue,” said Green. “We need to isolate the amount of revenue we get after the commissions, transaction fees, channel costs are all removed.”

Regarding optimal business mix, Green elaborated on her thought process. “It’s really the mix of channels and segments that give you the most net revenue for your hotel,” she said. “But there are some constraints and conditions: You have to look at what’s out there—what are the rates and room nights available? Those are the demand drivers, and you have to know the demand drivers in your market because it’s a finite pie we’re all trying to go after. Then you have to evaluate your ability and your competitor’s ability to tap that demand. Then, I’d go beyond that: what do consumers say about you and what do they say about your competitor? How well suited is your product to the demand? Maybe there’s a lot of group business in your market and you have 2,500 sq. ft. of meeting space. You’re not able to participate in that demand, so you’re going to be underperforming to a certain degree compared to others. Or you don’t have a swimming pool and you have a lot of leisure business that requires that kind of service. Finally, what is the base of your demand that comes through loyalty or recognition?

“If you look at all of these factors and then say what’s the most net revenue I could get given these, you might come up with some numbers,” she continued, noting that when hotels are benchmarking optimal mix, they should take into account the costs of customer acquisition. “Once you’ve got your room night and average rates estimates, from that comes a net revenue target, a COPE percentage target and a sales and marketing efficiency target… This optimal business mix sets net revenue targets, but more important than that, it sets spending targets.”

Green concluded, “With all of the big data available, you can start coming up with those targets in order to set something that’s more of an opportunity-based benchmark.”