How to Price Buy-Outs of Smaller Hotels in Leisure Markets

Larry Spelts

By Larry Spelts

May 15, 2024

Small properties (one hundred rooms or less), especially upper-upscale and luxury boutique hotels in destination markets that are principally leisure with higher ADRs, are often attractive buy-out destinations for certain kinds of groups. This can range from weddings and reunions to corporate and association retreats or incentive travel.

The Challenge of Hotel Buyouts for Weekends: Case Study

It is essential to good revenue management that opportunity costs be factored into weekend buyouts because hotels that are in principally leisure segment-dominated locations tend to sell out on many weekends perennially, and because many transient guests staying on weekends are staying 3 or more nights.

As an example of the economic implications of this, consider a sixty-four key property I managed for a decade in Charleston and that was a member of Relais & Chateaux.

We were approached by a wedding planner whose client wished to have a destination wedding in historic Charleson in late April during the greatest period of peak demand for rooms in the area. We wanted to avoid reduced room revenue due to the disruption of stay-through patterns, that would be caused by a large group taking nearly all of our rooms and suites for two nights only, while this is the time of year that guests will stay three to four nights and fill otherwise difficult to fill weeknights. In economic terms, we wanted to avoid incurring an opportunity cost upon ourselves for taking the wedding business.

Understanding Opportunity Cost

Opportunity cost is the potential forgone profit from a missed opportunity—the result of choosing one alternative over another.

In the case of buyouts, it is the cost of taking the buyout rather than the usual transient business that would have filled the hotel to full occupancy and would have included in their reservations on shoulder nights (weeknights before or after the weekend nights). This opportunity cost is created in turning away business that would have arrived on a Wednesday or Thursday and stayed through the weekend or even until Monday or Tuesday. As well as the business that would have arrived on Friday or Saturday and stayed through one or more weekdays of the following week.

A revenue manager must refer to recent prior years’ total room revenue on the two weekdays preceding and following the weekend buyout pattern of the proposed group.

In the best of cases, the revenue manager may have a revenue analyst look at the details of the arrivals on the preceding weeknights and of the arrivals over the subject weekend in years past for a number of nights and calculate the average length of stay of both the arrivals on the weekdays preceding the weekend and the arrivals on the weekend nights that stayed through Sunday and beyond. This will enable the revenue management team to calculate the estimated lost room revenue from turned-away stay-through patterns arriving on the shoulder nights before and staying shoulder on nights after the weekend.

Event space rental revenue, F&B revenue, and other ancillary revenues like parking and spa were not factors to be considered since the hotel and its restaurant had become a popular place for wedding planners to place weddings not being lodged in the subject hotel for rehearsal dinners, wedding receptions, and Sunday bruncheon “farewell parties.”

In cases where the purpose of the group’s buyout does not align with utilizing any of the hotels’ other profit centers, then the revenue that will be missed in the outlets must be added into the group’s buyout price. However, that was not the case here as wedding parties usually spend as much as other guests.

Completing a Hotel Displacement Analysis

A displacement analysis of business should be based on the total value of the business versus the value of the transient business that would be displaced if the business were accepted. If all the factors in the aforementioned are considered, then you can establish an appropriate buy-out price that is fair to the hotel.

Here is an example of such an analysis:

A graphic showcasing the difference between Scenario 1 "Group without Opportunity Cost included" and Scenario 2 "Buy-Out with Opportunity Cost included". Taking into consideration Days, Rooms, ADR, Gross Room Revenue, Opportunity Cost, where the pattern showed the scenario 2 has higher Total Combined Revenue

I have seen buy-out rates for Friday-Saturday pattern buy-outs that were almost double the transient BAR for the same weekend once all the opportunity costs were accounted for in a displacement analysis.

Be cautioned that dollar-for-dollar replacement of lost room revenue on shoulder nights with F&B dollars is not equivocal since the margin on rooms is much greater than on F&B. Requiring 1.5 F&B dollars for every lost dollar of room revenue may be a fair swap in some cases, but 2.0 in others. It is important to understand what the departmental profit margin is for F&B at the subject property.

Last but not least, remember to take care of your line staff. If occupancy is lost on the shoulder nights of the weekend group, the line staff who enjoy gratuities will miss the opportunity to collect said gratuities. Including a service charge for distribution to the team members who depend on gratuities will make them feel good about taking care of the group rather than feeling cheated.

Informed Decision Making and Communicating Value

For the professional planner, this pricing strategy will be no surprise, however, for the uninitiated – social business especially – this pricing strategy may come as a shock and must be delivered with some educating on the front end, which begins during the first conversation with the client.

The sooner they understand how the cost will be calculated and that it will be substantially more than the rates that the client sees as the hotel’s sell rate for that weekend, the better off they and you will be.

I have personally handled these situations, and there are plenty of times when the client consents and pays with the understanding of the value that they are receiving. For the other times when the client “balks and walks,” good riddance. You have protected your asset’s ability to meet its potential optimal revenue for the subject weekend, and that is the role of the revenue manager.

About the author

Larry Spelts

Spelts has helped create upper-upscale and luxury boutique hotels. He has led projects in Relais & Châteaux, Rosewood, Autograph, Tribute, Curio, Kimpton, and Graduate hotels. He has experience developing financial proformas for hotel projects, F&B concepts, co-work, retail, spas, fitness operations. Spelts work in development has encompassed RFP’s to select architects, branding agencies, interior designers, procurement agencies, IT systems providers. His skills in defining scope and requirements for project execution, vetting of proposals, and project investment workbooks that calculate returns on investment have provided owners with invaluable insight and recommendations. With his knowledge and experience in planning and design of back-of-house areas, review of FF&E  and OS&E he is an essential member of a development team. Spelts also has excelled in analyzing and developing solutions for underperforming assets both for owners and management companies. Spelts is principal of Hospitalitarian, LLC and an active member of Cayuga Hospitality Consultants.

 

 

 


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