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The B&B Team
 

What’s All this Stuff about Living Social and Groupon?

A little more info to add to Jan’s post of April 6th.

It used to be the mantra in the B&B industry to NEVER discount your rooms.  You cheapen your image and could set lower price expectations for the traveling public for their next trip to your inn.  Well William Shatner in his TV ads and a multitude of Price Lowering websites and alternatives have already changed those expectations…so get over it.

Here are a few Mid-Atlantic stories that counter the old school discounting taboo:

A Full Service Inn in New Jersey, through Living Social Escapes, sold 225 vouchers offering two options to purchasers…a one night stay (voucher price $230) or two night stay ($380)including dinner, breakfast, champagne, chocolates, 2 martinis at the bar and 2 tickets to a regional attraction.

Another upscale B&B in Maryland sold 86 coupons through Groupon for one night, flowers and chocolates for a voucher price of $155, and a larger inn in Maryland, using Living Social Escapes,  is offering two nights, wine and chocolates for $157 (weekends) and $117 (weekdays) and sold 632 at last count.  They make their money on upselling spa services and gift baskets with each voucher at a 20% discount from usual pricing.

A fourth, very upscale inn in Baltimore sold 550 Groupons at $99 for a room with a value up to $250!

The two largest companies, Living Social and Groupon, offer coupons to their memberships at deep discounts…often 50% or more.  They do mass marketing through their email membership databases usually targeted in a particular region or city.  Retailers and service providers have seen phenomenal traffic from the vouchers sold to these members.

Living Social has an “Escapes” section on their site specifically attractive to their travel membership.  Often, this is the section in which an inn can participate.

Here’s the general process:  A retail or service provider signs a deal with the service for a particular product or service having an identified value.  A discount to the purchaser is provided (50% off is usually the minimum…but negotiable with the company), and the coupon “drop” is targeted for a specific market.  The company sells the voucher, subtracts a commission (often 30%+ depending on the voucher price), and sends a net proceeds check each month to compensate the business.

Sound scary to try it?  Here are a few VERY IMPORTANT considerations when planning such a coupon drop:

  • Understand your variable costs.  Your fixed costs are those bills that you have to pay anyway…whether there is a guest in the house or not…such as the electric, real estate taxes, insurances and cable TV bills.  Variable costs are the extra costs when you have a guest, including:
    –  Food costs (take your annual food costs and divide by the number of room-nights sold…should be about $8 or $9).
    –  Laundry (use about $4 per room)
    –  Room amenities (shampoos, soaps, munchies, etc….perhaps $3?)
    –  Housekeeping labor and the withholding associated with wages (probably in the $10-$12 range)
    –  We won’t count the little bit of extra utilities a guest will use.
    –  Add a buck or two for the office supplies (confirmation letters, postage), wear and tear on the linens, etc.

This Variable Cost adds up to about $25-$30 for the first room-night…about $15 more for a second night’s stay.

  • Take the rack rates for the rooms you wish to dedicate to this effort…say it’s $160.  Divide that by two to figure in the 50% discount to the purchaser.  That leaves $80 price for the voucher in our example.
  • You can expect to pay at least 30% commission to the company.  They will also, most likely, charge you the credit card fee they have to pay (let’s say 2.5%).  That leaves $54 which is sent to you for each voucher sold.

    Then compare the proceeds you will receive with the Variable Costs you will incur…Worth it?

That is why inns are upselling other packages and services with their offer.  It increases the value of the voucher and ultimately the check received at a rate greater than the costs associated with the package.  But you must understand your costs.

On the good side of such an effort:

  • You can dedicate a time frame within which the voucher must be used.  Aim those dates to the holes in your schedules including the slow season and mid-week.  Stay away from the weekends and busy season when you will sell your rooms at your usual rates anyway.  You can put those restrictions on the voucher.
  • You can limit how many you sell so that you don’t have the risk of overselling for the time frame and angering guests.
  • Experience is showing a large number of younger couples taking advantage of the deals.  This is the NEXT generation of inn visitor…a valuable asset to the industry.
  • You will build your database with email addresses for future marketing efforts.
  • You can “hook ’em” with your hospitality so that they become repeat guests.
  • It seems about 20% of the vouchers will never be redeemed.  This is free income to you, but don’t budget it.

A few watch-outs from those who have used these programs:

  • The demographics of the visitors may not be your what you are used to.  They can be “cheapskates” (as one innkeeper put it), asking for other discounts and taking advantage of the free goodies you have around the inn.
  • “Sit by the phone” when the coupon drops…you will be swamped all at once.  One inn had a list of 60 callback names and numbers to get back to because the calls came in like a tsunami.
  • You will get calls from people trying to buy the deal after the vouchers sell out.  They saw it online and feel they have the right to book it directly with you.
  • The voucher holders tend to book early (as soon as they buy it) or late (just before they expire).  Be prepared with rooms for the procrastinators.

For those start-up inns or inns with very slow months of the year…I think it’s a valuable tool for cash flow.  Any other inns out there doing it?  Would love to hear your comments.    Scott

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3 Responses to “What’s All this Stuff about Living Social and Groupon?”

  1. Peter Scherman says:

    Thank you, Scott, for giving folks some good food for thought. There are many innkeepers experimenting with these programs, and learning as they go. To the extent that an innkeeper can take advantage of these programs successfully, everyone gains. If any innkeeper is thinking of one of these programs and wants to toss the idea around, feel free to contact any of us in The B&B Team. We’re getting lots of anecdotal evidence of what works and what doesn’t.

  2. brass says:

    Thanks for a very informative blog. I do appreciate and respect the importance of the “heads on beds” motto I learned through the B&B Teams Aspiring Innkeeper Seminar. I still hear Peter’s voice when we have that walk-in potential guest on a rainy Tuesday evening when the discussion then centers on the room rates (typically before we can even show them our rooms). Understanding and considering the potential of this room night in the bank versus “lost” to the night has helped us complete the sale many times. Thanks Peter and Rick!

    Now,if I read this right, the profit after all is said and done, for the example above, (which would also be very similar to our particular business model) is about $14 per night. Hmmm, I guess that is still better than $0/night. And hopefully there would be some advertising benefit through word of mouth. Though, it just seems like a lot of electronic maintenance for $14/night/room.

    I am, however, still having a hard time convincing myself that the deep discounts (50% or more) will not have an adverse effect on the percieved value of our rooms. And I know that this would be offset by strictly limiting the offers/coupons to those times when typically no one is here anyway.

    With that said, I know we need to be nimble and adaptable in this type of business or risk losing market share to our more nimble and adaptive competition. We are considering this option with the add ons consideration you suggest to hopefully boost the net profit during our absolute slowest weeks. Fortunately, we are coming out of our slow season and the early indications are that we have a strong looking summer ahead. We will continue to monitor the discussions on this latest trend to see where things flush out and look forward to possibly working this in to our Stick Season. Thanks.

    • scott-bushnell says:

      Hello, Lewis family! Thanks for the comment. I am hearing from a number of inns the concern about the perception of cheapening the image of the inn by participation in one of the discount programs. Since these programs are special offers, one-time deals, etc, I don’t think I would be too concerned about that.

      And with the profit margin so slim (and I see some inns actually losing money because they don’t know the the variable and controllable costs of a booking at their inn, I am coming to the conclusion that there are some rules of thumb to consider:
      – Always put a cap on the number of vouchers sold
      – Always have an expiration date (a use-by date) or black-out dates that avoid your busy season or weekends when you know you will sell full-price rooms anyway.
      – Always capture guest contact info for future marketing
      – Always try to upsell other inn services (additional nights, spa services, gift baskets, packages, etc) upon reservation AT THE FULL PRICE.

      I have actually developed a simple Excel worksheet into which inns can input some key data that will help calculate their profit with such programs (or more importantly understand the total costs). If you would like a copy, just email me at scott@bbteam.com.

      Thanks for your comment and congratulations on the strong season that appears to be shaping up for your inn! Scott

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