The MK Hotel: Performance and Incentives

Overview of The MK Hotel

The MK Hotel: Performance and Incentives

The MK on the Florida coast. The hotel has several restaurants, gift shops, meeting spaces, an outdoor swimming pool, and a spa. Alice herself had never worked in a hotel before, so she studied the reports and financial statements of The MK carefully in order to develop an understanding of the business.

Alice noticed that on most nights the hotel had a large number of unsold rooms. It intrigued her that 150 to 170 unites frequently stayed vacant while the other rooms were sold successfully. Why couldn’t all or almost all of the rooms be sold? She decided to do something to address that question, and, being a former salesperson, she understood the importance of motivation. She talked to Jim, who was in charge of the front office. It was Wednesday of the first week in March. She offered him an incentive in the form of a performance bonus for each sold-out night for the rest of the month.

“I think it’s possible to fill the hotel, provided I have the flexibility to use different price points”, suggested Jim. Alice told him she wanted to sell out on as many nights as possible and authorized Jim to use whatever tactics he saw fit-after all, he was the one with the industry experience. They agreed to discuss the March results early in April.

One day in the first week of April, Alice and Jim reviewed the hotel’s reports for March over cups of coffee in the back office behind the front desk. The MK’s occupancy rate showed a record high for the whole month. The hotel had produced a monthly occupancy of 85 percent! Alice could hardly contain her satisfaction. Fifteen sold-out nights! They came really close to a full house on a number of other nights as well. Alice congratulated Jim on a job well done and handed him an envelope with a check. The performance bonus was well deserved, she thought.

Alice kept studying the monthly reports after Jim returned to his post at the front desk. She was pleased with herself and couldn’t stop smiling-until she saw the report on room rates. She cleaned her glasses and took a closer look at the printout, because she didn’t believe her eyes at first. The hotel’s posted room rate was $100 in March. After all group discounts, senior discounts, and agency commissions were factored in, Alice expected the average net rate for March to be at least in the high $80 range. However, The MK’ net rate was only $60. Alice couldn’t believe it. Clearly, Jim had discounted frequently and heavily to sell out.   

After some time for reflection and more coffee, Alice realized that March’s inventive for Jim had involved only one key variable, which could account for the problem. She wanted to be a shrewd hotelier, and, after a chat with Jim, he accepted the new challenge for the new month. Alice would pay him a performance bonus for April if the hotel’s ADR reached $180 or more.

April was a month of softer demand, but as far as Alice was concerned the hotel had a good chance to keep its rates up. A competitor hotel in the area started an extensive renovation project and closed down half of its rooms as well as its outdoor pool. Also, the new highway sign for The MK was finally put up, and Alice had high hopes for that as well.

April was not as busy as March had been. Anyone could see that by simply looking at the number of cars in the hotel’s parking lot, which Alice had a habit of doing each night. She also noticed that the vehicle hotels were somewhat different in April: She saw old, beat-up cars less frequently than she had in March and noted more new-looking SUVs and import autos. She prepared for the end-of-the-month meeting with Jim with eager anticipation.

At the meeting, Alice was impressed by the increased ADR for April. She congratulated Jim for reaching a record ADR of $200, and handed him another bonus. Clearly, Jim had stopped the practice of indiscriminate heavy discounting; this change had resulted in a dramatic ADR turnaround. In fact, he had not made any rooms available to OTAs (Online Travel Agents such as Expedia.com or Booking.com), so the ADR was also the net rate.

Unfortunately, it was not only the ADR that changed drastically in April. The hotel’s monthly occupancy took a nose dive, dropping to 40 percent less than half of the occupancy in March.

Alice scratched her head. She is learning the hotel business the hard way, she thought ruefully. She is now considering reading up more on room statistics and hotel data analytics and learning how to evaluate a hotel’s performance properly.