Every time a new project enters our practice we receive the same question from our client: “How much money will my hotel cost?”. We always answer the same: “We are here to define how much money your hotel must cost”. Defining the maximum admissible investment for hotels (MAI) in 5 steps.
We assume that our clients invest in hotel buildings to earn money and recover their investment at an internal interest rate equal or higher than the cost of capital. In order to define how much money the client should invest, we recommend approaching the MAI issue by creating a business model through the following 5 steps:
1. Measure your destination
Identify key performance indicators as ADR, Occupancy Rate and REVPAR per category, in order to measure your minimum and maximum turnover.
Output: Market size
2. Define your reference business area
Define a perimeter around your location (real or target) where you can identify all the existing hotels that could be considered as your future competitive set (compset).
Output: Direct and indirect Competitors
3. Estimate your location potential
Test your location (real or target) maximum potential in terms of possible construction area, type of building and facilities so as to define your base cost and its impact per room. Hotel buildings are expensive, especially considering their need for an appropriate location, long lasting technical infrastructure and a smart combination of operational equipment, pieces of furniture and decoration.
Output: Own Capabilities
4. Calibrate your positioning
Create a positioning map by combining your compset ADR, reputation and size, and find your target positioning.
Output: Direct Competitors (compset) and positioning
5. Test your performance
Calculate your return on investment by combining your potential revenues (coming from your destination capabilities and your compset performance indicators) and your base cost defined by your location maximum potential and your product category expectations.
Output: Accurate Business Model
…and then play the song!
Once we are confident about the investment that both our market and location are capable to absorb without jeopardizing business targets and financial capabilities we are able to approach the product definition process.
Either if your business model is over performing or underperforming the reference market indicators, it’s more than important “listening” to market voice at this stage of the process in order to adjust your investment to your business model real capabilities.
There are several and easy to apply tools to help your business model fine tuning with your market at design phase. On the other hand, there are little ways to recover a business model that is suffering of “over investment”.