Bookmark Bookmark SelectedResource Center

Defining the right competitor set: similarity, competition and validity

Every benchmarking process is, essentially, a comparison. Thus, the ability to provide meaningful insights rests upon the relevance of the defined competitor set. Simply put, a competitor set is a group of similar hotels that are perceived as direct competitors. However straightforward this definition may seem, there are many subtleties to be considered that can render this task very challenging. In particular, there are two major questions you need to ask yourself when choosing a competitor set:

  • What characteristics make a group of properties similar?
  • What characteristics make a group of properties direct competitors?

Similarity

The most basic way to approach the task of defining a competitive set is by looking at properties that are similar to your own. Usually, this means identifying shared attributes, such as:

  • Number of rooms
  • Meeting space
  • Number and type of F&B offering
  • Spa
  • Age of the property
  • Amenities
  • Geographic proximity
  • Hotel type and class

Ideally, you would want to find a group of properties that are exactly the same as yours to have a perfect ground for comparison. Unfortunately, this isn’t realistic. Some hotels will resemble certain characteristics more accurately, while others will be similar in complementary ways. For example, a group of hotels might be the same type and class, have the same number of rooms and meeting space available, and be in the same zip code area. However, their F&B venues could be different, because while your hotel has an Italian restaurant, the others offer a range of varieties from modern-American to Thai. Does this mean that the properties are not similar? On the other hand, there may be other hotels located further away from yours, with more (or fewer) rooms available, with larger (or smaller) meeting spaces, but that have Italian restaurants just like yours. Should you leave them out of your competitor set?

There isn’t one way of defining similarity, especially for more complex operations. How, then, do you reconcile these different groups of hotels that are partially similar to yours but are completely different from each other? The answer is to create a diversity of comparable sets rather than trying to fit everything into one. You can choose a primary set made of properties you consider similar on the most relevant characteristics, and secondary sets for a more in-depth analysis of certain attributes. If possible, you would like to find a relevant secondary set for every department in your operation. In the example above, you would have a secondary set just to evaluate the operation of your Italian restaurant.

But why would you go through the trouble of defining different sets when you could simply use the one that approximates your operation the most? To answer this question, we must refer back to the ultimate goal of defining a competitor set: performing operational benchmarking to maximize profitability. In order to achieve this, you need to be as detailed as possible, finding the costs and expenses that are eating your revenue away, and trying to minimize them without affecting your service standards. Consider our previous example: comparing the cost of beverage sales percentage in your Italian restaurant to that of a restaurant focused on American cuisine may be deceiving. Consumers may drink wine with Italian food, which tends to have a high cost of sales percentage, and beer with American dishes, which tends to have a lower cost of sales percentage, and that could explain the differences observed. By comparing venues with similar food offerings, you are able to avoid that kind of variability and focus on the operational questions, like “are our beverage prices too low/high?” or “are we over serving wine when selling by the glass?”.

Competition

But a group of similar properties isn’t necessarily a competitor set. The second characteristic that needs to be met is that they are direct competitors. Competition is mainly perceived through the guests’ eyes. What other properties would they consider besides yours? In a way, this is another aspect of similarity that deals with the subjective attributes of an operation.

Because of this subjective component, competition is a more fluid concept than similarity. Unless the properties go through renovations or upgrades, their similarity remains unchanged. But competition can change seasonally, or according to the day of the week, among other factors. For example, a ski resort will compete directly with similar properties during the winter season, but during the spring and summer it may compete over weddings, social and corporate events with other destination hotels. In this case, during the winter you would probably focus your competitive set analysis on the revenues and expenses derived from the transient component of the Rooms department, the F&B venues, and Other operated departments (related to the ski activities), while in the summer you would most likely look at your other competitive set to analyze group business, and the conference and banqueting revenue and expenses.

Again, different sets of competitors can be defined for different competitive strategies.

Internal and External competitor sets

It is now time to present a classification of competitor sets that deals with the ownership and/or management of the properties included in it.

If you are comparing different properties you own and/or manage, you are dealing with an internal competitor set. Internal competitor sets are very useful when trying to identify best practices within your organization to maximize profitability. For example, you may want to compare Rooms Payroll as a percentage of Rooms Revenue for all your full-service hotels. This would help you understand the comparative ability of your properties to control payroll costs and see who is leading the group. Thus, best practices for labor costs can be put in place for the Rooms department across the entire organization, making your whole operation more profitable.

If, on the other hand, your competitor set is made up of properties that you do not own and/or manage, you are using an external competitive set. External competitive sets are an excellent indicator of your standing within the competitive landscape. For example, you could compare your departmental payroll expenses as a percentage of departmental revenue to that of your competitive set. Are you spending more, less or the average? What does that say about your staff-deployment efficiency? Should you develop any action plans to modify the situation? Again, the goal is to maximize profitability without jeopardizing your service standards. So, is there anything that you can learn from your competitors that can help you move towards that goal?

Rules for valid external competitor set formation with HotStats

Having explained the theoretical side of competitor set formation, we must now move to the rules that are in place in order to form a valid external competitor set. These rules were developed to guarantee the anonymity of the information provided to HotStats by the participating hotels. This means that there is no way to isolate the information of one property, brand, owner or operator.

Three conditions need to be met to have a valid external competitor set:

  • Sufficiency Condition: The set must have at least four properties, excluding your own.
  • Anonymity Condition: The set must have at least three different hotel operators, owners or brands, excluding your own.
  • Room Count Condition: No single operator, owner or brand may form more than 50% of the sample, excluding your own rooms.

Remember to re-assess your competitor sets periodically, because as properties are built, renovated or re-branded, they can become similar to your own and start competing directly for the same guests. Also, as more hotels are added to the HotStats reporting platform, more competitor set possibilities become available.

If you have any doubts about our competitor set formation rules, or would like to enquire about the possibility of updating your current sets, please don’t hesitate to contact us at enquiries@hotstats.com and we’ll be happy to help you.

Learning

NEXT RESOURCE

Is a Profit-Driven Hotel Management Agreement Fairer? Hotel owners and operators jostle for the upper hand in contracts

Trending Now Box URL