Hotel Classes: Why “Bottom-up” is Better than “Top-down”

August 29, 2011 in Journal by Hotel Compete

We had a phenomenal response to our recent posting on User-Generated Review Scores.  We’ve been digging deeper into that data, and we’re getting ready to share more details with our readers.  But before we do that, we need to introduce the idea hotel classes and the role that they play in performance analysis. 

Way back when we started running detailed analysis of all of the hotels in the market, we came up against an analytical road block.  Traditional notions of chain scale – while useful for broad classifications of hotels – offer little insight into the nature of individual properties.  Taking hotel brands as an example, we know that some are more consistent than others, and that creates an analytical headache.  

Suppose we are trying to understand how a hotel is positioned relative to its direct competitors.  A hotel’s class should be a key variable in understanding: who its most direct competitors are; and  what each of the competitors is like.  Unfortunately this is where chain scale breaks down: if we know that “midscale” includes a number of brands that are varyingly consistent, then what can it reliably tell us about the specific hotels in the comp set? 

The problem with chain scale is that it’s a top-down categorization of hotels – ie one that’s based on the values and the aspirations of a hotels or brands, rather than a true reflection of the properties that make up that brand.  Brands have expanded through franchising arrangements, and therefore strive to keep brand promises through hotels that they usually neither own nor manage.  Consistency is therefore critical for understanding hotel, and ultimately brand performance, but the top-down views of brands and of chain scale miss this critical variable. 

To make hotel classifications more useful, we need two things: 1) a more detailed set of hotel classes that do more to differentiate hotels than current chain scales; and 2) a way of allocating individual hotels to classes, rather than entire brands.  Let’s deal with those two components in turn. 

The table below shows an alternative set of hotel classes.  It is based on extensive segmentation analysis of all of the hotels in the US market.  The categories have been defined through detailed analysis of the characteristics (eg amenities, services, location, etc) of each individual property.  Extensive testing and client experience shows that this classification model is detailed enough to make sense of a complicated hotel market.  

List Of Hotel Classes

Finally we have to deal with the problem of allocating hotels to hotel classes.  Here we have to break with the industry’s traditional top-down approach of attaching the brand to a chain scale and assuming that all hotels within that brand follow suit.  Instead we complete the picture from the bottom up, allocating each individual hotel to a class, based on what that specific property is like. 

Assigning hotels to classes from the bottom up carries great benefits for anybody attempting hotel market analysis.  It is a great way of characterizing the types of hotel that form any local market.  It also helps us to understand a hotel’s true comp set (a subject close to our hearts as readers of this blog will know!)  When we assign all hotels to classes based on what they’re like, each hotel’s direct competitors should be relatively close on hotel class scale.  The top-down chain scale approach offers too little insight into specific product quality for this type of analysis. 

But perhaps the greatest benefit of the bottom-up approach is that it allows us to account for brand consistency/inconsistency.  Each brand has the potential to find its hotels spread out across multiple hotel classes, and this should be accounted for in industry metrics.  This has long been a weakness in the lodging industry, and we will return to the subject in the coming weeks and months. 

Please check back or subscribe to our blog to start receiving updates on the analysis that we’re going to be publishing using – amongst other things – this system of hotel classes.  We promise the results will surprise you!