The present operation of Peaceful Rest Motor Lodge is losing money and the occupancy is below the industry average despite the low price. Tristan Knaus must decide between making minor changes in the operation or joining a motel chain such as Days Inn and Holiday Inn.
Advertisement and Sales Promotion
The management does not use enough time or funds to advertise or launch sales promotions, resulting in low occupancy rates. This keeps the cost low for Knaus and the customers but he relies on his customers to find the motel as they go towards the resort area. There are no signs that indicate the location of the motel except for the two signs in front of his motel. According to the U.S. Small Business Administration (n.d.), signs are an inexpensive and effective form of advertisement that works every day of the year. Without a sign, potential customers of the motel will pass by without knowing about the business’ existence.
The current culture of the motel is not customer-centric, resulting in few online reviews and low occupancy rates. According to Anderson, there are an increasing number of customers that utilize online reviews before making a purchase. Furthermore, he found that there was a positive relationship between the cumulative impact of user reviews and the overall hotel performance (2012). Gustavo (2013) suggests that online review sites such as TripAdvisor can be a “strategic tool in the relationship with the consumer by ensuring a privileged and efficient means of communication and information management.” Although customers generally leave positive reviews for Peaceful Rest Motor Lodge, there are not enough. This may deter potential customers from booking a room.
Lack of Recreational Facilities
The motel does not include recreational facilities such as a pool in order to cut unnecessary expenses and avoid direct competition with full-service resort motels, resulting in low occupancy rates. Knaus found that 78% of visitors thought recreational facilities were important in their choice of accommodation. Although it is costly to maintain a pool year-round, general manager Greg Bryan stated that 60 to 70 percent of their potential customers ask if there is a pool (McMullen-Coyne, 2005).
Target Market and the Physical Environment
The physical environment of the hotel does not attract the target market to come in, resulting in low occupancy rates. Knaus noted that many people drive in the parking lot but do not go inside to register and book a room. According to Bitner (1992), “the physical environment can serve as a differentiator in signaling the intended market segment, positioning the organization, and conveying distinctiveness from competitors” (p. 67).
Lack of E-Commerce Site
The motel does not have an e-commerce site where customers can find information and book rooms online, resulting in loss of sales in a competitive environment. According to Phelan, Christodoulidou, Countryman, and Kistner (2011), e-commerce sites are advantageous for hotels because it improves the reservation and sales process, sells the experience of the service, and gives customers the convenience of self-service and accessible information anytime.
Evaluation of Alternatives
Knaus has some alternatives to increase the occupancy rate and revenue: make minor operation changes, join Days Inn, or join the Holiday Inn.
Make Minor Operation Changes
Knaus could make minor operation changes such as launching a low cost but visible sales promotion, improving customer service, maintaining and designing the appearance of the motel to attract target customers, and creating an e-commerce site.
Advantages. Making minor operation changes will allow Peaceful Rest Motor Lodge to remain independent while attempting to increase occupancy rates and revenue. Knaus would not have to pay a franchise fee and he could use the revenue to invest in the motel. Moreover, an independent motel would have more freedom to promote its uniqueness because there are no franchise rules to follow (O’Neill & Carlback, 2011). Knaus would also have the option of joining a marketing consortium such as Small Luxury Hotels which provides a booking mechanism for independent hotels and gives consumers a sense of reputation recognition (Gustavo, 2013).
Disadvantages. Remaining independent would make it difficult to compete with the increasing competition in the area because the motel does not have a recognizable brand name yet. More visitors are passing by independent motels for brand name lodging because brand names have consistent quality and their reputations are known—a small business must continually invest in improvements to keep people coming (Lee, 1997). Turning the motel into a recognized name brand would take more time and money compared to joining a franchise. Remaining independent is also a riskier investment due to the higher variance in occupancy rates and revenue (O’Neill & Carlback, 2011).
Join a Franchise
Knaus could join a motel chain to remain competitive and attract customers in the area. His options are Days Inn or Holiday Inn. Advantages. Joining a franchise would give Knaus access to a central reservation system, national name recognition, nationwide toll free reservation lines which produces 40% of bookings in affiliated motels, and a website. Also, O’Neill and Carlback (2011) found that branded hotels in their study had significantly higher occupancy rates than independent hotels in all economic situations and significantly higher net operating incomes during economic recessions. This might be due to economies of scale in a chain and the customer loyalty programs that lead to more consistent occupancy rates throughout the economic cycles. Root (n.d.) mentioned that franchise owners might also have access to marketing support, business methods, and territory protection to improve their chances of success.
Days Inn Advantages. Joining Days Inn would not require any major capital investment. They are also an economy lodge brand; Peaceful Rest Motor Lodge and Days Inn both target customers looking for simple low priced motels. Days Inn also has proven sales promotions and membership programs that encourage customers to return. There are no disadvantages other than the ones that apply to both Days Inn and Holiday Inn.
Holiday Inn Advantages. Joining Holiday Inn could increase the room rate to $75 per day due to the required upgraded facilities. The addition of a pool would satisfy the customers who indicate that recreational facilities are important in their choice of accommodation. Holiday Inn also has television and print advertising and membership programs that encourage customers to return.
Disadvantages. Knaus would have to pay 8% of gross room revenues to the chain which covers the costs of reservation services and national promotion. There are also periodic inspections and he could lose the franchise if the facilities are not maintained. Root (n.d.) stated that becoming a franchise would be less flexible for the owner and if the franchise company experiences a scandal, the business could lose revenue as well.
Holiday Inn Disadvantages. Knaus would need new capital investment between $300,000 and $500,000 and the upgrades do not guarantee higher profit margins.
Support of Recommendations
It is recommended that Knaus join the Days Inn motel chain to protect the motel from competition, attract more customers, and increase occupancy rates and revenue. First, the mission of Days Inn closely matches the mission of Peaceful Rest Motor Lodge—to provide comfortable rooms at a good value. With a similar mission, Knaus can build on his idea of the perfect motel with the help of a franchise that provides name recognition. Joining Days Inn would also allow the motel to have the strongest probable financial performance—there is no major capital investment required. On the other hand, joining Holiday Inn would require a large investment while simply making operation changes would require time and money to improve the situation.
For the cost of 8% of gross room revenues paid to Days Inn, Knaus would acquire sales promotion, an e-commerce site, and customer service methods that could lead to numerous positive reviews; these are all critical issues of Peaceful Rest Motor Lodge. Acquiring the Days Inn name brand and making a few improvements on the appearance of the hotel would also attract customers to come in and book a room. In the future, Knauss would also have the option of adding recreational facilities such as a pool if he finds that it would be beneficial. Finally, the Days Inn franchise is in harmony with the internal and external environment faced by the Peaceful Rest Motor Lodge.
Vacationers and economic buyers can continue to book standard rooms at their location for a low price and Knaus already has management experience in a large firm. Despite the lack of extra amenities, becoming a Days Inn would increase the occupancy rate through sales promotion, an online presence, and a recognizable brand name. The franchise would do well in the high traffic location off the highway and have a competitive advantage over the more expensive full-service resort motels by targeting the growing millennial population on a budget. Although recessions and uncontrollable external events might lead to a decline in tourism, customers can trust the Days Inn franchise to be affordable, comfortable, and consistent in any economic cycle.
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