7 Foundational Cornerstones For Managing Hotel Spa Profitability In A Post-Covid World

When I first got involved with hotel spas back in 2015, spas did not receive the same level of attention and performance scrutiny we applied to other departments. The reasons were multifold and mostly caused by an outdated paradigm.

Why do hotels build spas?

• to differentiate themselves from the competition
• to add more depth to their brand
• to diversify their amenity offerings for hotel guests

And yet, the revenue generated by hotel spas was always considered minor in comparison to the revenue generated by rooms, F&B, meetings, and events.

Yet times have changed dramatically. By 2018, global ancillary wellness spending including hotel spas exceeded $500B annually. And while the pandemic has temporarily halted the continued expansion of the global spa market, it should come as no surprise that hotel spa & wellness experiences will be sought after once demand starts to rebound.

Has the focus on personal wellbeing changed hotel spa customer expectations?

Driven by changing demographics and a greater focus on personal wellbeing, customer expectation has shifted significantly. Total body wellness is no longer just an afterthought; it has become a lifestyle. Add to that the need for emotional and spiritual care, and hotel spas and their qualified providers are perfectly positioned to deliver.

Hotel spas, with their broad range of services and products, are destined for unprecedented growth if they use the downtime to reevaluate their protocols, processes, and procedures.

Seven basic cornerstones to optimize hotel spa profit in a post-pandemic world

1. How to set up and analyze quantifiable data

“If you can’t measure it, you can’t improve it.”

The first challenge will always be the availability and accessibility of quantifiable data

When starting to evaluate your hotel spa performance, the first challenge will always be the availability and accessibility of quantifiable data. Without it, identifying areas of opportunity and goal setting becomes next to impossible.

Ideally, P&L statements are available, helping to discover many critical data points. Hotel spa software reporting can provide additional information. As with all systems of record, the phrase “garbage in, garbage out” applies.

Any available data must be validated first. Once validated, additional data points can be determined and configured.

Minimum data points to include when analyzing data to find areas of opportunity in spa profitability

With the assistance of a qualified analyst and the below data points, suitable reporting is easily set up.

Big picture data for overall tracking of hotel spa customer origin and ratios of realized revenue

More specific categories of data to collect to track revenue streams within the hotel spa

System and accounting updates are implemented according to USALI (Uniform System of Accounts for the Lodging Industry) standards. The more challenging part is the required change in behavior and processes when reviewing the human factor, covered in more detail below.

There will be a lag time from when data points are first tracked until profit-centric SMART goals can be established. Another point that comes up frequently when starting to track performance is benchmarking.

While STR’s HOST report can provide some guidance on industry and competitive set performance, using year-over-year and month-over-month data for comparison is critical. Only then can we identify trends and develop appropriate long-term strategies.

2. Identifying opportunities to increase top-line revenues and optimize expenses

As we know, there are two ways to drive profit: increasing top-line revenues and optimizing expenses. Since both areas are interdependent, we must evaluate them simultaneously. A thorough analysis of the now validated data will reveal opportunities relating to the ones with the most potential to drive incremental profit.

Regarding overall revenue generation, the largest contribution for most hotel spas still comes from body, facial, and massage services.

A massage tends to be slightly more profitable compared to a facial due to the lower quantity and lesser quality of the products used for the treatment. But when considering total revenue potential, facials can generate exponentially more profits in the form of treatment, add-ons, and post-treatment retail sales.

Therefore, a detailed understanding of the precise components of each service offered, including its total revenue potential, is essential. We then apply a variety of strategies:

• increasing the number of treatments (frequency)
• raising prices
• optimizing ancillary spending

The objective is to increase revenue, using RevPATH as the main performance indicator to measure success. The introduction of new business concepts, such as membership or subscription models, can also lead to significant profit upside.

On the expense side, it is essential to understand the various components as part of a thorough assessment.

Labor-related expenses are always the highest cost factor and therefore deserve special attention.

In California, for example, hotel spa compensation is customarily paid in one of three ways:

• mandatory fixed hourly minimum wage
• dynamically calculated commission derived from the actual treatment price
• dynamically calculated share of a service charge, also derived from the actual treatment price

One approach is to change the commission from dynamically calculated to fixed per individual service. The elements of treatment duration and price would be used to determine its value.

As a result, any revenue growth coming from menu pricing increases would not be automatically offset by a dynamic increase in therapist commission. Any additional revenue could then be partially reinvested into training and marketing, subsequently generating even more revenue.

I want to make a point, though. It is definitely not the objective to short-change spa therapists. Instead, changing the compensation structure allows for a more sustainable long-term growth and subsequent benefits for all stakeholders. As always, local circumstances must be considered to avoid negative implications on recruitment as much as possible.

Operational expenses are another area where hotel spas can streamline costs.

Soft goods such as robes, slippers, sheets, and towels present a significant opportunity due to the sheer amount used over the course of a year. The Hotel Spa Director plays a critical role here; they own the relationships with all key suppliers. I have seen savings of over 20% through effective renegotiation of terms and consolidation of sources. Also, those savings will increase exponentially when multiple spas under the same management go through the same process.

With the pandemic squeezing profit margins more than ever before, adequate labor expense management is of the essence. Additional safety protocols increase treatment room turnaround times, which must be considered when managing inventory and resource capacity. With hotel spa demand still highly volatile, dynamic and demand based staffing models are mission critical.

3. A Call for Better Hotel Spa Technology

As we have heard before, innovation in the hospitality tech sector has been slow in the past. This is especially true for hotel spa technology. One would think that with the amount of money at stake, there would be reasonable efforts to address pain points. But despite some progress, issues persist.

One major obstacle, which does not affect standalone spas, is the need to integrate with a wide range of other systems, most notably a PMS and a CRM. Most spa systems were not built to be part of a fully integrated ecosystem. While they generally work well in isolation, they cause issues when having to “play” well with others.

15 questions to ask when selecting hotel spa software.

• What integration protocols are employed, i.e., HTNG, OpenAPI?
• How are payments processed, interfaced, and reconciled?
• Is there a native booking engine that allows for a high degree of customization?
• Does the system come with a built-in CRM, or can it integrate the third-party one I’m already using?
• Does the system support dynamic pricing or advanced yield management capabilities?
• How sophisticated is reporting? Are critical data points, such as RevPATH, tracked automatically?
• Is it a true SAAS solution that is OS, browser, and device-agnostic?
• Is a native gift card or loyalty program included?
• Does it come with an advanced inventory management program?
• Are all essential forms digitalized, i.e., waivers, intake forms?
• Is the reporting adequate, tracking key data points? Can the data be extracted easily?
• How are employee tracking, payroll, and scheduling handled? Is dynamic scheduling available?
• Is advanced forecasting and budgeting supported?
• What are the labor expense management capabilities of the system?
• How will the appointment calendar handle group bookings?

This list is by no means all-inclusive. It serves as an example of the complexity of the selection process. Spa software providers and other relevant technology partners must make considerable effort to accelerate innovation and streamline processes. We live in an integrated world where all stakeholders need to move in the same direction.

4. The Human Factor – change in behavior and processes

Over the last couple of years in working with Spa Directors and their teams, I have realized that spa therapists are artists. They create unique experiences. No one else in the hotel gets closer to customers, literally. As such, it is vital to keep the human factor in mind when assessing the hotel spa, its potential, and any changes that need to be made.

I have previously spoken about some of the difficulties of driving change, and I do speak from experience when saying that fundamentally changing the status quo in an existing hotel spa is not easy.

The introduction of dynamic pricing and customer backlash

Although strategic discounting is standard practice at hotel spas, there is still a perception that the introduction of dynamic pricing would lead to substantial customer backlash. But with demand-based pricing now utilized in all areas of life, I firmly believe that the spa customer should have no objection to it if it is clearly communicated.

Driving substantial and lasting change requires a highly versatile and motivated Hotel Spa Director. Along with a positive attitude and an ability to persuade people, the Spa Director can disseminate business objectives quickly and efficiently. Also, their internal communication can focus on the common good of sustainable growth and its subsequent benefits for the individual.

Without the buy-in from the Spa Director and their teams, any implemented change will be short-lived. To make a real impact, the team members not only have to understand those changes, but they must also embrace them. Incorporating them into their daily routines and habits will reap the benefits of these changes.

5. Collaborating for Hotel Spa Success

Hotel spas have operated in isolation from the rest of the hotel for a long time. That situation has led to missed opportunities, which in turn equated to millions of dollars in lost profit over the years. We need to ensure that the hotel spa director has a permanent seat at the table. That includes participation in weekly revenue strategy meetings, forecast reviews, P&L debriefings, twice-monthly marketing meetings as well as conference pre-cons.

As stated previously, successful collaboration starts with the availability of quantifiable data. If we understand revenue and profit contribution on a micro level, we can all help hotel spas to make better pricing, sales, and marketing decisions.

Revenue and profit contribution in practice

• Marketing will promote high-profit services to the right customer staying at the hotel or living in the local community.
• Revenue Management will assist in revising dynamic pricing based on the day of week and hour of day demand.
• Finance will challenge the weekly operations and labor expense forecast.
• The sales team will include spa e-brochures in their proposals.
• The conference team will finish all their site visits with a sensory experience at the hotel spa to promote its services to their clients.
• The Front Desk team will refer any qualified, last-minute in house treatment customers.

The basis for mutually successful relationships with other departments is proactive communication and a general understanding of the hotel spa’s service offerings.

One word of caution as it relates to partnering with any external parties: it is paramount to run a full risk vs. reward analysis before entering any contractual partnership with an external spa management or branding company.

Core points to be considered include customer and staff perception, cost, the adverse impact of exclusivity, potential CAPEX requirements, and overall brand match.

6. The Importance of Retail

Another way to push hotel spa profitability above 40% is to increase the share of retail as part of the total revenue mix. The reason for retail to deliver higher than average profit is the lack of any significant labor component coupled with an average keystone mark up of at least 50%.

A comprehensive retail strategy is required to cover beauty products and a large variety of soft goods such as robes, workout clothes and other general wellness merchandise.

What makes up a comprehensive hotel spa retail strategy?

• An advanced inventory management software coupled with an easy to use and integrated EPOS system

With larger spas handling inventories of more than 1000 SKUs, the use of this software and system is critical. Detailed backend reporting will then allow for a thorough analysis to avoid any dead stock and instead focus on high-turnover items with attractive markups to boost profitability.

• The visual display and sensory experience of items are crucial for high volume sales.

Besides inventory management and analysis, the visual display and sensory experience of items are crucial for high volume sales. Items need to be easily accessible, not just at the spa itself. One needs to ensure that signature products are also prominently featured across the rest of the hotel. Examples include scented candles at the hotel reception, soap in public restrooms, and shower gel/shampoo deployed via bulk dispensers in the hotel bedrooms.

• Spa products can be used for corporate gift drops and in-room group amenities.

Products are also sold as part of the pre-arrival guest amenity program and are included as premium room amenities, allocating 70% of the retail value back to the spa.

How to integrate hotel spa retail suppliers, therapists, and receptionists for maximum impact on profitability

Similar to soft goods and other retail products, suppliers of hotel spa beauty products should be chosen wisely. A product line’s price point and brand perception must be in alignment with the hotel spa’s main customer base.

However, there is no argument against carrying multiple lines that build on or complement each other. The objective is to drive product sales to spa treatment customers and casual visitors alike. As an upside to having selected the right partners, complimentary gifts, preferential purchase terms, and free training sessions are an appreciated byproduct.

Because for any retail strategy to succeed, substantial training is essential. But training spa therapists is not enough. Contrary to common belief, it is the spa receptionists who do most post-treatment selling. Any other hotel team member expected to pitch spa products as amenities should at least participate in a basic product training session.

7. Wellness Experiences

The last point I want to make is about the impact of non-traditional spa revenue on hotel spa profitability. Examples include wellness experiences such as yoga, meditation, and nutrition, to name a few. As per the 2018 Global Wellness Institute report, global spend on wellness services overall has exceeded $4.5 trillion.

The benefit here is scalability, which allows for any of those experiences to drive profit exponentially. They make for perfect intimate group activities, especially as planners increasingly want wellness in some shape or form to be part of their programs.

Profit margins can easily exceed 80%, and the opportunities are endless. Integrating local vendors into your retail efforts further enhances the number of unique experiences. Once a wellness experience strategy has been developed, Marketing, in collaboration with the Spa Director, will produce visually appealing collateral, which is then easily shared during the hotel sales process.

Conclusion

Hotel spas are so much more than hotel amenities. They are fast-growing for-profit businesses within a hotel.

While spa revenue itself is still considered ancillary revenue by some, hotel spa strategies must be holistic to successfully generate revenue from a multitude of sources, channels, and customers. Effective collaboration and communication with internal and external stakeholders are critical for sustainable success.

It all starts with the availability of quality performance data to identify and prioritize opportunities, and ultimately optimize profit. Offering spa experiences which meet customers’ expectations of personalization and emotional care while maintaining a profitable business can be challenging.

When restrictions are lifted and the COVID19 vaccination has reached the majority of the population, hotel spas must be well positioned to effectively handle the anticipated increase in demand.

Contact us to find out about our profit enhancement solutions for ancillary revenue departments.