As the hotel market turns in favor of the sellers, hoteliers and groups are starting to look at the problem ofthrough a different lens and basing attrition on revenue, not room count.
“Since the dawn of attrition clauses, they have been based on numbers of people,” explains Steven Rudner, Esq., Rudner Law Offices, Dallas. “But what if we converted numbers of people to dollars?” he asks. In effect, the attrition penalty would be based on a revenue minimum, or dollar amount, as opposed to a minimum number of rooms picked up by the group.
In the past two years, hoteliers have used this strategy more frequently, observers say. It's an approach that's designed to alleviate, not exacerbate, a problem of attrition for planners, says Rudner. While it raises some concerns, many planners see value in the approach.
“We've had tremendous success with this concept,” explains Rudner, who says that planners have responded favorably to the idea in his experience. “If we keep doing it the way we've been doing it for the last 20 years, we're never going to fix this problem” of being charged for rooms blocked but not booked, he says. “I think planners recognize that hotels are trying to come up with creative ways to help them (with attrition).”
Avoiding a Bad Day
Here's how it works. A group commits to a block of rooms, as it normally would, and agrees to pick up 80 percent or 90 percent of the rooms, depending on how much permissible attrition is negotiated. Say the block is for 1,000 rooms with 10 percent wiggle room built in — that means that the group would have to pick up at least 900 rooms to avoid attrition charges under the traditional attrition clause.
But by basing attrition on a revenue minimum as opposed to rooms picked up, the parties would establish a revenue minimum based on the number of rooms the group agreed to pick up. Typically, the minimum is determined by calculating the number of rooms in the block, minus the 10 percent permissible attrition, times the rate. So, if the agreement calls for at least 900 rooms and the rooms average $200 per night, then the revenue minimum would be $180,000.
What this means is that it doesn't really matter how many rooms the group picks up as long as they pay $180,000. So, under the traditional attrition model, if the group only booked 800 rooms of the agreed upon 900, it would have to pay an attrition fee for the revenue lost on those 100 rooms, which at $200 per night, would be $20,000. Mathematically, it comes out the same, says Rudner. Either way, the hotel is going to get its $180,000. But here's the difference: Under the traditional approach to attrition, the group would be assessed, in this case, a $20,000 attrition penalty after the meeting. By agreeing to a revenue minimum, no penalty is assessed and the planner doesn't have to take the fall when it's time to pay the attrition fee. “Most executives aren't aware that attrition is brewing until the attrition bill comes,” says Rudner. “And when the attrition bill comes, it's a bad day for the planner. The boss assumes that the planner hasn't done a good job, when in fact it's the boss who hasn't done a very good job — it's not the planner's fault that people didn't show up to the meeting.”
But that's just part of it. The main benefit of this tactic is that the planner has the chance to meet the revenue commitment by spending it on better rooms for attendees. Instead of writing a check for $20,000 and getting nothing, the planner might be able to upgrade 10 attendees from a standard room with a queen-size bed to the best suite in the hotel. Since the group has made the commitment to pay a minimum, it might as well spend as much of it as possible. If upgrades aren't available, “you're still no worse off than you would have been if you based attrition on room counts,” says Rudner.
The same approach is being used with food and beverage, he adds. But instead of upgrading attendees to more expensive rooms, the planner might be able to make up the difference with better wine, more appetizers, or different menu items.
Show Me the Numbers
Lawyer James Goldberg, principal at Goldberg & Associates, a Washington, D.C.-based law firm that represents associations, has seen a lot more revenue-based attrition clauses in recent years. It may be driven by the increased focus that hotels have on revenue management, he surmises. In recent years, revenue managers have become more influential at hotels and these bottom-line-oriented clauses may be a result.
Goldberg says that he doesn't have a problem with the concept of revenue-based attrition clauses as long as the numbers add up.
For starters, he cautions planners to make sure the revenue minimum clause includes a number. “Most of the time, what I see is just some general language that says the hotel is expecting a certain minimum amount of revenue and if you don't hit 80 percent or 90 percent of it, you have to pay us the difference. You've got to define what minimum revenue is.” But even if the number is in the, Goldberg warns planners to do their own math because, “chances are they will have a different number than you will.”
He recently worked on a contract for an association client that included a minimum-revenue clause. “The hotel put a number in there that was about $45,000 over what I came up with, and I have no clue where they got that number,” he says. Often hotels will include anticipated ancillary charges (Internet, in-room movies, etc.) — based on what a typical guest spends, he says. For that reason, Goldberg recommends that groups put their own number in the clause, calculating room rates times number of rooms. “Have a number in there, and don't let them dictate what the number will be.”
Pay Before You Go?
Steven Rudner, Esq., Rudner Law Offices, Dallas, has a new concept in attrition — one that involves groups paying attrition fees before the meeting takes place.
Historically, hotels bill attrition fees when the meeting is over. “The problem with billing attrition when the meeting is over is that the planner can't do anything about it anymore — other than pay the bill and not be happy,” says Rudner.
But by billing attrition before the meeting, there's still time to avoid it. Sound confusing? Here's how Rudner sees it: “In the real world, planners are often very aware that attrition [fees are] looming because not enough people are registering for the meeting.” In many cases, but certainly not all, association executives are not — until the attrition bill arrives after the meeting.
A solution he has used with clients is to bill attrition on the hotel reservations due date — which is usually 30 days before the meeting. At that time, planners have a pretty good sense of whether they will fill the block. If the group falls short, the hotel would send a bill for estimated attrition to be paid before the meeting. The payment would be posted as a credit to the group's master account.
The question is: How does this benefit the group? When the planner asks the association executive to write a check for attrition before the meeting, it will get his or her attention at a time when it is still possible to do something to avoid it. The executive can exert his or her authority to help drum up attendance and fill out the block over the next 30 days, explains Rudner. If the group does manage to fill the block and meets its contracted obligation, all the money is returned to the association. If it gets halfway there, the group is reimbursed for half of the original attrition check.