Why “last year plus…” is not a commercial strategy

I have lost count of the number of times I have sat in a budgeting meeting and heard someone say, “We need to be 6% up on last year.”

It might be 5%, 7% or 10%, but the principle is usually the same. We take last year’s performance, add an uplift and suddenly we have next year’s target.

I understand why it happens. Finance teams need a budget, costs are increasing and owners quite rightly want to see growth. But my problem with “last year plus…” has always been that, unless we really understand what happened last year and what is likely to happen in the year ahead, that percentage is fairly meaningless.

But what actually happened last year?

Before we decide we want 6% more, surely we need to understand how we got to last year’s number in the first place?

There could have been a major event in the area that delivered a fantastic week of business, a competitor could have been closed for refurbishment, or perhaps the hotel secured a large group that won’t be returning. Equally, there could have been reasons why the hotel underperformed. Maybe rooms were out of order, an event was cancelled or the sales team was short-staffed for part of the year.

All of those things matter because they give context to the numbers. Last year is useful, of course it is, but simply looking at the final figure without understanding what drove it can give us a very misleading starting point.

The market has moved on too

Then we need to think about what has changed in the market, because the market you operated in last year may not be the one you are selling into now.

Has a new hotel opened nearby? Has an existing competitor added bedrooms or invested in its product? Have corporate accounts changed their travel patterns? Are events falling on different dates? Has new demand come into the area? What are you seeing in terms of booking pace and lead times?

These are the things that should be shaping the budget, rather than deciding on the percentage first and then trying to make the numbers fit.

Not every month needs to be 6% up

I also struggle with the idea that the same uplift should apply across every month. Hotel demand simply doesn’t work like that. You might have a genuine opportunity to grow February by 10% but find that achieving another 6% in August is incredibly difficult because last August was already exceptional.

Equally, you could have a month where the opportunity is far greater than the budget suggests. If demand is strong and the market can support it, why would we limit our ambition to 6% simply because that was the number agreed at the beginning of the year?

“But we’ve spent £2 million…”

And then there is CAPEX.

This is another conversation I have heard many times over the years: “We’ve spent £2 million refurbishing the hotel, so we need to put the rates up.”

Again, I understand the thinking, but spending money on a hotel doesn’t automatically mean that guests will pay more to stay there. Investment can absolutely create an opportunity to reposition a property, attract a different customer, compete with a new set of hotels or command a higher rate, but we still need to understand whether the market will support it.

The guest doesn’t know how much you spent on the refurbishment and, more importantly, they don’t owe you a return on that investment. What matters to them is the value they see and how your hotel compares with the other choices available to them.

Last year should be the starting point, not the strategy

None of this means we should ignore last year. Historical performance is hugely important, but it should be the beginning of the conversation rather than the answer.

Look at what happened last year and understand why. Then look at what has changed, what is coming up, what your competitors are doing and, most importantly, what your forward demand is telling you. From there, you can start to build a budget around the actual opportunities and risks you can see.

You may well end up at 6% growth overall, but perhaps February needs to deliver 10%, August 2% and October 8%. That tells you far more about the commercial opportunity than applying the same percentage across the board.

For me, a good budget shouldn’t just tell us how much more revenue we would like next year. It should show us where we believe that growth is going to come from and give us a commercially sound reason for believing we can achieve it.

Because even though you may want an uplift of  6%,  having a strategy to deliver it is a different story altogether