Understanding the Problem

Like “core software” in any other business, the job of a Property Management System (PMS) is to enable all processes at a hotel to promote efficiency and enhance profitability.  Yet, ask either a CEO of a PMS or a GM of a hotel:  “can the PMS do a better job for the hotel than it’s currently doing?” If being completely honest, both will answer yes.

So how can the PMS help their hotels optimize efficiency and profitability?

Invariably there are answers to this from the PMS and hotel perspective.  It’s important to understand both in order to resolve the right path forward for technology in hospitality.

This article will evaluate the challenges from the PMS perspective (the next one will dive into the hotels’).  Subsequent posts will discuss how PMS’s and hotels navigate the inherent barriers to generate the value both seek.

Boiling down “off the record” conversations with PMS CEOs, there are two primary challenges their businesses face which make it difficult to innovate faster and are at the root of most obstacles:

“Far and wide” versus “narrow and deep”

In tech parlance, a PMS is essentially ERP (Enterprise Resource Planning) software. ERP applications streamline business processes across an organization.  ERPs go “far and wide” being essential or involved in almost everything a business does.

In hotel technology, innovation occurs in the highly specialized application areas.  These are “narrow and deep” platforms like Channel Managers, Customer Relationship Management and Marketing Automation, Revenue Management Software, Operations, Sales and Catering, Payments, et. al.  All told there are more than a dozen of these vertical software categories hotels may use. 

Why did PMS’s allow Channel Managers, Revenue Management or Operations Software to exist, for example?  These vertical applications needed the PMS more than the PMS needed them.

PMS’s were stretched too thin providing expansive customer service to the hotels while maintaining their systems and integrating with these specialized applications. So they missed out on driving the benefits the vertical providers offer.

What’s astonishing is that in some instances a hotel pays more in licensing fees to a single specialized application than it does to the PMS.

The CAC Conundrum

The good news about the PMS customer base is it’s pretty “sticky”, with annual customer churn averaging single digit percentages.  Switching out of a PMS is not easy.  But that presents a challenge with customer acquisition.

To achieve any revenue growth, PMS’s must at the very least replace the customers they lost.  Since it’s hard for a hotel to change PMS platforms, this means a PMS must invest in sales and marketing in order to keep their customer church positive. 

Here’s the challenge:  the real CAC (customer acquisition cost) is often higher than most small to mid-size PMS’s have the capital to support. PMS’s flush with venture capital have a hidden CAC challenge – the CAC they model is high, allowing them to deploy capital into customer acquisition while running up significant annual deficits but, most often, the actual CAC ends up being even higher which ends up squeezing shareholders by constraining the valuations needed to produce good internal rates of return (IRR).

What Keeps a PMS CEO Up at Night?

With this context it’s now easier to understand what worries PMS leaders.  When you have honest conversations with them you learn that these are the stresses running through their minds:

Small to Mid-Size PMS CEOs

·      How do we capture more revenue for all the things we are doing?  With all these apps and new software coming to market it feels like the “tail is wagging the dog.”

·      When we sell the company, how am I going to have enough money to retire or do something else?

·      We need to be two to three times the size we are now in order for us to sell – every year we keep adding new features and initiatives yet our revenue stays pretty much the same.  What do we do?

·      How do we balance this company as a lifestyle business versus something that’s growing and investable?

VC-backed PMS CEOs

·      The valuation of our last raise requires near “rule of 40” performance.  We are not achieving that – I may get fired or our equity could get crushed.

·      The CAC we sold to our investors is not panning out – it’s higher and the LTVs are speculative – what do we do?  Should we try M+A to offset what we are losing in organic growth?

·      The IRR our investors modeled may not be achievable because it’s going to take us more time and potentially more money to achieve the revenue growth targets we promised.  What do we do?

This article is part of a series that address systemic issues facing PMS’s and hotel technology. We will also address what the future must look like in order for hotels and hotel technology businesses to succeed. 

The next article will discuss the problems with the PMS from a hotel perspective.

This article is written by Rich Maradik, CEO of NSight Holdings.