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Why Upscale Hotels Charge for WiFi, and What We Can Learn from It

If you’ve traveled much, then you’ve probably noticed that the more expensive, “better” hotels charge for WiFi while the same service is often included in the room rate at less expensive hotels.  This phenomenon probably seems odd to you — isn’t this the opposite of what you should expect? In this article I’ll provide an explanation, and I’ll offer advice on how you can avoid the same problem in your own business.

Upscale Hotels were Early Adopters
The roots of the pricing problem go back to the early history of providing Internet access in hotels. The more upscale hotels were the first to offer Internet access, and because early Internet access required a wired connection, there was a considerable investment required to update a hotel’s infrastructure. Ethernet outlets had to be provided in every room, cables had to run through the hotel walls to link the outlets, and routers and bridges had to be added throughout the building to link together all of this cable. This required an expertise that was beyond the capabilities of most hotels, and so independent companies jumped in to fill the gap.

The independent company would wire your hotel, service all of the equipment, provide an Internet link, supply a billing system for customers, and deliver ongoing troubleshooting and support. And based on the negotiated deal with each hotel chain, the independent company would keep a percentage of the revenues. For some chains, the hotel provided most of the investment and took most of the risk, but in many cases during the early years, the independent company would provide the equipment and labor in return for a long-term contract which split the revenue between the hotel and the independent company.

This outsourcing model for hotel services is fairly common in upscale hotels. The same financial approach is often used to outsource the management of many other services provided on a hotel property: snack machines, florist shops, shoeshine stands, cleaners, car rentals, and even in some cases gift shops, restaurants and bars.

Less Upscale Hotels and Motels were Later Adopters
Other hotels and motels added Internet access later.  Some added wired Internet access, and some late adopters jumped over the wired Internet stage and went directly to WiFi, eliminating the need to put wired outlets in every room. By the time they adopted it, the less upscale hotels and motels viewed Internet access as a ticket-to-play item — not as a revenue generator. Not having Internet access was like not having cable TV; customers wouldn’t stay at the hotel without basic services. And the less upscale hotels don’t rely as much on the outsourcing model for hotel services, so even if they used an outside service to install the Internet equipment, they were less likely to negotiate a deal with their service provider to share revenue and cost.

Why Do Upscale Hotels Continue to Charge for Internet?
The practice continues because:

  1. Contracts for outsourced Internet service are still in place in some hotels. In some cases, the hotel doesn’t even own the equipment and cable — it’s owned by the outsourcing company. So there is no financial incentive to switch to free Internet service.
  2. Once the precedent was established, the practice of charging separately for Internet access was taken for granted by customers at the high-end hotels.  I’m sure the customers didn’t like it, but they still made the assumption that it would continue. And since the higher-end hotels rely more on business travelers and wealthy guests who are less cost sensitive, the practice has continued.
  3. Keeping the Internet cost separate allows the hotel the appearance of a lower room rate so that the hotel can appear to be competitive on price while still getting additional revenue from Internet use.
  4. Making Internet service free would eliminate a revenue stream that’s already factored into the hotel projections.
  5. The practice hasn’t yet had a significant measurable negative impact on hotel business.

What Can We Learn from This Example?
There are a number of lessons here that can be applied to technology decisions in any business:

1. Financial decisions are often made with an unstated assumption that the technology underlying the decision will not change significantly over time. Sometimes it’s easier to make the assumption of no change than it is to predict how the technology will change.  But regardless of how difficult it might be to predict technology change, you have to anticipate that technology will change.  Your best option is to make financial decisions based on the short-term: a payback in a year or two.  The longer the payback of an investment, or the longer the commitment of a contract, the more you need to factor into the decision the possibility of technology change.

2. It’s very difficult for a business to drop a revenue item, even in the face of customer dissatisfaction. And once a capital investment has been made, there’s a tendency to stay with that capital investment even if there’s now a better approach. Financial best practices call for depreciation of capital investment in order to apportion a one-time cost over the life of the investment.  But that shouldn’t mean that you’re stuck with using that same asset over the anticipated asset life when better, more cost effective technologies become available. The best strategic decisions are not always the same as the best financial decisions, and good decisions should be made looking forward — not backward.

3. Outsourcing a part of your business usually requires a commitment to a certain way of operating your business for the duration of the outsourcing contract. The financial advantage of outsourcing depends on the guarantee that things will stay the same. Don’t sign an outsourcing contract for a contract duration longer than you can vouch for such a guarantee. Outsourcing locks you in, and prevents change. Understand the consequences of that lock-in before you commit to a long-term contract.

4. The reasons something first happens are often different from the reasons something stays in place later.  But habit and repetition keep things going the way they were until someone challenges a practice.

Conclusion
I believe that upscale hotels started to charge for Internet access because they locked themselves into the practice by accident. They continue to charge because they haven’t yet seen an incentive to do otherwise. Where in your own business are you doing something because of a past decision that makes no sense in today’s world? What are you going to do about it?

Comments on this entry are closed.

  • John Hunter July 10, 2012, 7:32 pm

    Those are explanations for excuses. But it would not continue if the hotels valued customer focus (in the Deming way, not the amorphous – we care about customers but don’t take actions on that claim) they would not continue this practice. It is similar to the types of practices at airlines and large financial institutions; both of which have very poor customer focus.

    I think your explanation are sensible. I don’t think they justify the disrespect for customers exhibited by the practice. If you make a bad business decisions (as an early adopter) that doesn’t give you the right to foist the costs onto your customers. Accept the cost of your bad decision and move on.

    • Harwell July 11, 2012, 7:35 am

      Someone once said, “A reason is why you’re a certain way, but an excuse is why you stay that way.” What started out as reasons have turned into excuses. It’s almost as if the high-end hotels think their customers enjoy spending money.

  • Martin Erb July 11, 2012, 10:02 am

    I believe “5. The practice hasn’t yet had a significant measurable negative impact on hotel business.” may well be false. The larger hotels are retaining business traveles with free internet for frequent stayers. In a depressed market, it is hard to know what part of the overall growth one might have gotten if the internet access were free. In room Wifi (or even decent 4G for those on more generous expense accounts) is a must for most business travelers and many younger travelers. Our consultants eschew hotels without Wifi *in the room*. They know they are loosing business. Even the expensive hotels are providing free wireless in the lobby.

    • Harwell July 11, 2012, 10:38 am

      That’s a good point you make about offering free Internet for frequent stayers. I had forgotten about that angle. It let’s them further segment the market and still charge people who aren’t members of their frequent stayer programs. But while it rewards people who are already customers, it doesn’t do anything to attract new customers. And I guess that’s the philosophy of most of the big hotel chains: perpetuate the old until it breaks.

      Thanks for your comment.

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