Create More Accurate Hotel Valuations with the Competitive Quotient

by | 10 January 2017

A true and well-supported opinion of property value can mean the difference between reaching a critical goal—securing a loan, closing a sale, reporting to investors, choosing the best asset—or failing to achieve it altogether.

When it comes to valuing hotels, a crucial part of the valuation exercise is understanding the competitive profile of a marketplace and the level of competitiveness of each property. To do this, you must have an accurate understanding of a property’s direct (or primary) competitors and indirect (or secondary) competitors.

A common reflex is to summarily ascribe all direct competitors a 100% competitive rate. However, hotels rarely go fully head-to-head like this because of the differences created by wide-ranging strategies and characteristics, such as:

  • Market segments
  • Operating strategies
  • Price sensitivities
  • Amenities
  • Facility needs

Furthermore, when representing the competitive rate of secondary competitors, the actual percentage selected is often somewhat arbitrary. In my work with clients, we employ a very useful tool to help address these challenges: the competitive quotient.


The competitive quotient represents the potential “overlap” between a property and its competitors. A competitor that has a very similar demand mix as the subject property would have a substantially higher competitive quotient relative to a competitor property that accommodates a vastly different composition of demand. The greater the overlap, the higher the potential competitive quotient.

Let’s look at an example that analyzes a real-life market offering a mixture of full-service, select-service, limited-service and extended-stay hotels. The competitive landscape of this market is such that there is a limited capacity to have multiple properties of the same service orientation.

The following table summarizes the estimated segmentation percentages at the subject property and each of the competitors, based on analysis of rate structure, service orientation, condition, location, meeting facilities, operational strategy and other characteristics.


After these quantitative measurements are applied, we consider the rate differential between each of the competitors and the subject as well as the general price sensitivity of the local lodging market. Based on this information, we make qualitative adjustments to the competitive quotient.

As an example, in markets where the price sensitivity is high, the competitive quotient between properties drops more rapidly as the differential in the average daily rate between the hotels increases. Conversely, in markets where there is low price sensitivity, the competitive quotient will be less impacted by the differential in room rates. In this particular case, the subject’s competitive market is deemed to have moderate price sensitivity, thereby commanding a fairly moderate adjustment to the potential competitive quotient.

The following table summarizes the estimated competitive overlap of each property measured against the subject’s demand levels, along with an aggregated overlap potential amount during the base year. In addition, the table details the rate differential between the subject and each of the competitors, followed by our overall competitive quotient conclusion for each property.


In this analysis, properties that have a 70% competitive level or higher are considered to be primary competitors, and the remaining are considered secondary in nature.


While this process is highly involved, developing an accurate competitive profile is essential for a number of reasons. Perhaps the most prominent is the impact of new supply in the future.

In the event that a new hotel is built that is highly competitive with a subject property, the impact of this project becomes more significant as the number of competitive rooms in the market becomes lower. The fewer the rooms in a market, the lower the buffer becomes. In the event that the total competitive inventory is overstated, the impact of new supply would likely be understated, and contrariwise.

Determining the competitive quotient of hotels using this approach lends a significant amount of credence to market trend projections and, ultimately, a more reliable cash flow estimate for a particular property.

For more detail, read Determining the Level of Competitiveness Among Hotels. 

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