“If there ever were a red ocean,” observes Michael Levie, co-founder of CitizenM Hotels, “the hotel industry would be it. It’s redder than red.”
Four-star hotels offer four-fifths of what five-star hotels offer. Three-star hotels offer three-quarters of what four-star hotels provide. And so on down to one-star hotels that offer roughly half of what two-star hotels offer. In other words, they all compete on essentially the same things. “In this industry,” says Levie, “people think they’ve innovated if they change the paint color on the walls or switch the type of chocolate on the pillow.”
Against this backdrop, Rattan Chadha and Michael Levie, co-founders of CitizenM – both new entrants to the hotel industry – wanted to create a blue ocean with a new kind of hotel chain. One that would capture the growing mass of frequent travelers – what they call “mobile citizens” – whether traveling for business or for pleasure.
The two entrepreneurs noticed that many of these “mobile citizens” were frequenting either three-star or luxury hotels. Sensing a blue ocean opportunity, they wanted to understand why frequent travelers chose luxury hotels over three-star hotels and vice versa. As they did, a host of insights began to emerge.
Despite all the factors the hotel industry competes on, it turned out that only three factors stood out as decisive in determining why frequent travelers traded up to five-star hotels over three stars: the feeling of luxury and beauty they experience; its more luxurious sleeping environment; and their prime location. As for those who choose a three-star hotel over a five-star, price jumped out as the most common factor, followed by one other: five-star hotels often felt too formal and pretentious. The Eliminate-Reduce-Raise-Create Grid (ERRC Grid), a key blue ocean analytic, allows us to lay this out.
CitizenM Hotels’ ERRC Grid
By gaining these insights, Chadha and Levie identified which factors to eliminate, reduce, raise and create. For example, the customers of neither five-star nor three-star hotels saw the front desk, concierge service, bellhops, or doormen as bringing them much-added value. CitizenM saw these as factors they could eliminate.
Next, since the “mobile citizens” they were targeting aren’t the type of customer that spends much time in their room, they realised they could reduce room size – and cost – as this also meant more rooms per square foot of real estate space. And instead, to maintain a high level of comfort and luxury, they raised the quality of the sleeping environment with extra-large king beds, fine linens, good sound insulation, fluffy towels and amazing showers.
Finally, through these market insights, Chadha and Levie discovered that there were new kinds of value that they could create. They eliminated the front desk, replacing it with self-check-in kiosks allowing guests to check in with no lines. And in case help was needed, front desk staff were replaced with multi-tasking ‘ambassadors’ who could help with anything from giving directions to shaking a cocktail.
CitizenM launched its first hotel in Amsterdam, opening up a new value-cost frontier of affordable luxury for frequent travelers. It has since opened hotels in prime locations of major cities like London, Paris and New York, and is continually expanding. Today, CitizenM hotels earn the highest guest rankings in the hospitality industry, placing them in the “fabulous” and “superb” categories, alongside five-star hotels. Yet, their rooms are affordable to three-star customers.
The result is an average occupancy rate of 90% across its hotels – 80% higher than the industry average. The chain’s cost of staff is 50% lower than the industry average and profitability per square meter twice that of comparable upscale hotels.
You can read the full case study in our book Blue Ocean Shift: Beyond Competing – Proven Steps to Inspire Confidence and Seize New Growth to learn how you too can look across strategic groups (in this case people who traded up to five-star hotels versus those who opted for three-star hotels) to gain valuable insights into your industry and identify a blue ocean opportunity. Then, learn step by step, how to translate these observations into a clear and concrete set of actions that will form the basis of your next blue ocean move.