The International Network of Hospitality Consulting Professionals

Take Your Guest Reservations Back Offline

 

Remember 20+ years ago, when your hotel guests could only book direct via phone, your brand’s 1-800 number, the brand website and your own website. Ahhhh…The good old days when you got to keep 100% of the rate.  (Except when a Travel Agent booked for the guest and then you simply had to a pay a bargain 10% commission.)

Then, the OTA’s came into the picture around 1996-97 claiming anywhere from 15-30% commissions.

Allow me to run through the brief history of how the marriage or shall I say dysfunctional marriage between hoteliers and OTA’s has transpired.  In my many years of hotel sales and marketing experience, I have personally observed this landscape change and continually transform.

In the beginning, I remember being a Front Office Manager and being fined by my brand franchisor for violations of lowest rate guarantee.  It was a learning curve as we Hoteliers were trying to navigate around this new technology of its time.  Rate Parity Policies and its related processes have certainly become more streamlined.  Online Travel Agencies have come and gone, yet most have been merged to form a few powerhouses.

There is really no need to look back on additional historic points as to how we arrived on the scene today; both OTA’s and Hotels are here to stay.  The real question is how we can co-exist and how can we as hoteliers drive more guests to book direct which is our most profitable booking channel.  The OTA’s of the world are becoming ever so much more clever at grabbing the attention of the guests we eventually host.  OTA Loyalty programs are just one example.  Another would be the Millions of Dollars spent on advertising to lure our potential guests into using their services.

One strategy that absolutely confuses consumers is Google AdWords Campaigns that populate an OTA over a Branded Website.  Here is one example:  A guest googles “Brand X in City Y” and a listing pulls up in the #1 spot.  They proceed to call the 1-800 attached, or book direct online thinking they are working directly with the property when in fact they are booking through an OTA.

In my hotel operations experience, I have seen this happening several times each week.  Guests will swear that they called the hotel direct and booked their room.  Now why can’t they cancel with the hotel directly?  Why did they not get the specific room type they thought they would get?

There are three specific strategies that I think we as Hoteliers should implement in order to pull our guests back offline and back to booking with us direct:

  1. Re-train our front desk staff or reservation agents to become more inquisitive when speaking with an incoming caller.  Prior to calling your hotel, a guest has most likely been searching various OTA’s regarding your hotel and some are online at the time they call your hotel.  With specific training, your agents can book those guests right then and there and avoid a customer booking on an OTA.
  2. We need to advocate that our National and International Brands run a joint and entire industry campaign to educate consumers as to the benefits and pitfalls of booking with an OTA versus Booking Direct.  A campaign that is not brand specific, yet more of like a Public Service Announcement in form.  Note, I did say there are some benefits for some consumers with booking with an OTA.  i.e. convenience of booking hotel, air and car is one of them.
  3. Continue to educate our customers who booked on an OTA, that upon their return visit to book direct.  Inform them that they can get the best rate by calling direct and they also have more control over reservation changes and/or cancellations.

The relationship that we as Hoteliers and OTA’s have isn’t the perfect marriage made in heaven, but we can make the best of it by taking even a small percentage of our guests back Offline and back to booking with us direct.  It is time that us hoteliers put more money back into our own pockets! Figure out how many rooms you should dedicate to OTA’s.

If you have any questions or concerns, feel free to contact us!


About the Author:

Jay Hartz is a former member of Cayuga Hospitality Consultants.

Should the Mix of OTA Room Nights Be…?

What Should the Mix of OTA Room Nights Be…?*

Response to the battle cry “lower the OTA percentage of room night mix” may reduce EBITDA.

Ultimately, improving EBITDA through shifts in channel mix is based on a holistic analysis and execution of total integrated channel mix strategy over time. The shift must be augmented with sales and marketing actions and associated costs to achieve it and sustain EBITDA. To illustrate this point, we developed a simple EBITDA impact model for OTA and non-OTA channel mix shifts. The model is based on a 200-room, limited-service property with 70% occupancy and aggregate ADR of $100.

A simplistic (and potentially misleading) evaluation of decreased OTA room night mix impact is a reduction in OTA room nights (e.g., 1/3) replaced with non-OTA room nights.  This evaluation predicts a substantial (e.g., a 10%) increase in EBITDA.  Missing from the evaluation is how much it may cost to replace foregone OTA room nights with non-OTA room nights to sustain occupancy.  And, can the shift be achieved with positive EBITDA improvement, given increases in marketing and sales expense to achieve it?  In effect, some or all foregone OTA bookings must be replaced and there is some EBITDA neutral upper threshold sales and marketing expense level (e.g., 17%) to achieve it.

The answer to that question is complicated in general and even more complex for any one property.  It is also complicated by the interplay of property-level billboard and dilution effects.

The billboard effect is the impact display in OTA sites has on driving incremental transactions through hotel direct channels such as the reservation center and the brand website by being displayed, but not booked, in OTA websites.   In effect, the prominent presence in OTA display acts like a search engine, where the consumer views the OTA site but ultimately books directly with the property.  There is ample published research to suggest that there is such an effect**. The dilution effect is the diversion of transactions from a property that would have been booked through hotel direct channels but instead are booked in OTA channels.

We developed an EBITDA model to evaluate the interplay of various possible billboard and dilution levels effects to illustrate how those impacts change the results for various levels of increase and decrease in the mix of OTA transactions. To illustrate this point, we developed a simple EBITDA impact model for OTA and non-OTA channel mix shifts. The model is based on a 200-room, limited-service property with 70% occupancy and aggregate ADR of $100.

See the table below for impacts of a 1/3 reduction and increase of OTA room night mix on EBITA, sales and marketing expenses and chain costs, (i.e., to achieve EBITA neutrality) when various billboard and dilution effects where present.  For example, the model showed that:

  • The number and percentage increase in non-OTA room nights can be much greater with, for example, a 33% reduction in OTA room nights when a property-level billboard effect is substantial (e.g., one non-OTA booking for every two OTA bookings foregone) and even greater with a relatively low dilution effect (e.g., 10% increase in non-OTA diluted room nights for each foregone OTA room night). Depending on values for these effects, a required level of non-OTA room night replacement can be substantial (e.g., nearly 40% greater).  As well, the EBITDA neutral threshold percentage level for increased marketing and sales expense growth can be much lower (e.g., 4.5% versus 8.5%) before EBITDA gains would be fully offset.
  • A major EBITDA loss risks exist if there is a substantial billboard effect relative to a dilution effect and foregone OTA room nights are not replaced. In this case, the impact on EBITDA can be substantial and negative (e.g., an 8% percent reduction).
  • Alternatively, that same 33% reduction in OTA room nights could be achieved with a slightly larger increase in non-OTA bookings (e.g., 13.5% versus 19.7%) and with a much higher EBITDA neutral threshold for a marketing and sales expense (e.g., 9.0% versus 4.5%), if the billboard effect was slight (e.g., one non-OTA booking lost for 4 OTA bookings foregone) and the dilution effect was significant (e.g., a 30%increase in bookings made direct for each OTA booking foregone).

Interestingly, that same analysis could be applied to evaluate the EBITDA effect of increasing the mix of OTA room nights.  For example, in the appendix, we show that if there were no billboard or dilution effects, increasing the mix of OTA bookings could increase EBITDA by 2.9%.

For chain properties, there is another dimension of this type of analysis.  Are there additional costs, direct or opportunity for chain-level efforts to reduce OTA room night mix? And, do these costs offset potential EBITDA gains for the property? The direct cost might include chain imposed assessments for that purpose.  Opportunity costs might include the shift of chain expenditures and/or investments to support the shift that might have had a more effective impact on property level EBITDA.  These might include, for example, the diversion of general promotional advertising and marketing expenditures to spending a mix change (book direct) campaign.

There can, of course, be a whole series of potential values for billboard and dilution effects (and the means to measure them) for a property and for specific circumstances such as quality classification, occupancy, ADR, channel mix, seasonality and so forth.  So, measuring them can be difficult and further complicated by the fact that the impact magnitudes are likely non-linear based on the OTA room night contribution percentages and changes thereto.  (NOTE: The model does allow sensitivity testing of such values on EBITDA. We selected a few values for illustration purposes.) Despite the difficulty, the impacts of these effects on EBITDA are significant. Therefore, owners and managers would be wise to evaluate the possible outcomes of their efforts to change the distribution of OTA room nights even if they employ some sensitivity testing of their values.

The practical implications are that changing the mix of OTA room nights requires a plan to replace them with non-OTA room nights and a need to know (or estimate) EBITDA-neutral threshold levels for sales and marketing costs needed to achieve the mix change. Moreover, including an analysis of the potential interplay of possible billboard and dilution impacts would be advised.

A dilemma for owners and managers is how to measure (or accurately estimate) property-specific billboard and dilution effects.  One approach is to do sensitivity testing for such values (as illustrated in the model) and cautiously change channel mix over time while observing impacts on OTA and non-OTA mix, EBITDA and marketing and sales expenses.  Another is to perform some A/B testing of increases and decreases in OTA participation to observe impacts on non-OTA bookings and EBITDA.

As well, asset managers might implement some operational means to observe over time patterns in guest channel booking behavior related to OTA participation, for example:

  • When checking in guests, ask if they have stayed at the property before and their primary channel source(s) for choosing the property. Do the same if they have not. If possible capture their email address. In all cases, track guests’ booking channels (or do so by relating rate codes used to channels). If they used an OTA channel, ask if they would be likely to use it again or book direct. Then track over time.
  • During guests’ stays solicit feedback on satisfaction and possible actions to improve their experiences. Better yet, use past stay experiences (e.g., through a customer relationship management system (CRM)), to take actions likely to improve guest satisfaction. At a minimum, resolve guest issues ideally in real time. Finally, celebrate successes and resolve mistakes over time; better yet, ask guests to do so as well, ideally via social media.
  • At check out and post stay solicit information about stay satisfaction and ask if they would be likely to book directly in the future. Better yet, capture their e-mail address in exchange for some future value for the next stay(s).

If all this sounds like effective asset management, it is.  Many successful property managers and owners are already doing this and have discovered many other ways to improve guest satisfaction and financial performance. What is different is the discipline to connect such actions (and guest reactions) with channel choices and guest stay frequency. Capturing this supports the assignment of economic values to reduced channel costs and/or increased guest stay frequency. The bottom line is for asset managers to practice effective CRM, measure its impact, celebrate its success, address its failures and encourage guests to do the same via social media.

Owners need to estimate the value of such actions on EBITDA as a guide to resource allocation for asset value growth.

* This model was developed and presented at the Cornell Center for Hospitality Research Summit, October   2017. Contact the authors Bill Carroll, Ph.D. wjc28@cornell.edu and Trevor Stuart-Hill trevor@revenuematters.com for more information about the model and the presentation.

** See CK Anderson, “The Billboard Effect: Online Travel Agent Impact on Non-OTA Reservation Volume,”

Cornell Center for Hospitality Research Report, 2009; CK Anderson, “Search, OTAs, and Online Booking: An

Expanded Analysis of the Billboard Effect,” Cornell Center for Hospitality Research Report, 2011.

ESTIMATED IMPACT ON REPLACEMENT (AND NON-REPLACEMENT) OF OTA ROOM NIGHTS ON EBITDA GIVEN MARKETING SPEND AND CHAIN COSTS

Sustainable Profitability in a World with OTA’s

From No One Wins to Everyone Wins

The Colombian hotel market is currently in a price war with ADR falling, occupancy flat, room supply  growth exceeding demand growth.  The forecast is for this to continue with chains entering the market using a discount price penetration strategy.  The government is giving tax breaks to stimulate investment.  It’s an economic recipe for profit loss for the thousands of small independent hotel owners.

OTAs are thriving in this environment and over-reliance on them and price discounting by hotel management is problematic.  In order to achieve sustainable profitability, what is needed is a long run vision by owners, managers and OTAs to improve the situation for all.

View Dr. Carroll’s presentation HERE

This presentation was given at several universities, the Columbia Hotel Association and several events sponsored by some consultants in the area. An associated paper prepared for Cayuga Hospitality Consultants also makes this point.


About the Author:

Bill Carroll

Bill Carroll is actively engaged with hotel ownership groups, intermediaries and start ups in the areas of new media management, pricing, and marketing. He is capable of taking a holistic view of marketing, pricing, distribution and revenue management for hospitality related firms. He helps clients chart a successful courses of action through improved strategic focus, organizational change and systems solutions choices. Bill is a Consulting Member of Cayuga Hospitality Consultants.

OTA Value: It Depends on How You Play the Game!

EXECUTIVE SUMMARY

Many hospitality owners and consultants hold a short run view that OTA’s are overly powerful market actors, who use their sizeable marketing budgets, expansive consumer reach and, increasingly, their reward/loyalty programs, to force rate discounting; collect unreasonable fees; and interpose themselves in the guest-and-lodging service provider relationships.

There is an alternate long run point of view:

  1. Ultimately, the market forces of supply and demand determine price. Asset owners have the power to control room inventory supply versus demand.  When room supply is effectively matched with demand, a major short run incentive to discount rates is removed.
  2. Asset managers can and should focus primarily on creating value for their guests; giving new guests delivered by OTAs reasons to choose their properties – and book direct – in the future; incenting loyal guests to return again and again; and encouraging guest-advocates to communicate why they value their properties. This produces a sustained core of room demand (and occupancy) and reduces the need to rate discount as a way to sustain occupancy.
  3. OTA senior management should take a long term partnership approach with hospitality suppliers focusing on value creation and promotion for both the customer and the supplier.
  4. It is in the OTAs’ long run interest to deliver more personalized, targeted recommendations to consumers based on what they know about them and the properties that choose to be listed. Choice displays, particularly default sorts, should be based primarily on projected guest lodging service value – price and service and less on payment by suppliers.
  5. OTAs create value for suppliers by producing incremental customers (e.g., non-loyal ones) that those suppliers are not likely, or less expensively able, to get on their own. OTAs need to more effectively demonstrate and align distribution versus media marketing costs to hotels.

There can and should be a common long run ground for hotels and OTAs

Read the Full Article below:

“Many of the truths we cling to depend greatly on our point of view.” Obi Wan Kenobi, Return of the Jedi, Star Wars Movie Series

Debate over the value of online travel agents (OTAs) and their impact on ADR and profitability for hospitality owners and managers seems endless. The point of view for those debates may have a lot to do with this.

Many hospitality owners and managers (plus some consultants and vendors) hold a short run view that OTAs (and their meta-search counterparts and subsidiaries) are overly powerful market actors.  They use their sizable marketing budgets, expansive consumer reach and, increasingly, their reward/loyalty programs, to force rate discounting; collect unreasonable fees (or merchant margins – a markup of hotel provided rate retained by the OTA a time of sale); and interpose themselves in the guest-and-lodging service provider relationships (e.g., loyalty).

There is an alternate point of view. Long run lodging financial sustainability can, and often is, undermined by short run price discounting. This occurs when lodging supply exceeds demand and is exacerbated by OTA over-reliance on price as the prime (default) sort determinant in their website displays.  In the long run, solutions to this problem are in the hands of hospitality managers and owners and OTA senior management.  Consider a long run market point of view:

  1. Ultimately, the market forces of supply and demand determine price. Asset owners have the power to control room inventory supply versus demand. This includes accurate forecasting of room demand versus supply plus consideration of rooms supply via the share economy (i.e., Airbnb, Home Away, etc.).  When room supply is effectively matched with demand, a major short run incentive to discount rates is removed.
  2. Asset managers can and should focus primarily on creating value for their guests; give new guests (including those delivered by OTAs) reasons to choose their properties or chains in the future; incent loyal (satisfied) guests to return again and again; and encourage guest-advocates to communicate why they value their properties. This produces a sustained core of room demand (and occupancy) and reduces the need to rate discount as a way to sustain occupancy. Management focus should be on the size and sustainability of this core over time with OTAs as means to augment the core and less on the percentage mix of OTA bookings.[i]
  3. OTA senior management can, and in some cases does, take a long term partnership approach with owners and managers (i.e., a case in point is the well be the publicized relationships between Expedia and Marriott announced September 16, 2016). Such relationships can focus on value creation and promotion for both the customer and the supplier.
  4. Value for the consumer is created through OTA choice displays (e.g., via sort options and default sorts of hotel listings) based on both price and projected guest lodging service value for the consumer from participating properties. It is in the OTAs’ long run interest to deliver more personalized (i.e., targeted) recommendations to consumers based on what they know about them and the properties that choose to be listed.
  5. OTAs create value for suppliers by producing incremental customers (e.g., non-loyal ones) that those suppliers are not likely, or less expensively able, to get on their own. This can be done by serving as both a distribution channel and marketing media for hotels. As OTAs more effectively demonstrate and align distribution versus media marketing costs to hotels with the benefits, an improved long-term business partnership is more likely.
  6. For independent properties, determination of the benefits versus costs for OTA participation needs to be evaluated versus the costs of achieving similar benefits from chain membership with its attendant fees and costs.

Some Facts

On a global scale, OTAs and their meta-search counterparts continue to capture an increasing share of online hotel bookings.   See Figure 1.

Figure 1:

Hotel vs OTA Share of Online Hotel Revenue

OTA business carroll-fig1b

This is despite significant efforts (and advice by some consultants) for chains and some properties to shift OTA bookings to hotel-direct channels.

It is interesting to note that in global regions where chain membership is low, OTA participation is higher.  It may be that hotels see greater value in using OTAs (and other intermediary services) than incurring the cost of chain membership.  An alternate point of view is that chain membership gives individual hotels greater leverage in OTA negotiations over fees.

In the US many chains have been focused on shifting the percent of bookings going to their direct distribution channels.  While there has been some mix shift over the past decade, recent efforts have not produced a significant shift. See Figure 2.

Figure 2:

U.S. Percent Share of Online Hotel Revenue 

2012 – 2017

Year 2012 2013 2014 2015 2016 2017
Hotel Website 54% 51% 50% 50% 49% 49%
OTA Website 46% 49% 50% 50% 51% 51%

Source: Phocuswright

  • Note: US has the highest percent of chain hotels. Chains have been aggressive in trying to drive bookings to their properties’ websites. As shown in Figure 1, other regions have much lower penetration of chain membership and these (independent) properties are typically more reliant on the OTA channel for bookings. Also, the US data is consistent with the research done by Chris Anderson over the same time period, though it shows a much greater reliance by consumers on OTA displays for consumer choice.

Aggressive marketing efforts by chains and hotels to shift bookings to direct channels can be costly (facts about such costs are difficult to find).  Moreover, OTAs like Expedia spend nearly half of their revenues on marketing and almost one-third on IT.[ii] This type of market power is difficult (and costly) for chains and hotels to match.

In some cases, chains and independents are trying to use their loyalty programs as an instrument to break OTA rate parity (an agreement between OTAs and properties that publically available rate levels offered to OTAs cannot be lower on hotel websites).  When a hotel or chains offers a lower rate and additional benefits (i.e., for loyal customers), the likelihood for the booking to be made via a hotel-direct channel is enhanced.

While this approach may have some impact, OTAs have the ability to use their own loyalty programs and packaging to offer lower rates than those offered by participating hotels and provide rewards on all travel bookings, not just hotels.  Moreover, many hotel guests belong to more than one hotel loyalty program, making them potentially less loyal to any one hotel or chain.

The important question for hotel owners and managers is whether investment, or perhaps worse, over-investment in loyalty program and direct-only booking campaigns are worth the return, particularly in the long run.  This is the question that owners, managers and consultants should be asking! For independent properties, the question is even more complex, as owners must also evaluate the costs and benefits of chain membership.  In addition, they have the option of joining (and paying for) membership in separate independent loyalty programs like Stash in the US, and purchasing separately many chain provided services from independent vendors.

Some Simple Economics

Numerous articles on market behavior by hotels in competitive sets suggest that price discounting leads to ever-falling prices, RevPAR and profits when there is excess room inventory in the market.[iii]  Moreover, efforts to raise rates when there is excess room supply likely leads to falling revenue, RevPAR and profits.

When there is excess room inventory in the market, in general or seasonally, intermediaries can generate incremental demand for a given property or set of properties.  They do this by shifting market share to select (by OTAs) properties and away from other properties within the competitive sets. It is unlikely, and to my knowledge has not been shown, that OTAs have had a significant effect on driving primary (i.e., non-share-shift) demand to a given competitive set in the aggregate. There is ample evidence that they can impact demand.[iv]

OTAs focused only on price discounting facilitate this market dynamic. That leads to falling ADR for all or most properties in a competitive set. Owners who expand supply in competitive sets or fail to consider the effects of share-economy room supply in development planning do as well.

There are ways for hotels owners and managers to reduce the effects of price competition (in general and through OTAs) and support efforts to raise prices within competitive sets, even in the short run.  In summary, these include:

  1. Providing better service and facilities than the competition; growing the base of loyal and repeat guests; and creating guest-advocates for the property as part of an effective marketing and sales effort. In a phrase, do a better job than competition in service operations and marketing.
  2. Creating, maintaining and marketing a sufficiently differentiated service (e.g., preferred location, brand, etc.) for a sizeable enough target market to achieve profitable occupancy levels at prices above competitors.
  3. Managing prices in accordance with periods of excess demand via effective price management and/or revenue management. (NOTE: In periods of excess supply, hotels can resist to extent possible, given market forces, reducing prices or over-discounting relative to typical seasonal pricing patterns. This approach is difficult and requires a disciplined approach to pricing and marketing by asset managers.)
  4. Observing and responding appropriately to the pricing actions of price-leader properties within competitive sets.
  5. Being a responsible price leader within a competitive set: Consistently and systematically execute rate increase actions that competitors can observe publically. Match price increases by followers quickly and visibly. (NOTE: Price leader properties are typically ones that have achieved prominence in areas covered by points 1, 2 and 3 above.)

OTAs can have a role in helping properties with these activities.  They are in a position to forecast aggregate lodging demand for competitive sets.  They have visibility over factors effecting demand – demand for air travel, site user activity, traveler interest in given destinations, and so forth.    They are also in a position to compare that data with other destinations and over time. In sum, OTAs have publically available data on travel and lodging demand and prices that individual properties and chains may not. They could and should share it.

OTAs are a repository of public future rate information within competitive sets. Many properties already make use of that information as part of their regular rate monitoring and management activities.[v]  To the extent that OTAs typically drive less brand (property) loyal (i.e., mercenary) demand, they are in a position to evaluate for, and perhaps communicate to, all participating properties in a competitive set how much incremental demand can be shifted during excess supply periods.  In a phrase, they can be source of mercenary consumer hotel price response values. (NOTE: The formal term used by economists for this is price elasticity of demand that measures in percentage terms the change in revenue with a given percentage change in price, when all other factors are held constant.)

OTAs can also help hotel managers and owners gauge the amount of share economy room supply in a given market. For example, Expedia lists Home Away inventory. As we will discuss below, this could be a valuable source of information relative to potential or actual share economy lodging supply for asset owners or investors.

Over the long run OTAs can become a repository and provider of information about user behavior, specifically more personalized behavior, relative to hotel choice on their websites. They are in a position to assist individual properties with effective representations and promotions of service values – brand promises, peer-evaluations and prices in OTA displays. They could do this in terms of both target markets and competitors. 

A Possible End Result

If all of this sounds farfetched, consider the following.

As OTAs become more prominent marketing and distribution solution partners, merchant margins can be reduced and rationalized relative to their separate marketing and distribution values for hotels. In effect, OTAs can demonstrate the media value for hotels, perhaps as an extension of “billboard effect” research.  Moreover, reduced merchant fee levels can be offset by fees for distribution and marketing services aligned with the value they deliver to owners. This can sustain long term market value and profits for both hotels and OTAs.

As owners restrict room supply versus demand more effectively, they can sustain ADR, occupancy and profit.  Managers of individual properties can create and promote services that keep their guests coming back and telling others why they do.  Their properties’ RevPARs, ADRs, occupancies and profits can increase and be sustained. And, as ADR rises, so does the absolute value of OTA merchant margins even if the percent margins do not. Finally, when the OTAs, managers and owners focus on growing total market and/or specific destination demand, long run profits for all can be sustained.

Perhaps the long run solution for OTAs and hotels is not a zero sum game. All can win if the game is played right

 

Footnote: 

[i] One of Cayuga Consultants, Gordon Carncross has had a very successful practice helping hotels create and maintain their core business as a key pathway to long run financial success.

[ii] See SEC Filing 10K for Expedia, 2016.

[iii] See chapter 13 of Cornell on Hospitality, “Demand Management,” John Wiley and Sons, 2011.

[iv] See CK Anderson, “The Billboard Effect: Online Travel Agent Impact on Non-OTA Reservation Volume,” Cornell Center for Hospitality Research Report, 2009; CK Anderson, “Search, OTAs, and Online Booking: An Expanded Analysis of the Billboard Effect,” Cornell Center for Hospitality Research Report, 2011; …

[v] See for example, eRevMax and TravelClick


About the Author:

Bill Carroll

Bill Carroll is actively engaged with hotel ownership groups, intermediaries and start ups in the areas of new media management, pricing, and marketing. He is capable of taking a holistic view of marketing, pricing, distribution and revenue management for hospitality related firms. He helps clients chart a successful courses of action through improved strategic focus, organizational change and systems solutions choices. Bill is a Consulting Member of Cayuga Hospitality Consultants.

The Battle for ‘Book Direct’ May Be Won, but the War Will Not

‘Book direct’ is the war cry of hotel owners, management company executives, chain CEOs and many marketing consulting groups. Like real war, the costs and benefits must be evaluated, particularly by those who will be paying for it – hotel owners. This is even more critical for a war that is unwinnable.

“Wars are won and lost on the basis of superior strategy and overwhelming resources.”
-Clausewitz, On War, Book 2, Chapter 2, 1873

An Unwinnable War
In this war to win the hearts and minds of modern travelers, intermediaries like Google, Expedia and Priceline have the resources and major strategic advantages. Individually and collectively, they have massive financial resources to invest in technology (website and mobile), systems, databases, marketing, talent and so forth – more than any single chain, much less an independent property.

They have strategic advantages in their market power, reach and capitalization. Their strategic proposition for the consumer is also more compelling – an efficient means to assemble, determine value for and obtain the lowest prices for a comprehensive travel experience. They also have the traveler and supplier information to execute a seamless user experience. Moreover, their mobile apps are efficient, proactive and executed in real-time.

On first glance, a war against these opponents is unwinnable.

Hotels can offer only a part of this. Their websites limit consumers’ evaluations to the confines of their own brand.com, though most provide external and independent access to TripAdvisor reviews and social networks. Further, their consumer traveler assistance is limited to the property and local area via mobile-concierge-type apps.

Chains are winning some battles. They are leveraging loyalty programs as part of the now widespread ‘book direct’ advertisement campaigns that communicate better deals for their loyal consumers as well as mechanisms to evade intermediaries’ rate parity agreements. They are also using apps, targeted at loyal guests to improve the hotel experiences and produce additional non-room revenue before, during and after the stay.

The strategic weakness of this approach is that consumers are often members of multiple chains’ loyalty programs and multiple mobile apps. All of these typically provide points and assistance only for the hotel stay. On the flip side, OTA intermediaries provide both points and assistance for the entire travel experience. They are a ‘one stop shop’.

As well, the hotel’s loyal customer is not a new or incremental customer. In effect, the owner is paying (to the chain or others) more to keep an existing customer and, hopefully, produce a better room rate margin. The question for the owner is whether the investment is worth the result.

Strategically, intermediaries have resources and advantages to counter the bottom line effects of chain loyalty program actions. They can offer better deals for the intermediary loyalty program customers – for example, prices that are below parity or chain discounts. Intermediaries can also offer their loyal consumers last minute prices below that of a chain’s at competitor properties right up until check-in. With this capability, they can make trip arrangements to accommodate a change and cost-efficiently manage the entire travel experience. They can even force major hotel brands to lower their loyal customers’ rates as the chains try to preserve guest bookings with value ads or the promise of lower rates (that is, the best rate guarantee). In either case, owners’ margins are reduced and intermediaries are well-positioned to manipulate chain rates and reduce loyalty program benefits.

Alas, there’s always hope. The most significant weapon that owners have to drive direct business is revenue management. Hotels can and should execute revenue management where the highest margin rates are offered on available inventory and the lowest rates – that is, those offered to the OTA merchants – are rejected.

Increasing revenue management efficiency is a battle than can be won, but only when market or property inventory demand exceeds supply. The risks here come during economic downturns or off-peak periods when intermediaries have the clear strategic advantage. They can choose to benefit their well-behaved partners – for example, through better results page position – or punish them accordingly.

With the hotel industry as fragmented as it is, there is little that an individual owner can do. Hence, owners must carefully evaluate the importance of a viable relationship with intermediaries versus waging an unwinnable war.

Measuring the Effects of War Accurately is Essential
Consulting groups frequently estimate the margin effects of intermediaries solely on the basis of their merchant rates and commissions. On several occasions, I have been critical of this methodology. My major criticism is their failure to explicitly include media effects of presence and prominence on their sites, otherwise known as the Billboard Effect. Despite disagreements over the exact size of this effect, the actions of properties that have left and returned to OTA sites confirm the existence of a statistically significant impact.

Intermediaries’ market power emanates from profitably driving consumer eyeballs to their visual display real estate. The majority of their hotel-based profits comes from the economic rents levied for properties to appear on their websites. Like the real estate industry, intermediaries compete with one another on creating valuable digital displays and the rent they charge suppliers to occupy this space.

Both activities could eventually benefit owners. The missing element for intermediaries and owners in all of this is an accurate metric of the net revenues generated for owners by appearing on their digital real estate. It is the same element missing in aggregate measurements of intermediary margin impacts. An additional collective downside for owners is that one owner’s net gain is, for the most part, another’s loss. In effect, intermediaries mostly shift share rather than create new market business.

Wrapping your head around all this takes time, so don’t panic. A reasonable approach for owners is to first recognize that a war with intermediaries and OTAs is unwinnable. Next, participate in battles that are winnable, only after evaluating the costs and benefits. Thirdly, find ways to work effectively with your intermediary opponents based on joint efforts to measure the net revenue generating impacts of the business relationship.


About the Author

Bill Carroll
Bill Carroll

Bill Carroll is actively engaged with hotel ownership groups, intermediaries and start ups in the areas of new media management, pricing, and marketing. He is capable of taking a holistic view of marketing, pricing, distribution and revenue management for hospitality related firms. He helps clients chart a successful courses of action through improved strategic focus, organizational change and systems solutions choices. Bill is a Consulting Member of Cayuga Hospitality Consultants.