Where Oh Where Are These Hotel Brands In The Top US Sites?

In today’s Tnooz release “Expedia and Priceline stretch lead – Top US travel sites – August 6, 2011” these two brands were sited as to have extended their dominance of US travel websites by securing almost a quarter of all traffic from agency sites.

If I were an agency site I’d be rolling my eyes, again, because this isn’t the first time that these two OTAs have dominated their one/two rankings and won’t be the last.

Now I don’t belittle these giants for what they have achieved but I wonder what it feels like when a Director of e-Commerce or Revenue Manager has to meet with their owners and explain why some of their distribution channels are achieving strategic dominance over the hotel?

That said, in the category of “Destinations and Accommodations” (kind of a confusing combination) only three of 10 were major hotel brands namely Marriott, InterCon and Hilton.  So where were Choice, Wyndham, Best Western, Starwood, Hyatt, and Carlson?

If you click on the link that I’ve provide above, scroll down a bit until you get to the Airlines category.  Do you see any OTAs included as distributors in the list of top sites?

Well then how can these OTAs dominate travel sites and “destinations and accommodations” sites and have no influence in airline distribution?

Tom Costello is the CEO, Partner & Co-Founder of Groups International, a company that provides marketing, consultative services, and technology solutions to the group and leisure travel markets.  Connect with him on Twitter, LinkedIn, and Facebook or contact him by email.

Why hotels shouldn’t sell a $200 hotel room for $50

This is a reprint of an article written by Tom Walker with Teradata.

Tnooz’s June 22 article “Expedia: What Groupon Getaways with Expedia means for hotels,” (why a hotel should sell a $200 hotel room for $50) posits an interesting case. But does it withstand a closer look?

To make the argument, Jennifer Mellet, Expedia’s senior director of new channel sales, presents the following hypotheticals.

$100: What the customer pays
$ 50: What the hotel receives
$ 40: Cost per occupied room (CPOR)
$ 10: Net to the hotel

Assuming 1,000 people buy the offer, the hotel nets $10,000.

Ms. Mellet further claims that “those are 1,000 largely incremental room nights that would have otherwise gone unsold.” No doubt some of the business would be incremental, but how much is really an unknown. It is also true that some cannibalization would occur, which again is an unknown.

At a gross level of analysis, $200 is four times the $50 that might otherwise be sold. On the margin, however (using the article’s $40 CPOR), the Expedia/Groupon deal is sixteen times less than what the $200 sale is worth:

$200 – $40 = $160. 160/10 = 16.

Is it realistic to believe that the Expedia/Groupon offer will deliver sixteen times more sales than the hotel would realize without running the special? Anything is possible, but as a hotelier I would be more than a little skeptical.

To further strengthen her case, Ms. Mellet points out that:

– In fact, Groupon customers have been shown to spend as much as 60 to 80 percent on top of the value of the Groupon.

Illustration continued:

– Cross-sell revenue per room (70% on top of $100 voucher at 70% margin to hotel): $49

– Total margin generated if 1,000 vouchers are sold: $59,000.

But is there any reason to believe that Groupon customers are more likely than other customers to spend additionally once staying in the hotel? Perhaps, but the proposition is far from self evident. If the hotel sells one sixteenth of the rooms at $200 that Expedia/Groupon would sell, it would achieve equivalent profitability. And the customer would be the hotel’s, not Expedia’s.

There is a pitched battle today between OTAs and hotels over which of them “owns” the customer. Expedia is aggressively positioning itself to be the owner of what might otherwise be hotels’ customers. Unquestionably, Expedia and other OTAs provide hotels a valuable service, but that value is delivered at a comparatively high price.

Rather than abet Expedia in its drive to become a traveler’s supplier of choice, it might be wiser to gamble that hotels’ own channels can achieve more than one sixteenth of what Expedia/Groupon could produce. In the bargain, hotels retain their loyalty position with the customer, which represent a value far greater than the $10 Expedia/Groupon might deliver.

Hotels Testing New Direct Connect Model

A new Google Maps feature that aggregates real-time hotel rates and availability has passed a seven-week beta test and has gone live, and at least one Central Reservation System provider is on a global road show informing hotel clients of their appearance on the new distribution channel.

Distribution experts still are hypothesizing about what kind of effect the search-engine giant will have on where travelers book hotel rooms, but some say the program should be embraced by hoteliers who don’t want to lose bookings to online travel agencies. Brands have taken notice and are discussing whether to alter their distribution strategies.

A Hotel’s Case for Direct Connect

If it costs the airlines billions to conduct business through OTAs and the GDS then what will it take for the hotel industry to re-think its current conventional distribution strategy?

The recent actions by American Airlines to move forward with their “direct connect” model has ushered in a new era of how products and services are marketed to travelers.

According to an article released by Fairlogix, “A Picture is Worth $7 Billion, The real story behind airline distribution, travel supply chain, and consumer value”, it costs the airlines roughly $7 billion annually to conduct business through their current indirect distribution channels such as Orbitz and Sabre.

To set the record straight “direct connect” is not a new phenomenon in fact Orbitz introduced its own version of direct connect in 2002 with none other than the same airline that they are now battling.

The technology known as “Supplier Link” was designed to lower costs and avoid Global Distribution Systems (GDS) fees but Orbitz eventually went on to become AA’s highest-cost OTA (Online Travel Agency) per booking.

The OTAs and the GDSs have made their sentiments against direct connect very clear: They want to control the airline’s product, pricing, distribution, and at the end of the day remain status quo.

Likewise the intentions stated by American Airlines, Air Canada, AirTran, and Southwest Airlines are equally as clear: They want to control their product and inventory and establish closer ties to their customers.

The hotel industry and the OTAs

While the OTAs and the GDSs continue to dig in their heels in this uphill battle with AA, let’s take a look at another market segment that is under their thumb, the hospitality industry, where especially the OTAs are blamed for commoditizing hotels, decimating rates, and training travelers to demand deep discounts.

According to a much discussed article released by Hospitality eBusiness Strategies titled “The Billion Dollar Leak – The Impact of the Merchant Model on US Hotel Profits” revenue leaked from hotels to the OTAs in the form of abnormally high commissions was estimated to reach $5.4 billion in 2010.

In addition to this leakage, which primarily represents leisure travel, hotels are paying millions in commissions to “other” third-parties for business that represents meetings and events that are held at their hotel.

In total, we estimate the hotel industry is currently in the same predicament as the airline industry and don’t appear to be moving toward a “direct connect” distribution model.

Why hasn’t the hotel industry developed a strategy to wean themselves off OTAs?

Due to the lack of demand from 2008 through 2010 most industry pundits would suggest that hotels were too busy playing catch up and desperate to capture revenue from any source that was available.

We certainly can’t blame the OTAs for the adoption of that strategy but because of this hotels lost any momentum and market share that they could generate on their own.

Over that same time period OTAs demanded and got new agreements that were against everything the hospitality industry stood for: last room availability, guaranteed best rates (only found on the OTAs websites), penalties for hotels that don’t use the OTA, thus tightening the noose.

What are some options for hotels moving forward?

In order for the hotel industry to take back some of the control that they relinquished over the past three years, they must adopt some if not all of the following initiatives:

• Move beyond traditional search methods and engage prospective customers the very moment they start thinking about travel.
• Reverse the trend and reward customers who book in advance and not necessarily at the last minute.
• Maintain strict rate parity, a best rate guarantee, and in the future don’t give any distribution channel the ability to undersell your hotel.
• Expand social media presence and promote special offerings that are only available to individuals who are following your hotel.
• Make it a point to elevate current and prospective customer’s online experience before and after their stay at your hotel.
• Look for and adopt emerging direct connect distribution channels like Hotelmine™ that allow customers to book direct with you and not through an indirect channel.

Tom Costello is the CEO, Partner & Co-Founder of Groups International, a company that provides marketing, consultative services, and technology solutions to the group and leisure travel markets.  Connect with him on Twitter, LinkedIn, and Facebook or contact him by email.