Part 3 of the distribution series with Alessandro Crotti
If you missed it, Read part 1 and part 2
It comes as no surprise that OTAs have always been the best in getting the most out of the crises, at the expense of hoteliers’ margin dilution. Wait, we are not blaming OTAs here: we, as hoteliers, are responsible for the choices we make when it comes to distribution.
When there is unawareness on revenue and distribution management, the focus is frequently on occupancy rather than NetRevPAR and Profit, the two most important indexes for the hotel’s financial health.
Post-2008 crisis is full of business cases of hotels that committed up to 70% of their inventory to tour operators and OTAs in the desperate effort to drive occupancy, totally neglecting any consideration on revenue and profits.
It took years for these hotels to ramp back up on profits and market share, compared to the ones that maintained a balanced channel mix and focused long-term.
After Thomas Cook tour operator went bankrupt, some hotels experienced severe financial issues as they were overdependent on this player only, and did not have any plan B (and strategy) when the operator closed.
Unhealthy distribution and channel mix, overdependence on only a few players and neglecting the importance of a distribution strategy, can kill faster than a crisis.
Before falling in love with volumes, look beyond the gross rate. Commissions, promotions, discounts can be margin killers.
If you start from a sell rate of e.g. 100 euro and you start deducting Member discount, Opaque discount, Commissions… you can easily get to 40% or 50% of distribution costs (or better, cost + missed revenue for the more precise revenue people out there :)).
It is not black and white but it is paramount to be aware of the costs related to intermediation, like it or not, revenue management is not about top-line only anymore (was it ever by the way?)
Member discounts: give me more
(by Silvia)
We have always been intrigued by the controversy of the loyalty programs for OTAs. According to Wikipedia: “A loyalty program is a marketing strategy designed to encourage customers to continue to shop at or use the services of a business associated with the program”.
So basically when we are agreeing to an OTA loyalty program, we are “encouraging customers to continue shop” at that specific OTA.
Weird isn’t it?
Hotel chains don’t obviously join the OTAs loyalty programs, having already their own one (would you imagine a Marriott hotel joining the Genius program?).
But is that worth it for independent Hotels? OTAs are very tricky and there is an allure in joining their programs: visibility, average extra spend, a longer length of stay and more chances of being selected among the competition.
When volumes are low, who wouldn’t be tempted?
All that sounds amazing, but we don’t have to forget that we are still “encouraging customers to book there”.
So let’s make sure that we give an extra discount for direct bookings, enticing guests to join our “membership club” for instance, or simply by capturing their email for marketing purposes.
Technology helps and the most advanced booking engines or marketing tools, allow to match the Member-only discounts. There are plenty of opportunities, the right choice is always to make sure that it is never more convenient (both in terms of pricing and value) to book via an OTA rather than direct.
Member discounts, frills and upgrades don’t have to be made available across all room types and all year round: before committing make sure you set your strategy according to your own goals and not for the OTA interest only.
Lastly, pay attention to the fact that OTA members’ discounts (almost) always sum up automatically. So each time you agree to a promotion or offer, the member discount is added on top.
If you don’t want that to happen because it is unprofitable, revise your promotion discount or talk to your market manager!
The sense of exclusiveness and personalization…?
Flash sales & subscription models
(by Silvia)
Flash sales cause addiction
There was a time when flash sales were the ultimate addiction! As a borderline compulsive buyer, I was addicted too.
The winning logic of flash sales is based on scarcity and great savings for members only, giving a great sense of exclusiveness. And sooo appealing for Hoteliers that can get quick bookings with very low effort!
Curious though, that “exclusive” or “private” sale requires only one click to register and become visible and bookable.
Flash sales have increased in popularity over the years, major OTAs such as Booking recently launched Flash Deals promotion vehicles, aimed at giving travelers great discounts for a limited time booking window…
Flash sales can drive great volumes but the costs associated are quite high, much higher than any other OTA.
Factoring the rate reduction + the commission, you can start from 50% + the costs of the benefits and frills included in the offer, it can easily reach a 70% distribution cost in total.
In our experience, we have seen hotels making great use of flash sales…far too great though: arriving at ridiculous margins after exhausting negotiations with the partner to drop the rates, and then struggling to accommodate all the bookings (with consequent revenue and profit displacement).
Some Flash Sales turned into Permanent Collections, with some Hotels always featuring their offers. Looks like the model is evolving in a way, and becoming in our view more like a hybrid wholesale/OTA model.
Again, wise forecasting of costs and opportunities to make the right choice, as per every channel
Subscription models: the Netflix phenomena
According to McKinsey & Company, “For consumers, subscription products … offer a convenient, personalized and often lower-cost way to buy what they want and need.”
In Travel and Hospitality, CitizenM Hotel Chain first launched the Corporate Subscription program in September 2020: for a monthly fee, one employee can work at any citizenM hotel living room anytime they want, sleep, use the meeting rooms and more.
Airlines had been promoting their subscription programs way before, giving customers extra discounts or seat upgrades.
But the great change came with Tripadvisor launching its own subscription model with Tripadvisor Plus. Tripadvisor Plus is a subscription program that seeks to provide subscribing individuals with benefits, such as travel-related amenities, offers, awards and services.
At the moment, only for selected Hotels.
The subscription model formula is gaining importance also in the luxury travel segment, Ispirato launched its Luxury Pass and the members, by paying a monthly fee, can book dedicated packages at either four-star-plus hotels or at its vacation rentals. Pass holders plug in dates they want to travel, and thousands of options are available.
What do we think about Subscription programs?
People say that they move the industry towards the democratization of travel, giving travelers the possibility to choose hotels, resorts and real estate destinations, mixing and matching dates, locations and experiences to suit needs and budgets.
For us, subscription programs in travel and hospitality will still take quite a bit to really break through, not because of the logic per se but because in order to make it successful we must be able to create an attractive perceived value, be relevant and meaningful for a wide target.
And that is not as easy as it seems. Time will tell.
Affiliate Programs
(by Ale)
You remember the first episode of this very series, when we started by showing the italian customer who ended up booking an almost-next-door hotel in Italy via an OTA based in China?
From now on, let’s assume that the Italian hotelier in that scenario is you with your hotel and staff.
After you, the first player in the journey towards the final guest is the OTA you have a direct contract with, like Expedia, Booking.com, etc.
Typically you sell your rooms and rates to this OTA by applying your inventory, prices, policies, descriptions and restrictions in a so-called Extranet.
From here, all that stuff gets distributed across different websites.
Let’s take Expedia, just to make the example more realistic. Starting from the main site expedia.com and all its points of sales (expedia.it, expedia.de, expedia.co.uk, etc.), your rates and inventory get distributed to a whole bunch of other websites that belong to the Expedia corporation, including Hotels.com, Travelocity, Orbitz, Lastminute.com, etc.
These are all proprietary domains that the Expedia Group either developed from the very beginning or acquired. However the group also sells their full portfolio through an extensive network of affiliate sites, most of which connected to Expedia via the EAN: Expedia Affiliate Network.
But how does EAN work (and similarly all other OTAs’ affiliate programs)? Imagine a carbon-copy website of Expedia.com, exactly identical as the original one, with 2 only differences:
- no Expedia branding;
- no graphics to present the hotels with a nice look&feel, but a raw and infinite number words, lines of code and numbers that no one but the software engineers understand.
Now, imagine making this carbon-copy (and ugly) of expedia.com available to anyone via API and there you go: EAN.
Expedia Affiliate Network, Booking.com Affiliate Partner Program… tomayto, tomahto. The bigger the OTA, the greater the chances they offer affiliate programs, making the most of their huge selection of accommodation online (aka, your hotels).
Besides the big player behind, the overall principle is very simple: everyone can buy AND sell hotel rates. And that’s exactly what they do, because that’s exactly what they want. To the point that what we’ve seen so far it’s just the beginning. In fact…
Expedia SHPM
(by Ale)
To be crystal clear, it’s not intentional that the name of EX keeps popping up.. but when it comes to debugging what happens in hotel distribution, we just can’t ignore their role.
So, let’s keep digging.
Have you ever heard of the SHPM system? Likely not, in fact no one is supposed to be knowing what it is. And we won’t get into much details as we’ve written a dedicated article on that, with a real and step-by-step example.
But here’s a short summary: SHPM stands for Stand Alone Price Modification and it’s a system that, in simple words, undercuts hotels’ rates when certain conditions are met in the booking search.
For example: a user searching on Expedia via Tripadvisor and from certain countries may benefit from a reduced room price, as a result of this SHPM system, as opposed to another user who makes the exact same search, for the same dates, in the exact same moment directly on Expedia (no Tripadvisor).
Typically these price cuts happen when the booking search comes from any country other than the one the hotel is located in (no need to explain why, isn’t it?).
In conclusion, there are few point-beings (questions) we should raise:
- Even if you didn’t know about this system, are you really surprised or, deep down, all this sounds disgustingly normal?
- If there are OTAs that are willing to put forth such systems to win a booking, what else are they capable of that we, hoteliers, are totally unaware of?
- Do you realize now how useless (and dangerous) all those magic-overnight solutions and quick-fix products that we so often and so easily buy into are, like price-comparison widgets and also rate shopping tools?
- Ultimately, how can we defend and protect ourselves?
First, acknowledging and accepting that hotel distribution is, indeed, complex, complicated and a big headache represents a good starting point and, thus, as such, must be dealt with.
More importantly though, in our opinion (Silvia & Ale) we believe we should all learn to connect the dots.
What does it mean? Let’s see an example.
Who collects the booking payment?
(by Ale)
Let’s think logically, together: have you ever thought why certain OTAs, have always been reluctant to abandon their OTA-collect model?
Beyond one’s personal preference, I guess we all agree that most people would choose to pay later at the hotel rather than paying upfront at times of bookings, if given the option to choose, right?
Especially in a competitive market like hotel distribution where the number #1 OTA, namely Booking, historically focused their persuasiveness on a “book-now-pay-later” approach towards the travellers.
Probably the scenario outlined above may give you a possible explanation: if you, hotel, were to collect the payment, systems like SHPM and similar would have no reason to exist.
In the previous article we talked about wholesalers, among other things. Again, tomayto, tomahto. The very moment you don’t control who pays for the rooms you sell, you’re giving up your hotel distribution.
If it wasn’t like this, you would expect Expedia and all other OTAs who mainly collect travellers’ payment to give up with this model and follow what Booking does.
Now, in the light of what we’ve just discussed, does the following article sound a bit different than how it claims to? https://www.hospitalitynet.org/news/4107729.html
This article was published less than 2 months ago. Do you see how they “sell” the idea of payments being a strategic asset and priority?
In other words, are you connecting the dots?
This is the world we live in and the players we have to play with, like it or not. So, let’s deal. And make your move.
