Mr. McCartan

Revenue Management

Cost of Distribution: Out of control or a real expense

By Michael McCartan, Managing Director Europe, the Middle East, and Africa, Duetto

2013 could be a turbulent year for the hotel industry should the price-fixing fiasco take a further step forward. Proving yet again, following the collapse of the financial markets in 2008 and 9/11, that while hospitality maybe an old industry dating 1000's years, the environment of online sales is still in its infancy and terribly immature.

Online travel sales channels have taken as much as they can since the internet launch of 1995 subjecting properties to insane rates of commission during tough trading periods - that made these resellers big beasts and created a David and Goliath scenario. Big brands have at various times tried to contend by withdrawing from these sites which resulted in lost market share and reduced volume bookings. Yet it wasn't only the hotels who suffered, these sales channels couldn't live without their big brands either. Hotels have found their way to handle their Goliath, but is he someone they have to live with?

On both sides of the Atlantic there's be a tough price war- between the consumer and hotel to push rates lower, and between hotels and suppliers to get the Best Available Rate, resulting in this accusation of 'price-fixing' within the industry. Whatever the result of the current inquiries in Europe and America times are changing, as even Expedia appears to look to move from its traditional Merchant model to Agency model.

These changes, with the constraints of rate parity removed, could be the start of hoteliers gaining back control of their prices and inventory as they focus on developing relevant products for the selected resale channels to make the best yield possible. But the challenge now is retaining occupancy while pushing that revenue up, without being caught in the crossfire of commission rates and volume booking websites.

The Distribution Challenge 2012

In a recent market research report by Ecole Hoteliere de Lasuanne, The Distribution Challenge 2012, it found that hotels in Europe and North America have had to deal with fickle demand while experiencing increasing costs to from sales distribution channels. Making the balance between rate, revenue and production incredibly fine. The survey identified a reasonably wide spectrum of challenges facing hoteliers - increased exposure to new markets, shifting demand from the group travel segment, developing new corporate contracts, pushing direct sales, managing faster availability and rates on distribution channels, and reinforcing rate parity and rate integrity.

But if two conclusions may be drawn from this finding, it is that 1) having a reliable channel management tool is the norm; and 2) revenue management is more than ever about the right distribution channel in terms of exposure and costs. Those hotels that have been using a technology with direct connectivity to its third party sales channels were able to be more flexible and dynamic both with their pricing and inventory distribution, and were able to change and further substantiate different room and package types. Revenue managers were able to compile the data on a weekly or even daily basis to identify the volume of production breaking it down by length of stay (LoS), market segment, guest type and value for the hotel to further leverage opportunities of marketing with these channels or to assess what additional channels to add without the time pressures involved of more sales partners.

Interestingly, when the study reviewed the evolution of the distribution mix and decisions for the last years all hotels had marked the significant prominence of online sales channels and an increasing volume of sales contracts to manage, while deciding to open up more options to the property. There is an increase in working with smaller independent websites for different types of guests, including introducing social media, and more traditional sales models like group and corporate contracts to secure advanced occupancy and more guaranteed rate structures - which has helped properties to slowly push the rate back up.

The online travel industry has played its game on the last minute deal and pushed rates down, in the opposite way to how the airline industry works. Rather than there being limited availability on the short-booking window, the industry has let slip and made available choice to the consumer. Hotels who have avoided playing this dangerous rate game have already sold the revenue portion of their inventory and are in a more comfortable position to be able to play the final waiting game with stronger rates.

Revenue managers want other hotels to panic, when looking at the rate mix for the next 7 days it is about being confident to pitch the room rate at the top end of the competitor set. This is achieved by securing those bookings early, even if that means ensuring that at least 30 - 50% of bookings are confirmed through advanced purchase and secured corporate deals. This way the property can supply OTAs with its choice of rates and inventory and make them work for hotel.

Ecole Hoteliere de Lausanne found three key challenges revenue managers are facing: 1) the need to increase RevPAR, 2) the urgency to control costs of distribution/e-business, 3) and the requirement to increase exposure. The Billboard Effect has been well publicised and The Distribution Challenge 2012 paper itself found that the more sales channels the property used to gain reservations the more exposure and, ultimately, more direct bookings it received. This illustrates consumer behaviour, whether it was a result of transparent pricing with rate parity, the traveller researching finding the same price and therefore booking direct, or confidence for the consumer to book direct instead of through a third party, this answers the three challenges revenue managers face above; 1) better RevPAR gained through the direct sales channel without the need to pay double-figure commissions, 2) other than paying for channel management technology and cost per reservation for the booking engine all OTA fees were irrelevant and 3) exposure across more channels drove the direct booking. This argues both the necessity for third parties and the opportunity available.

There are other ways, however, in which hoteliers can be confident of reducing the cost of e-distribution, instead of hoping that the direct sales will transpire as a result of OTA exposure. Firstly, it is important to build a personal relationship with the market manager of all third party channels. Don't rely on email, but pick up a phone and take the opportunity to meet them in person at local events. These market managers know their product, like hoteliers know their properties, and can give insight to the promotions; marketing and positioning that can work for a particular property. They can provide data on similar types of hotels so the revenue managers can benchmark and see what that investment is worth, from Targeted Advertising, to tailoring the content and hotel description. Hotels need to take the time to explore alternative pricing models with existing OTA sales channels, to discover potential better commission rates, building a mix of inventory versus room type supply to give the sales channels the availability they need. It is about learning what is the demand by city and providing that supply, be it room type, service or promotions.

Gaining back control of sales

Many hotels have lost control of their inventory and its becoming essential to holdfast and be prepared to negotiate hard when it comes to renewing contracts with third party intermediaries to protect the property's supply. It's important not to commit too much inventory. Inventory provided to sales channels should also be made available to the hotel's own direct booking engine, to prevent the property selling itself short. By making inventory as dynamic as pricing availability can continually be distributed to producing channels any time of the day or night.

Secondly, develop the hotel website. Ensure there is an easy-to-use, stable and most importantly simple booking engine. Can guests book in two steps like the OTAs or will they need to keep clicking pages? Keep the website simple, clear and easy to understand. Increase those conversions on the hotel's own website and then booking will be made easier for visitors.

Third, make sure any pages of content on any third party channels shows the hotel in a way that represents that website brand, not just the property, to encourage the traveller to learn more on the property website. Leave an element of intrigue, as this will make them want to see what is actually available. Keep the best photos for the hotel's own website, and ensure it elaborates on the location, and services of the property.

Approaching this change of distribution

When it comes to innovation with sales channels the bad news is that whatever channel chosen is not new, the hotel won't be in the forefront (it would also be disappointing because of lack of traffic), but how revenue managers work with them and how become exposed in the market is entirely a decision made by property. Hotels need to be thinking creatively, outside the box, looking in at their local area, understand why the location is chosen, why the choice of hotel and how as a hotel they can add to that experience. Hotels have introduced Romantic Getaway packages that target the sports fan, Highway Promotions that encourage people to escape the city for quiet unbeknown suburbs. Some have totally remarketed themselves to a completely different market, selling themselves as a gay or even gay-friendly hotel, making them stand out in a crowded marketplace for specific type of guests.

The Distribution Challenge 2012 study also clocked the significance of GDS today and the value it was driving for booking and ADR. Hotels who utilised the channel were making gains that pushed more inventory to the dated sales channel, while those properties that underutilised the GDS were seeing the end of this once lucrative channel. However like any piece of technology it is how you work with it that counts, what you understand about it and how to milk the most out of it, rather than expecting it to do your job for you. If the GDS fits with the hotel, for the type of guest that brings the ADR then put more emphasis here - identify what other partners can be brought on board to book stock through the original electronic sales channels. And making the rates and inventory as dynamic as other sales channels can help the revenue manager to continue to yield.

Ecole Hoteliere de Lausanne found approximately 35% of all bookings derived from the OTA, with brand.com and other direct sales accounting for about 31% and the CRS and voice channels contributed to 16% of reservations. This was a general overview of the European and North American markets, delving deeper into the analysis we can see that the US fares pretty well with 23% of bookings coming through OTAs compared to France and UK hotels with more than 40% of bookings. The US properties did on the whole show a more balanced distribution mix than European counterparts. It was noted though, that in general, 4-star hotels and US properties targeting corporate travel are taking a higher share of reservations thanks to GDSs and travel agents. All markets appear to need to take heed from the 50%+ direct sales the Spanish were achieving, this market had focused so heavily on strong sales channels, partnerships and connections that it had naturally lead to a focus on direct sales with all the technology in place.

Spanish hotels had the full pricing data to make sound room rate judgements, which was combined with intelligent revenue management systems to better RevPAR, a fully automated channel management system and sophisticated CRS and PMS, allowing the revenue manager to focus on strategy instead of updates. The combination of science and technology was giving this market an advantage and much needed during very tough trading times for a very difficult European economy.

Direct sales come with their own expense of self-marketing, technical development and being at the eye of the consumer. Hotels need to realise that third parties have always been around and will be here to stay, but the way they sell needs to become more dynamic, fresh and creative, they need the tools to asses how and where to sell to increase productivity from the channels that bring them the revenue without surrendering to quick easy sales. The growth of online sales has just changed the way hotels work, it may not be realistic to expect to turn our back on third party sales, but revenue managers can alter how they work with them.

An expert in the fields of hospitality and electronic distribution, Michael McCartan joined Duetto as Managing Director for Europe, the Middle East and Africa in 2014 to spearhead the rollout of the company's products and development of Customer Success teams throughout the EMEA region. Since joining Duetto, he has grown the European headquarters of Duetto in London, as well as establishing teams in Germany and Dubai. Mr. McCartan is adept at engineering creative solutions and then executing their delivery, understanding the exact needs of the client and the challenges surrounding the market. He is a valued member of the HSMAI Europe Revenue Management Advisory Board, contributing to articles and leading seminars and keynote sessions for the association. He is also a frequent speaker and panellist at major travel industry events across EMEA. Mr. McCartan can be contacted at +44 7557968806 or michael.mccartan@duettoresearch.com Please visit http://www.duettoresearch.com for more information. Extended Bio...

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