Towards A Smarter Distribution Strategy
Has profit growth in the accommodation sector kept track with ADR or revenue growth? Doesn’t look like it. Undoubtedly costs are rising and eating into profit, but some of these costs may be more under your control as a hotelier than you might think. Finding the time to actually think critically about this is the key, because there are no quick and easy (sustainable) solutions to improving profit and it takes time to analyse your position and consider alternatives to your current mode of operation.
Focusing on improving your distribution costs in particular, or making those costs produce better (or work harder) for you, is something you cannot afford not to do. Many of your distributors may be far better at getting a cut of the upturn than you are. A buoyant market is an opportunity to capitalise, and lowering distribution cost rather than jacking up rates is the sustainable way to do that.
Making A Start – 3 Steps
I have a simple (simplistic in fact) 3-step approach for any hotelier starting to really analyse their distribution and rate strategy, namely:
1. Recognise that anyone selling rooms in your hotel is your competitor
The idea here is to assume that your best position is to be selling every single room at an optimum rate yourself (directly on your website) and that any other approach is going to cost you profit, i.e. someone else is benefitting from the service you are providing. This of course assumes that you know what an optimum rate is (which you should be actively managing), but for now let’s focus on the distribution end.
2. Only release rooms to distributors (competitors) if you cannot find a way to sell those same rooms directly on your website at a lower cost of acquisition and
3. Prioritise distribution channels based on profit retention, not revenue.
We know we can’t sell everything only on our website. But giving anyone a share of your business should not be done lightly. The three steps above raise further issues that can help you shape your distribution strategy.
Who’s In Control?
Online Travel Agents (OTAs) do a very good job indeed in bringing you bookings and revenue. They do a very necessary job of allowing you to tap into markets you cannot otherwise reach. In fact they are so good at their online business that they are quite likely also to be taking a significant chunk of business that you could have taken for yourself at significantly lower cost.
Given their branding and advertising budgets, the question I am asked often is “How can I possibly compete with them?”. That’s the wrong question. That passive question needs to be replaced with the more assertive “Why do I let them compete with me?”. After all, you give them the rates and the rooms to do so.
Two critical areas where OTAs are growing rapidly and hotels seem to have turned a blind eye are on rate and on lead-in time.
Firstly, while the parity rules are finally changing across Europe, the real issue in rate is that hotels are funding the growth of private sale and loyalty clubs on OTAs by effectively giving them sub-parity rates so the OTAs can lock in more customers. If you are discounting so-called “private” rates on OTAs on the basis that it brings you extra business, have you analysed if it is indeed extra business or just replacement of full price business? If you are doing so, why are you not offering similar rates on your own website, using newsletter signup or promo codes to make them more “private” if necessary? Hotels need to seriously look at the consequences of helping OTAs to build their own private rate programs at the expense of their own profit.
Secondly, the danger in a high occupancy market is that hotels are so content with the here and now that they fail to see pick-up on OTAs in the very long tail until it’s too late. OTAs, largely saturating the short lead-in time market, have started aggressively pushing the long tail market 6, 9 even 12 months out, where hotels without active rate management have probably just loaded low rates and unchecked availability and look no further. Worse, if hotels are using most of the market leading channel managers to control distribution, those tools are probably putting open inventory on OTAs in the long tail with no checks at all! Without adequate rate and distribution planning, hotels are losing significant yielding capability from which the OTAs can profit. Hotels should shut down long tail availability on distribution channels until they are ready to manage it properly. Bookassist’s Distribution Management System allows this channel-by-channel control necessary for an effective strategy.
To counter these issues and regain control, you need to be confident you can build your direct business.
Is my direct-online strategy good enough to reduce distribution dependence?
Reducing dependence means improving independence. Enhancing your direct-to-web strategy so that you can stand on your own is a must. And it must be a real strategy, backed with facts and planned with deliverables, not just a secondary notion.
A direct-to-web strategy needs real coherence across website, branding, customer communication, digital marketing, rate strategy and distribution strategy. It needs priority and investment. Unfortunately, few hotels fully recognise this and the consequence is that the result of the effort is often poor.
A poorly managed direct strategy will always cost you more than you need to be spending, with poor results. Easy to see why some hotels just give up and give in to the demands of the OTAs. On the other hand a well executed and thought out direct strategy will pay dividends and not just in the short term. Direct strategy benefits are sustainable enabling you to reinvest in your direct brand rather than supporting someone else’s
Far too many times I’ve heard hotels remark that driving direct business is “too expensive” and maybe OTAs are worth it after all. Yet direct business is actually growing in the industry so somebody is doing it right and customers are clearly prepared to go direct!
Like nurturing a tree, it takes patience and investment, care and protection, to bring it to fruition. But the harvest is dependent on the work put in. If direct business to your website looks like it is costing too much in return-on-investment terms, then the solution is not to reduce spending, but to analyse why it is not as effective as it should be and take corrective action so you can reach industry standards. Companies like Bookassist play a critical role in the industry, empowering hotels to compete with the heavy weights and gain sustainable advantage. Taking the easy route and relying on everyone else to sell your rooms is not where you want to be going. The only way is down in that situation.
Time for relationship change?
What’s clear is that OTAs run a two-tier service level, where the big brand accommodation providers have less stringent contract terms and more favourable rates, while the independent hotels must fend for themselves in a one-size-fits-all world. Clearly hotels need OTAs, but hotels should ideally be able to change or select alternate service levels that suit both sides. It is perfectly reasonable to pay an OTA an increased commission if they have truly brought business you could not get elsewhere. But it should likewise be reasonable to be charged a far lower commission if they have used your preferential rates in special offers to deliver bookings.
Bidding by OTAs on hotel brand names is a key problem that the big brands have managed to severely limit. Why don’t independent properties have the option to limit bidding on their brand name? Seriously, independent hotels need to square up a bit more. At the very least hotels need to review their contracts with OTAs and attempt to regain control of the inventory that they know full well they could sell themselves. Likewise, OTAs need to review the relationship they have with hotels - isn’t it time they recognise that not all hotels have the same needs and so differentiate their service offerings to them just as they do for the big hotel brands? Independent hotels are easy pickings and unless hotels take an assertive position with regard to their inventory just as the big brands did, OTAs will just keep on getting stronger to the ultimate demise of profit and sustainability.
The fact is that hotels are now much more tech-savvy than before, and can reach customers far more effectively online than was the case some years ago. The tools and technology available to hotels today can help level the playing field, if they are seized upon and used properly. But a passive approach to distribution will lose out to the professional and very active OTAs every time. You can’t blame OTAs for optimising their business, but you certainly make it easier for them to do so if you do not optimise yours.
Starting with the approach of “Anyone selling rooms in your hotel is your competitor” might be overly simplistic, but scrutinising your business from that protective position will certainly do you no harm at all.
Dr Des O’Mahony is CEO and Founder at Bookassist (http://www.bookassist.com), the multi-award-winning technology and digital strategy partner for hotels worldwide, and is a HSMAI “Top 20 Extraordinary Minds” recipient.