Demystifying the digital marketplace

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Industry report encourages hoteliers to find their optimal channel mix for bookings.

By Nick Fortuna

In the rapidly changing digital marketplace, hotels are faced with a difficult balancing act. They want to attract as many guests as possible but don’t want so many of those guests booking through third-party intermediaries that commissions really start to eat into revenue growth. An empty hotel room benefits no one, but relying too heavily on online travel agencies (OTAs) and metasearch websites for customers comes at a hefty cost.

In its new report, “Demystifying the Digital Marketplace: Spotlight on the Hospitality Industry,” Kalibri Labs seeks to help hoteliers find just the right channel mix for acquiring customers while limiting customer acquisition costs. The report is co-authored by Cindy Estis Green, the longtime hotel-industry consultant who published the 2012 report “Distribution Channel Analysis: A Guide for Hotels” and founded Rockville, Maryland-based Kalibri Labs later that year.

Prior to that, Estis Green had founded the data-mining consultancy Driving Revenue, sold it to Pegasus Solutions and spent 12 years as managing partner with the Estis Group, providing strategic marketing consulting services to the hospitality industry. During that time, she produced two reports – “Demystifying Distribution” in 2005 and “Demystifying Distribution 2.0” in 2008 – that led to her being approached by hoteliers who were concerned about rising customer acquisition costs associated with the surge in popularity of OTAs.

“When I did the last study in 2012, a lot of hotel owners and operators wanted to keep a finger on the pulse of this information and get updates, so in 2012, I established Kalibri Labs,” Estis Green said. “I went to all the hotel companies to ask if they would share their channel and cost data for us to maintain an ongoing tracking system so those in the industry could see what the patterns and trends were by channel and cost of acquisition. There was a big appetite to maintain this information going forward.”

Part 1 of the three-part report was published in the fall of 2016, and Estis Green said she hoped to release the other two parts by early 2017.

Part 2, “Hotel Performance in the Digital Marketplace,” will use data from more than 25,000 hotels in North America to review hotel performance metrics. The analysis will look at net revenue performance and industry demand performance by market and will provide updates on the results of book-direct campaigns launched in 2016.

The final installment, “Taking Action,” will provide case studies and guidance for the types of analysis and actions hotels can use to evaluate and drive revenue growth and achieve their optimal channel mix. The report will also provide updates on legislative action stemming from issues related to the explosive growth of the digital marketplace.

Estis Green said these reports provide clear benefits to the hotel industry.

“My goal is to make sure that owners and operators are better informed about the digital marketplace so they can make better decisions about how much business they want to get through each of their potential partners and channels,” she said. “If hotels can make more informed decisions, it can make them more profitable and they can provide more options for their guests, so I think it makes for a better, healthier marketplace.”

“So, my main goal is to help hotels manage a new area that they really hadn’t been exposed to before. The digital marketplace is still new, and in the last five to 10 years, it’s become much more dominant, and a lot of hotel owners and operators just don’t really know what they should do differently.”

According to the report, U.S. hotels brought in $145.4 billion in revenue from guests in 2015, up 7.3 percent from $135.5 billion in 2014. However, hotels spent $25 billion in customer acquisition costs in 2015, which meant that the “revenue capture” figure – the percentage of revenue retained by hotels after paying all customer acquisition costs – fell 0.4 percent to 82.8 percent from 83.2 percent in 2014. That small decline might not sound like much, but when spread out across the entire U.S. hotel industry, it represents $572.8 million in lost net operating income for hotels.

Estis Green said the revenue-capture decline isn’t due to OTAs commanding higher commissions, but rather an increasing percentage of hotels’ bookings coming from OTAs, which increases the percentage of hotel revenue that is subject to commissions. There are travel websites that require hotels to pay more in order to be listed more prominently, but overall, the cost to the hotel for each OTA booking is not rising, she said.

According to a 2013 Kalibri Labs study done in conjunction with the Hospitality Asset Managers Association, the total amount of commissions paid to third parties rose at twice the rate of revenue growth from 2009-2012. That trend has held steady in the past few years. Kalibri Labs analyzed data from 25,000 hotels and found that from 2011-2015, commissions continued to grow at twice the rate of revenue.

Here are some other key findings from the report.

There is no such thing as the “billboard effect”
Industry data show that the typical consumer will visit seven to 10 travel websites before ultimately booking, so OTAs such as Expedia have long argued that there are many guests who search their sites and then end up booking on the hotel brands’ sites. The OTAs used this so-called billboard effect to justify higher commission costs, claiming that hotels were essentially getting free advertising on their websites.

But in reality, only 7 percent of OTA shoppers eventually booked on the hotel brands’ sites, according to a study that Kalibri Labs did with the Consumer Innovation Forum, a committee of the American Hotel & Lodging Association. The study analyzed approximately 4,000 bookings made in 2014.

Book-direct campaigns are changing
Direct bookings, such as through a hotel brand’s site, typically are 9 percent more profitable than bookings through OTAs, but hotels saw a 40-percent reduction in direct bookings from 2011-2015, according to the report. In 2011, there were 4.3 room nights booked directly for every one that came indirectly, but by 2015, that ratio dropped to 2.7 to 1. That steep decline is the main reason why many hotels have launched marketing campaigns to encourage consumers to book directly, often offering discounted rates to loyalty members.

But Estis Green said hotel brands also can encourage direct bookings by offering enhanced services for guests who book directly, such as the ability to check into their room with their cellphones and keyless entry to their rooms.

Metasearch sites and phone apps are becoming more popular
Estis Green said metasearch sites such as Google Travel, Trivago and Kayak are likely to see much faster growth in the next few years than OTAs, and OTAs recognize this likelihood and are seeking to capitalize on it. For example, Expedia owns a majority stake in Trivago, and Priceline owns Kayak.

“The balance and the mix of the marketplace will change over the next few years, and metasearch sites and apps are going to be much more popular with consumers than the traditional OTA model,” she said. “People are going to do a lot more shopping and booking using apps on their phone than they will using their computers. A lot more business is moving to mobile sites as they gain more functionality.

“However, phone screens are much smaller than computer screens, and there are only so many hotels that can show up on there, so if you want more visibility for your hotel, you may have to pay more to be visible.”

Get ready for marketplace disruptors
Estis Green said she expects more corporate travel to be aggregated by new players. Sites such as TripBam can scan prices constantly and cancel and rebook travelers when lower rates are posted. Additionally, companies like Rocketrip and TravelPerk are incentivizing corporate travelers to find lower-cost travel options by giving them a share of any cost savings they can find. The result is that there’s less of a need to lock in annual rates with a hotel directly or a travel management company through a bidding process when a traveler can get the lowest rate available up to the day before arrival and travelers can manage their own travel.

Additionally, since there currently are no OTAs specializing in booking accommodations for large corporate conferences and meetings, there likely will be OTAs that emerge in the next three to five years to fill that niche, Estis Green said. In the past, bookings for these large events have been highly inefficient, and these new sites will attempt to streamline this process and make it less costly.

Home and vacation rental sites like Airbnb and HomeAway, which is owned by Expedia, also are likely to gain in popularity and continue to disrupt the digital marketplace, Estis Green said. Expedia and Priceline will integrate home and vacation rentals into their listings, which could drastically increase the supply of rooms for consumers in every market, she said. While these sites have gained in popularity, efforts to address regulatory and tax issues associated with them have lagged behind, so it’s important that these issues be resolved so that home rental and vacation inventory are operating under the same rules as the hotel industry.

Estis Green said hotels in some markets will feel the pressure of the added inventory of home and vacation rentals, which may reduce hotel occupancy during high-demand periods, thereby hindering revenue growth.

Hotel brands are tailoring content to consumers
Estis Green said compelling descriptions of hotels’ rooms and services, along with photos and videos, lead to higher conversions for any merchandiser of hotel rooms, whether it’s an OTA or the branded hotels’ websites. Therefore, tailoring the content on a hotels’ own sites can help ensure customers are served up meaningful content and are more likely to book directly instead of through third parties. Managing content carefully is crucial to achieving an optimal channel mix, according to the report.

“If you have lots of room types and lots of special packages and things, you may want to offer the kind that will be suitable for the way the consumer is shopping,” Estis Green said. “The more appropriate merchandising content you provide, the more likely you are to get bookings, so you want to be sure to that a hotel always has the best photos, best descriptions that appeals to the types of customers a hotel wants to attract.”

Hotels’ agreements with OTAs are changing
Estis Green said many large hotel brands have negotiated better agreements with OTAs that give them more control of their own inventory. Many hotels are no longer required to give OTAs last-room availability and instead can “shut off” access to these last few rooms on sites like Expedia and Hotels.com whenever they want. This allows hotels to gain more direct bookings when demand is especially high and avoid paying costly commissions to third parties.

In addition, legislation in some European countries and subsequent changes made by major brands to their OTA agreements have made rate parity less of an issue for many hotels and have given them a greater ability to manage their own rates and inventory. Many hotels are no longer required to offer the same rate on third-party sites and their own sites.

Hotels simply can’t be present on every OTA and metasearch site
There is a cost associated with maintaining a presence on each site, so hotels must pick their spots and prioritize some over others, according to the report. Hoteliers should understand that the average hotel guest will visit many sites before booking, so they shouldn’t feel pressure to make their hotels ubiquitous on these sites at great cost to their business.

Estis Green said all hoteliers obviously would like 100 percent of their customers to book directly, but it’s up to them to evaluate their market and come up with a channel mix that is realistic. Hoteliers must gain an understanding of the profile of demand in their market and the costs associated with getting that demand, and then seek to obtain the optimal channel mix that yields the highest net revenue.

“Hotel owners and operators need to really give that thought, and part of what Kalibri Labs is doing is helping the hotels calculate their optimal target; if hotels are realistic and they know how much is reasonable for them to pay in customer acquisition costs, then they can manage according to those net revenue objectives. Targeting net revenue is the most important message.”    ■

The three-part series
“Demystifying the Digital Marketplace: Spotlight on the Hospitality Industry,” a three-part series, provide by Kalibri Labs through the AH&LA Consumer Innovation Forum, along with many industry sponsors (including AAHOA), is a full breakdown of data, as well as a systematic analysis on digital and distribution issues and how they’ll impact consumers and affect the hotel industry.

To learn more or gain access to this insightful data, email info@aahoa.com.

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