How Can Hoteliers Deal with Wholesale Distribution Dilemma?
Hoteliers around the world have unlimited options these days when it comes to distribution channels. While direct bookings are perceived to be the most profitable bookings, the benefit and scope of indirect bookings can’t be undermined.
NB: This is an article from Trivago
A mix of direct as well as indirect bookings will help you drive a diverse stream of revenue and reach a variety of customers in a fast-paced hospitality environment. Thus, while creating your online distribution strategy, you need to create a healthy and optimal distribution mix.
In order to diversify your distribution landscape, you might like to consider OTAs (Online Travel Agencies), hotel metasearch sites, direct and indirect channels, and wholesalers. It is important to effectively leverage all of these channels by creating the right balance between them. The challenging part here is to create a profitable and sustainable strategy for every distribution channel to maximize profits and gain a competitive foothold in the market.
In this post, we are going to show you how to deal with the wholesale distribution dilemma and optimize your distribution strategy for maximum profits and minimum headaches. Let’s begin by understanding who the wholesalers are.
Understanding the wholesale distribution model
- Who is a wholesaler?
A wholesaler or a merchant is a middleman between a travel supplier (hotel) and an OTA/travel agent. It sources the hotel room nights in bulk, packages them, negotiates rates, and then sells them to OTAs and travel agents.
- How does the wholesale distribution work?
The wholesaler business model in the hotel industry works in three key stages:
- The hotel provides a heavily discounted net rate to the hotel wholesaler as it buys the rooms in bulk. The wholesaler, in turn, guarantees to cover the room costs, whether they’re resold or not.
- The wholesaler applies a mark-up to its net rates and resells the rates to other OTAs. The wholesaler sends an invoice to the OTA, charging them for all rooms they’ve resold. The OTA then institutes an additional mark-up.
- Guests, then, book the same hotel room at different prices depending on the mark-up chosen by the OTAs or tour operators. The customers pay directly to the OTA.
Benefits of wholesale distribution model
Working with the wholesalers enables hoteliers to take their properties to a wide range of markets that they are unable to reach directly. For example, the wholesale distribution model is especially beneficial when hoteliers want to target audiences with whom developing and maintaining personalized relationships aren’t easy, like international customers. Also, wholesalers help the hoteliers maximize their occupancy, along with a certain occupancy rate guaranteed. This is particularly useful when the hoteliers have properties with high inventory volume.
Challenges of wholesale distribution model
Even though a wholesaler can help a hotel reach full occupancy, there are quite a few challenges associated with this non-direct distribution model, so much so that the current situation has many hoteliers at the end of their tether.
While many hoteliers understand that the wholesalers are the biggest issue in hotel distribution, as reported by Hospitality Net, a lot of hoteliers are unaware of the problem altogether.
Therefore, many hoteliers ask questions like, ‘Why do my rates appear through an OTA I didn’t collaborate with?’, ‘How come my rooms are distributed at inconsistent rates?’, ‘Why are the rates displayed at trivago much lower than my website rates?’ without knowing that these problems are a result of their collaboration with the wholesalers.
But, how do these problems arise from the wholesaler model? The direct answer to this question is – wholesalers have an opaque distribution model. If wholesalers bundled the rates in packages or only provided them through bricks-and-mortar agencies, things would be fine. But this is not always the case. The resulting dilemmas for the hoteliers because of this issue are:
- Lack of control on distribution:
The wholesalers themselves don’t generally sell rooms through their websites but sell their rates through wholesale aggregation channels. Sometimes, they sell the inventory to other agencies, who then sell them on to other agencies, and so on, in a chain. Due to this, hotels get puzzled when they see some random online travel agency they’ve never heard of before competing against them. When rates appear online, it’s generally very difficult to know which wholesaler specifically is providing that inventory. Thus, hotels ultimately don’t have any control over distribution.
Check the contracts you signed with your online distributors. Normally, there is an agreement enabling wholesalers to resell your rooms to third party vendors in the contract details. This is why you may find hotel rates distributed through OTAs you’ve never heard of.
- Rate disparity:
As a hotelier, you negotiate a net rate with the wholesaler, but you don’t have control over the final price displayed to the traveler due to the long supply chains. This is because there are two different contracts – one with the wholesaler and another between the wholesaler and the third parties.
Once resold, the OTAs will apply a mark-up to the final price of your rooms, depending on their marketing policies. It’s not wholesalers’ prerogative to control distribution downstream, which is why there’s such a big distribution problem in this sector. On top of that, wholesalers also work on a model that marks up their buying rate from a hotel. The wholesaler’s entire value proposition is arguably their resale price, which allows the receiver of this hotel room to add their mark-up and undercut the hotel’s pricing, resulting in huge rate disparity. According to Fornova & EyeforTravel report, “Non-contracted OTAs are undercutting more aggressively than contracted counterparts. Typically, OTAs working under agreements with the hotel posted rates that were 5% to 6% lower than the direct rate.”
Additionally, it is also very common for wholesalers to unbundle rates designed to be sold as part of packages. According to Triptease’s study, Spotlight on Wholesalers, “Most hotels expect the wholesalers to package, and contracts suggest this, but wholesalers don’t always package their hotel inventory with significant travel components such as a flight, or car, at their point of sale. These heavily discounted rates then find their way onto OTAs like Amoma, and a hotel room worth $200 ends up being sold for $120.”
These factors don’t only have a negative impact on your hotel’s profits but can also seriously impact your hotel’s reputation. When rooms are offered at lower rates on some or all OTAs than your website rates, you run the risk of confusing, and eventually, repelling your potential customers.
Tips to overcome wholesale distribution challenges
As a hotelier, cutting off all ties with the wholesalers isn’t viable for your widespread distribution strategy. However, here are a few practical ways through which you can optimize your wholesale distribution strategy and ensure better control on the distribution as well as the pricing:
- Work with wholesalers whose philosophy matches yours:
As a hotelier, your philosophy might be essentially connected to serving people. To ensure successful and fruitful partnerships, you should work with wholesalers who have the same ethical ideal.
Some wholesalers, rather than believing in taking care of people and enhancing guest experiences, sell for a minimal margin just to secure a sale. At the end of the day, it is up to you to decide if you want to maintain your partnership with such distributors.
In addition to your willingness to work with the like-minded people, your decision should come from the analysis of how much business that very wholesaler brings for you from the markets you can’t reach yourself. If you find yourself in a position to penetrate that market yourself or directly reach out to local OTAs, you can easily do away with that wholesaler. You should also evaluate a true ROI against the money and time spent dealing with contract violations while taking decisions regarding current partnerships.
- Move to dynamic-only rates with the wholesalers:
Hoteliers should take a strong stand to move to dynamic-only rates with wholesalers to reduce disparity and put themselves back in control. Thus, you should consolidate your wholesaler list by signing contracts only with those who agree to your pricing strategy.
Moving your rate structures into a dynamic environment, where prices fluctuate based on supply and demand, will decrease the possibility of an expired, out-of-parity rate floating around on the internet. You can also continue to take advantage of the demand that wholesalers provide, but now at the right price. Just like any other segment, flexing your rates will allow you to maximize profitability and keep rooms available for those consumers who actually want to stay at your hotel.
- Consider rate parity monitoring tools and support:
Rate parity monitoring tools help you catch real-time leakage offenders in order to help you deal with rate disparities and redesign your parity strategy. It also gives you insights on the rates of your competitors so that you can benchmark your room rates against your competitors across different booking channels and, in turn, be able to set attractive prices accordingly.