Win Some Battles, Lose Some Others, Play to Win
NB: this is an article from Silvia Cantarella of Revenue Acrobats
I had the privilege and pleasure of attending and lecturing at the second Italian Hotel Revenue Forum on February 28th. Distribution was amongst the hot topics of the day and was the content of the speech I gave together with Francesco Criscuolo from H.n.H. Working on our presentation, we discovered that besides Revenue Management we have another passion in common: motorbikes! We found a lot of similarities between a MotoGP championship and the online hotel distribution ride.
BEND THE CURVES
The current online distribution scenario is complex and evolving. Offline suppliers are unpopularly turning into new online players by distributing rogue rates and undercutting brand.com prices. This practice is negatively impacting the Hotels’ direct sales conversion, increasing distribution costs and compromising the guests’ trust towards the direct channels.
The big elephant in the room is not the Hotels’ fight against the OTAs rate parity anymore. The rate parity abolition gave birth to the world 2.0 where the rules have changed: “no rules” is the new untold truth and the pricing leads the fight.
We will dive into the root causes, development and possible evolution of the distribution scenario. A tough ride to the best RevPAR gain, where the Revenue Manager must overcome multiple challenges along the way: respect some rules, break some others and finally drive the Hotel safe and first to the finish line.
THE PIT LANE: METASEARCH ENGINES
“Tolerance is allowing wholesalers to cheat and win a game in which we should set the rules.”
Wholesale B2B (Business to Business) net rates are being distributed B2C (Business to Customer) and end up in metasearch engines through low cost websites, undercutting brand.com rates and eroding the hotels’ profit margins. The onward distribution of unbundled B2B rates is a vicious circle in which hotels lose control of wholesale distribution because wholesalers themselves, lose control of their own onward distribution.
The rate parity abolition created a no-rules new online world where the battlefield is purely on price.
Who is really to blame?
Many Hotels indeed question: what is the point of working with wholesalers when they play unfair, undercut brand.com rates online and cost event more than a “controllable” OTA channel (20-25% commission on average for wholesalers)?
Hotels should evaluate opportunities and risks based on their own markets:
Pros: wholesalers offer a wide distribution, “free” marketing and visibility, a secured volumes base, easy forecasting and direct access to major airline companies.
Cons: wholesalers’ rates provide low margins either if working with static or dynamic rates, they limit inventory availability due to allotment constraints (where applicable) and there is little transparency in the way the hotel rates are distributed.
“Wait, but how?” The funnel before and after the API
Application program interfaces radically changed the distribution world.
At the beginning, wholesalers used to distribute as they were supposed to: offline, packaged and B2B, leveraging the power of connections and direct relationships.
Now, Application Programs Interfaces are connecting the wholesaler’s rates and inventory with thousands of partners, making onward online distribution quick, labyrinthic and chaotic.
The change is the natural evolution of the increasing online purchases, OTAs gaining power year after year and growing their market share compared to the other channels. The traditional wholesaler business model is obsolete and the tap into the online sales represents, in some cases, a way to survive.
THE OVERTAKE ON A BEND: OTAS DEFENSE STRATEGY
“We make promise to our customers: the best rates guaranteed”
Parity rate issues impact brand.com and direct channels in the same way they impact OTAs.
Booking.basic, Early payment benefits, Expedia Add on advantage, Agoda coupons and (not so) private sales are just some of the defense actions that the major players in the online market put in place to keep the promise of the best rate.
It all happens through commission cutting and rate sourcing of third party rates (again, wholesalers’ rates), with direct impact on the OTAs bottom lines as they get in return very limited or nearly non-existent margins on these sales.
In the end, who is really winning the race considering that everybody seems to be losing and diluting profits?
PENALTY AND RIDE THROUGH: THE WHOLESALE CONTRACT’S NEW CLAUSES
Less than 10 years ago the wholesale contracts were a 2-pages agreement.
After the uncontrolled boost of online rogue rates, agreements changed radically: rate integrity obligations, penalties for contract breaches, refund in case of violation, mandated minimum mark ups (where possible) and other add-ons were included. Contracts changed shape from a simple 2-pages to a 6 to 10 pages agreement.
THE LAST LAP: FROM DISTRIBUTION MANAGEMENT TO DISTRIBUTION STRATEGY
“Constantly monitor the online distribution is a job.”
NetRevPAR, Cost per Acquisition and Cost per Sales have become fundamental KPIs and the control of online distribution has become part of the Revenue Manager’s daily activity.
Contract clauses protect the Hotels’ rights in case of breach but do not prevent onward distribution to happen. When rogue rates are being distributed online, making real “false” test reservations helps to identify the offender. It requires time and a credit card, but if the contract clauses include penalties in case of breach, you can get the refund from the offender for any cancellation charges applied by the website that you are testing.
If you are not in urgency, another way is to collect the client’s booking vouchers upon check in or. In case of dynamic contracts through the channel manager, close one availability at a time for each partner you are connected to, to see when the rogue rates disappear and consequently unveil the offender.
“Dynamic pricing for wholesalers is NOT the solution”
Dynamic pricing brings only positive effects as you are in total control of your yielding. But it does not prevent onward distributor to publish online the rates net of commission at whatever markup they want to apply to undercut your brand.com rates. Still, you are in control of your yielding and you can adjust (increase) the gross rate that you are distributing, plus eventually limit and play smart with the rooms’ inventory on the specific channel.
“It’s all about weighing Risks vs Opportunities”
The key to succeed and drive topline revenue and profits is to find a right balance of channels, embrace the change and stop wasting time complaining about who are the evils and the saints. Everyone is winning and losing alike in the current distribution landscape.
Evaluate the following and ask yourself some questions:
- Real incremental revenue (Could I reach the same volumes and revenue without intermediaries or this specific channel? Where are the customers coming from?)
- Business mix and booking lead time (When do I receive bookings compared to my regular lead time? Is this generating revenue displacement on other segments? Am I filling my rooms too soon or too late, thus diluting my revenue opportunities?)
- Channel mix (Do I have a healthy balance of channels, could I replace some channels with some others, how is my distribution per day of the week?)
- Total revenue opportunity (What is the total revenue impact of each channel, what is the average extra spend compared to the other channels (not rooms related)?)
Once you ask yourself those questions and deep dive into each channel’s total value, you will be able to refine your strategy.
One thing is certain about the future of Hotel distribution: the race is only to get tougher. Resale sites, misleading online sales tactics, Google, Amazon, Wechat, Voice search… a lot of changes ahead.
You can either be mass or selective on your distribution choices; you can either have zero tolerance on offenders or compromise for the total revenue opportunity’s sake.
Balance is in the middle.
Compromise at times, zero tolerance at others. Win one race, lose one race.
What counts, in the end, is to drive your Hotel to the best possible RevPAR and profit gain to win the championship.
Have a safe and fast ride!