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Optimizing Profit & Reducing Distribution Costs

Optimizing Profit & Reducing Distribution Costs

There is still a lot of talk in the hospitality industry regarding the rising costs of distribution. While encouraging guests to book direct can help hotels bypass some commissions and fees (even direct channels are typically not a free lunch), there are still many hotels that rely on the distribution and marketing reach of online travel agencies (OTAs).

NB: This is an article from IDeaS

As hotels start to change their contracts with third-party channels, they gain flexibility in managing rate and availability parity. It now becomes critical to weigh the value of a channel—not only today but in the long term—versus the costs of acquiring reservations through that channel and how much of that demand is needed.

So, why hasn’t the industry progressed much on how to understand channels better? In this Q&A with IDeaS senior product manager and industry vet Stephen Hambleton we review the critical points and offer some tips on how to get your distribution data in better shape.

What’s the latest buzz around channel optimization?

There is a vast amount of data available to hoteliers from their reservations and distribution systems. For many years, the industry has been focused on revenue optimization. Over time, the reservation acquisition costs have increased as hotels have seen demand shift to higher cost channels with more pressure on bottom-line performance.

Understanding your costs by channel—and evaluating which channels give you the most bang for the buck—can be an overwhelming task, unless your team has a common definition on the coding structure and a means to calculate cost of acquisition. There’s now a focus on collecting data to understand the impact of acquisition costs on profitability to support adjusting contracts with OTAs. This builds a basis for more profitable decisions in the short-term and more long-term channel-value-centric decisions when contracting with distribution channel partners.

What should be considered in determining the cost structure of a channel?

There are many ways to approach this, such as including your infrastructure and labor costs, like data servers, salespeople, etc., and that’s a valid approach when evaluating the overall cost associated with a channel. For revenue management purposes, I think it’s more appropriate to keep it simple and consider the cost of acquiring one additional booking through a channel.

This will make it easier to compare costs on a channel-by-channel basis and build a foundation for optimization—i.e., how we decide if we need one more reservation from that channel, or if we have demand from lower-cost channels. To be able to achieve this comes down to how your business is coded.

What should hotels know about channel and source codes?

At the core, hotels typically need to understand and streamline the structure of their channel and source codes. Historically, to support revenue management, we have had a lot of focus on well-defined rate codes and market segment codes. As I wrote in an earlier blog, it’s still true that before you can apply any predictive analytics, the data inputs need to be clean and organized.

For example, if your teams are using channel and source codes interchangeably with some codes repeating in both areas, this will lead to confusion within reservations teams and result in poor data collection. You’ll want to be able to separate each booking endpoint as well as isolate the differences in demand and cost structures. Thereafter, you can start to use this data for measuring performance, forecasting and making revenue management decisions.

How will this information help hotels with their selling partners?

Knowing the value of your channels supports effective contract negotiation with your booking partners. This includes deciding how you agree to a fair commission percentage or which rate and availability parity clauses to agree upon (and how you may be penalized for authorized breaking of said clauses within your contract).

The alignment of these clauses across partners are important prerequisites as you go farther down the profit optimization path (e.g., if you close or restrict bookings in one channel, must you do the same in all channels?). You’ll want to consider the potential long-term ramifications of this practice as well, such as impact on search placement.

The current value of these activities and the partner overall can be hard to evaluate, and the impacts are difficult to predict unless contractually committed. It is especially important as revenue management and marketing are typically a short-term centric discipline, with short-term promotions or pricing practices to drive demand across optimized occupancy dates. Trends or impacts of these distribution practices will play a key role in longer-term performance and should be evaluated as such.

What steps can hoteliers start to take now?

  • Start to review your third-party contractual commitments to availability and rate parity and investigate introducing more flexibility into those commitments. These changes typically take time to go into effect and have a significant bearing on how you can enact longer term channel optimization.
  • Review and capture your channel costs by looking at each booking endpoint in your distribution ecosystem—from direct to your brand.com through each GDS, OTA and group booking partner. As you consider each booking endpoint, define what the cost of taking each additional booking is. Try to keep it simple. For example, perhaps do not include any annual subscription fees for the channel or reservations system since this is a fixed cost regardless of the number of bookings you take through this channel. However, you should include any per-reservation fees (fixed and/or percentage).
  • Review the business coding for your channels and sources. Ensure your team agrees upon a set of well-defined codes representing each booking origin point. And, most importantly, ensure you have buy-in that these codes will be reliably assigned to reservations (ideally automatically via systems and interfaces). Initially this will ensure the collection of good reporting data, and later will serve as an input to forecasting and optimization. Recoding booking history is typically challenging, so that’s why it is important to draw a line and begin the process to collect clean data.
  • Once you have clean data from which you can isolate your channel costs, you can make the decision to take more or less of the available demand through various channels on the basis of the cost to take one additional reservation through that channel. That’s how you’ll improve profit performance: by controlling costs on a channel-by-channel basis.
  • The key to building a solid foundation is to clean your “data house” now. Set your immediate focus on reviewing and modifying your channel and source codes, understanding your channel costs, and introducing more flexibility into your contracts with OTAs.

Where is the industry headed?

We are going to see mutually beneficial relationships develop with OTA partners as brands continue to drive business direct to brand.com and begin the conversations to review their OTA contracts. This is but one step in the journey toward profit optimization and a shift toward long-term decisions in revenue management. This highlights a large shift in the discipline of revenue management—it is a big and exciting step for our discipline.

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