Part 2.
Talking about the ever-evolving travel industry, a first element to consider in the benefits of a revenue management strategy implementation, is the evolution and increase of online distribution. According to a study by D-Edge published in 2018 (pre-pandemic) about the online hotel distribution scenario in Europe:
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- Online Distribution has grown by 46.7% between 2014 and 2018.
- 71% of online distribution revenue for independent hotels is generated by online travel agencies, website direct is the second most important channel, with 20,9% of the market share.
- Wholesalers and bed banks have grown by over 100% in 5.
Even though 2018 looks like ages ago, the growth evidenced is quite significant for the years that would come and that are to come.
According to Phocuswright’s travel research report of March 2020 about US Online Travel Agencies 2019 Market Sizing and Landscape, OTAs delivered US $78 billion in gross bookings in 2019, a 7% increase from $ 72 billion in 2018. One-fifth of US travel is now booked through OTAs, and most of that is lodging. For Hotels, roughly 50% of bookings come from OTAs. (www. phocuswright.com)
The development of metasearch distribution made the market more transparent and fueled the competition on the pricing playing field.
A metasearch engine allows travelers to compare hotel room rates (or airline, rental car rates alike) from various online travel agencies and other booking sites, all in one place. Any potential guest can use these websites to source, find and compare room prices for the same hotel, from multiple website options at the same time and find and book the cheapest rate available and issues on rate parity.
What does rate parity mean?
The practice of rate parity consists in mantaining the same rates across all distribution channels. With the growth of OTAs bookings over the years and the dilution of the hotels’ profits due to the high commissions paid, many countries asked for the abolition of the rate parity clause (that OTAs themselves introduced in their contracts agreements) stating it was an unfair and anti-competitive practice, as it did not give any choice to the customer but only diluted the hotel profits, putting at a stake the hotels’ chances to be competitive. The abolition of rate parity started around the year 2017 and there is a global patchwork of regulations of rate parity clauses and OTA behaviors. The rate parity ban brought, as a result, a liberalization of the hotel rates’ online distribution thus allowing hotel direct rates to finally be lower than the ones distributed through travel intermediaries. Following the liberalization of hotel pricing though, not only hotels but also intermediaries could start to freely distribute their own price, by working on techniques such as the price cut or the commission cut that allows OTAs to sell at a lower price by deliberately reducing their own commission margin.
A second phenomenon is the online redistribution of rogue rates: these are net rates negotiated with tour operators or wholesalers that usually are around 20/25% off the public rate, they are meant for the business to business (distributed to a second intermediary, wholesaler to travel agency for instance) or packaged (sold as part of a travel package, bundled with other services such as flights, tickets, transfers). These net rates are nevertheless often redistributed online with the discretionary mark-up which most of the time results in the final selling price through the OTA, being lower than the one displayed on the direct Hotel website. This causes the loss of competitiveness for hotels, with important economic repercussions in terms of loss of turnover, but above all increase in costs and dilution of profit.
The pandemic changed the cards on the table, website direct bookings became one of the fastest-growing channels in 2021.
Hotel distribution is not a satellite activity in revenue management, but it is an integral part of its execution: an effective distribution and optimal channels mix can bring incremental profits to the Hotel, even when maintaining the same levels of occupancy and without working on pricing.
When there is no revenue and distribution management, the focus is frequently on occupancy rather than RevPAR (Revenue Per Available Room) and Profit, two of the most important indexes for the hotel’s financial health.
The post-2008 crisis is full of business cases of hotels that committed up to 70% of their inventory to tour operators and OTAs in a desperate effort to drive occupancy, totally neglecting any consideration of revenue and profits. It took years for these hotels to ramp back up on profits and market share, compared to the ones that maintained a balanced channel mix and focused long-term. After the historical Thomas Cook tour operator went bankrupt, some hotels had to close because they were overdependent on this player and did not have any plan B (and strategy) when the operator closed.
Unhealthy distribution and channel mix, overdependency on few players only and neglecting the importance of a distribution strategy, can kill faster than a crisis.
TECHNOLOGY AND REVENUE MANAGEMENT FOR SUCCESS
In revenue management there are different systems needed to be present at every stage of the customer journey: starting from a Property Management System (PMS) that connects to a Channel Manager, which connects to an OTA, which then connects to a search engine for advertising and promotion, and finally to the guest.
There are multiple tools that a hotel can implement to be present at every stage of the customers’ journey, to mention a few:
- Property Management System (PMS): a software application for the operations of hospitality and residential rental properties that collects and stores all the data.
- Revenue Management Systems (RMS): automate the entire process of revenue management and generate rates, restrictions and strategies that can maximize revenue and profitability.
- Channel Managers: they connect the hotel’s booking engine or the hotel’s PMS directly with all available online distribution channels to update in real-time the room availability, restrictions, and rates in all the connected OTAs.
- Global Distribution Systems (GDS): a reservation system that connects travel bookers and suppliers. Amadeus, Saber and Travelport, Apollo and Galileo are all global distribution systems.
And again: CRS (Central Reservations Systems), Digital platforms (online travel agencies, meta searches, online tour operators, wholesalers, travel management companies, travel agents), Review tools, CRM tools, chatbots.
The implementation and strategic use of these tools are paramount if the Hotel wants to grow and remain competitive in the hotel industry.
Talking about competition: hotels cannot ignore the increase of alternative forms of accommodation and their market evaluation (Airbnb closed with a worth higher than the top three Hotel Chains Combined, After IPO in late 2020), making them essential competitors for hotels of any rating.
The development of new forms of hospitality such as hostels are rapidly growing and offering low-cost solutions for a young and carefree market, hybrid models like aparthotels can target at the same time both the traditional hotel traveler and long stay guests looking for a hyper-technological and contactless experience. All these new forms of accommodation require constant attention to the new market trends to keep up with the customer needs, and to stay competitive and relevant.
Revenue Management has at its core the philosophy of determining the right strategy for each market segment.
A market segmentation strategy is meant to analyze the target markets and segment them based on the pricing sensitivity and booking behaviors. The analysis of the customer and of the demand segments is essential to fully understand the potential customers’ needs, convert them effectively into bookers and adapt the sale around their characteristics, bringing not only additional turnover but also cost savings.
In analyzing the booking behavior of a segment of demand, different factors are taken into consideration such as the average length of stay, seasonality, booking lead time, reservations, cancellations, booking channel, room type booked, rate product, and price. Where market segmentation is not in place, it is easy to fall into the trap of losing focus on the profitable execution of the sale and waste time, money, and resources. The only weapon left is to focus on pricing: with this, the risk of creating a race to the bottom is guaranteed: Hotels start to undercut the market pricing in the hope to drive incremental bookings, again focusing only on occupancy and neglecting any consideration on RevPAR and Profits.
to be continued…
