Smart operators recognize that that the role of revenue management is critical to overall financial results, not just top-line performance. In addition to being responsible for the functional aspects of forecasting, pricing and inventory management, today’s revenue management professional is often accountable for managing the distribution efforts for their respective organizations. This poses some challenges, and also brings with it some interesting opportunities.
What is Distribution?
Distribution in the lodging environment is about making our products and services available for sale to potential guests through various means. These means (or channels in hospitality industry vernacular) could either be direct or via 3rd party intermediaries. In the classical definition of the marketing mix consisting of 4 P’s: price, product, promotion and place surrounding a single “C”: consumer, the concept of distribution sits squarely in the place category. It answers the question – How? How will consumers buy our products or services?
A Historical Perspective
Not too many years ago, managing distribution was relatively straightforward proposition since the number of channels to consider was very low. Property-direct (phone, telegrams, telex or fax), central reservations (800# calls) and global distribution system (GDS) were the most common means. Then – the Internet happened.
Following the events of 9/11, the industry was struggling and the OTA’s were viewed as a simple way to move excess inventory at a substantial discount to a “fenced” audience. Similar in concept to offering an AAA discount where a guest needs to be a member to receive the savings, the OTA fencing was derived from the lack of widespread public adoption levels of Internet as a means for booking travel. How quickly things changed.
The 5 Internet Models (1)
Compounded by increased pricing sophistication and a meteoric rise in the number of intermediaries within the supply chain, today’s distribution landscape is vast and multifaceted. Effectively navigating it can appear to be both a daunting and highly complex undertaking. Fortunately, it doesn’t have to be that way.
The traditional channels consisting of voice, CRS and GDS are still as important and viable as ever; however, faxes, telegrams and telex messages once common means of communication under the property direct category have (presumably) been replaced with robust proprietary websites and mobile capabilities that have been optimized for attracting, engaging and transacting with guests.
In terms of 3rd party intermediaries, essentially five (5) economic models have emerged. These point-of-sale models are Retail, Merchant, Auction, Opaque and Referral.
- Retail – Retail model entities can be identified by the fact that the supplier collects payment directly from the guest and pays a commission after the fact to the retail model entity that supplied the booking – similar in nature to a traditional retail travel agency. Examples include Booking.com and Quikbook. Expedia’s Hotel Collect option which is governed by either how supplier content is sourced or “traveler preference” also fits into this category.
- Merchant – In the case of a Merchant model, it is the distribution entity that collects payment from the guest and is therefore the “merchant of record” in the transaction. The supplier then collects a net payment plus taxes and/or fees applicable to that net amount from the distribution entity. The merchant model is most commonly associated with the traditional OTA model. Hotels.com, Expedia, Travelocity, Orbitz and Priceline are often referenced as the top OTA entities.
- Opaque – The term opaque refers to a model in which some element of the transaction is “hidden” from the consumer. This hidden element could be the name of the property that is revealed only after the consumer makes a purchase. In the case of a package where air, car and hotel are bundled together, the price of individual components is not revealed. Hotwire is a good example. Orbitz or Travelocity’s packages path bookings would also fit into this category.
- Auction – As expected, in the case of an auction model, several consumers may “bid” on a travel experience, but not all will be successful in securing the purchase. Priceline’s Name Your Own Price™ is a relevant example of the auction model.
- Referral With a referral model, the supplier defines the “call to action”. Often this call to action is the supplier’s proprietary website or a unique reservation telephone number. The financial arrangement between supplier and distributor is most often a cost per click (CPC), cost per action (CPA), revenue share and/or listing fee. Travelzoo, TravelTicker and a business listing on TripAdvisor are all good examples of the referral model.
One could argue that metasearch would be a sixth distribution model, but from a supplier’s perspective that is not the case based on point-of-sale (booking) attribution. Metasearch entities such as TripAdvisor, Trivago, Kayak, Google Hotel Finder and Hotelscan either fit into the referral model or merchant model since they refer business to suppliers directly or to OTA’s, which, in turn, transact with supplier under a merchant agreement. The lack of margin typically associated with the retail model would preclude a revenue share from the OTA back to the metasearch entity, but of course there are exceptions to this rule. As attribution data becomes more sophisticated, additional factors will need to be considered to both respond to and influence consumer behavior; however, developing a strategic plan to leverage the points of sale outlined above in your favor is where you should start.
A Strategic Plan
Most properties track market segmentation since the financials are set up in this fashion. It is very important to realize that the segmentation you find on a property P&L is simply a by-product of many other decisions and activities. Segment tracking by itself is not enough.
It is important to know which channels are performing when. A simple excel sheet depicting both pace and channel mix can be very useful in enabling visibility into conditions that will likely result in a given outcome. Some basic “what-if” scenarios can be easily layered in to depict another set of outcomes. It will be come quickly apparent which ones are desirable and which ones are not. More advanced analysis that includes ancillary spend profiles can also be quite revealing. The key then will be to align your activities and decision making throughout the organization towards your intended objectives.
Rate plan production reporting is also critical in better understanding which activities, programs and entities are impacting your business. Seasonality, promotional activity, competitive actions, direct sales efforts, stay restrictions, policies and pricing can all have an influence on rate plan production. While there isn’t a perfect correlation between rate plan production and channel production; nor between channel production and segmentation, the three are interrelated to a large extent. Clearly, looking at just one will not reveal the whole story at best, and will lead to risky decision making at worst. A comprehensive view of segmentation that is augmented by channel mix and rate plan production will help you to develop, validate and refine a strategic approach to distribution that will support achieving your performance targets.
Costs and the Brand.com Myth
Within the context of formulating your strategic plan, it is critical to know specific costs that influence profitability: Distribution Costs, Variable Brand Costs and Cost per Occupied Room. Consider the real-world example below:
In this case, the effective ADR after transaction costs and revenue-dependent brand costs such as royalty fees, marketing fees and loyalty program fees etc., depicts the GDS channel as highly desirable. Brand.com is only slightly better than OTA #1, but significantly more desirable than OTA #2.
Property-level brand CPOR includes items such as breakfast, free water, upgraded amenities, room upgrades, late checkouts etc. given to brand loyalty members over the course of the evaluation period. Even with these components omitted, Brand.com contribution to net incremental profit per reservation is just as favorable as was OTA #1. Additional loads on the brand.com channel in the form of pay-per-click or other marketing fees would make it even less desirable on a per-reservation basis.
This illustration highlights the fact that this property should abandon its participation in Opaque channels at the current pricing level and immediately move rates up to a profitable level. An unsold room in this case would be more favorable than continuing down the current path of paying guests to stay at the property unless ancillary spend capture was strong enough to justify this course of action.
This analysis also points to the need for the property to work closely with the market manager for OTA #2 to improve ADR performance assuming stay patterns are reasonably consistent with those of OTA #1.
Please note that the transaction costs for property direct reservations were listed as zero. An increased rooms department CPOR figure was used for direct reservations to account for the labor associated with transacting over the phone and/or entering guest data into the property management system.
The key metrics used in our industry today are revenue per available room (RevPAR) and revenue growth index (RGI). These are not meaningful in measuring profitable revenue performance, nor do incentives tied to these metrics align with the interests of ownership or management. Gross operating profit per available room (GOPAR) or even net incremental profit (NIP) net of ancillary spend impact as outlined above may be more relevant. What’s certain is that greater transparency into true brand costs will be extremely helpful in this type of analysis since today these are routinely spread across rooms, marketing and unallocated overhead departments.
The end result is that you shouldn’t listen to industry rhetoric regarding which channel is better than another. Each property is unique and you should take the time to analyze your particular circumstance. Only then will you be armed with the data you need to develop a strategic distribution plan – one that supports not only top-line performance, but one that positively impacts both your bottom line and asset value.
References: (1) This concept was first introduced in the textbook entitled “An Introduction to Revenue Management for the Hospitality Industry – Principles and Practices for the Real World”, Pearson Prentice Hall 2009.
This article was first published on HotelExecutive.com
2 Comments
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However, perhaps one of the biggest challenges for the tourism industry is to understand how digital distribution works and strike a balance between direct online sales and selling through distributors. For the hotel industry in particular, this is probably one of the most important pieces of unfinished business: understanding how an inadequate channel mix affects profitability.
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Revenue management is a highly intricate process that requires professionals with deep knowledge of the industry and exceptional skills in data analysis, consumer psychology, communication, and critical thinking. Transition from manual calculations or legacy systems to modern technologies is a major industry problem, especially for small and medium businesses.
