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Will Expedia & Groupon Turn Your Hotel Into A Commodity?
By Madigan Pratt
Friday, 1st July 2011
 
When travelers sign up for the new Groupon Getaways with Expedia they are told this is the best thing to happen to travel since the inflatable neck pillow. That may be true for the traveler, but what does it mean for your hotel?

Could the Expedia/Groupon combination turn your hotel rooms into a commodity like an airline seat a product with little or no differentiation left to compete almost exclusively on price? Here are questions you should be asking.

In a recent article, "What Groupon Getaways With Expedia Means for Hotels" Expedia puts forth the proposition that it makes good business sense to sell your $200 room for $50. Here's their thought process:
  • To start cut your $200 room price in half (to $100)
  • Then make Expedia/Groupon a 50/50 partner. For every room night sold you get $50 and Expedia/Groupon gets $50.
  • If your hotel's operating cost is $40 you'll make $10 for each room sold. Sell 1,000 rooms and make $10,000. (Somehow I suspect Expedia/Groupon achieves a better ROI. Do the math using your own operating costs.)
Expedia/Groupon goes on to offer a rationale for why their venture makes sense for your hotel. Here are their points and my thoughts:
  • Customers have been shown to spend as much as 60 to 80 percent more than the value of the Groupon. When someone says "as much as" it usually indicates the high range not the average. I suspect the average is lower, don't you?
  • Expedia/Groupon has 50 million subscribers so it will not cannibalize your existing customers. With so many subscribers, they probably do a pretty good job of reaching a significant portion of your existing customer base.
  • Converting existing, higher paying past guests to Groupon buyers qualifies as cannibalization in my book.
    Your hotel can now spend marketing dollars on real customers rather than on efforts that are hard to measure and may or may not work. This assumes two things:
    - The customers they send you are not only "real," but are profitable both short and long term. The Expedia example illustrates the guests they send are marginally profitable, at best, in the short term
    - Your hotel is not effectively tracking its marketing ROI.
As a hotelier, here are a few questions you should entertain before selling rooms at a 75% discount. These are especially good questions if you represent a small luxury hotel:
  • Who are these Groupon buyers? What chance is there of making them loyal repeat guests those who would visit again and pay a more reasonable rate? Or are they simply bargain hunters who will only buy at a steep discount?
  • How does participation in Expedia/Groupon affect your brand image? With 50 million subscribers they are bound to reach past guests and even repeat VIP guests. What will they feel about your property when they see deeper discounts being offered to strangers than they perhaps have received? Will it erode my brand?
  • How does participating in Expedia/Groupon affect the relationship you have with other travel suppliers, like travel agents? If they are actively selling your hotel, how happy will they be when one of their clients complains they can get a room for less than they can?
  • What happens when one of your loyal repeat guests sits by the pool next to an Expedia/Groupon buyer and they start talking about what a great value they received? Will your loyal repeat guests be pleased at how your hotel has rewarded them for their loyalty?
If you are interested in immediate revenue and not concerned if participation will turn your hotel into a commodity, Expedia/Groupon presents interesting logic you can use to justify participating in their deals.

However, if you are a marketer interested in differentiating your hotel, building a strong brand with loyal and profitable customers, then promoting rooms on Expedia/Groupon at a huge discount is probably the last thing you should consider.

Travelers may see Expedia/Groupon as the best thing to happen since the inflatable neck pillow. It may also be a good deal for Expedia/Groupon. It's hard to imagine a scenario where it would ever be a good idea for your hotel.

Caveat emptor!

What do you think?

Madigan Pratt is Managing Director of Madigan Pratt & Associates, Inc., an innovative CRM company dedicated to acquiring and retaining profitable customers for luxury hotels. Prior to founding MP&A in New York two decades ago he held senior management positions overseeing marketing communications for several Fortune 500 companies.

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