ITB 2023 Special Reporting
Social Buying & Flash Sales: The Future of Hotel Distribution or a Recession Phenomenon?
By Max Starkov and Ritesh Gupta
Tuesday, 20th September 2011
Recently we had a professional chat with Ritesh Gupta, Managing Editor/ Global Correspondent at EyeforTravel, about the role social buying/flash sales sites should or should not play in hotel distribution.

Ritesh Gupta/EyeforTravel:

How has the whole arena of Social Buying and Flash Sales progressed in 2011? How is it being perceived in the travel industry at this juncture even as HeBS Digital points out that the "economics" does not work for the hospitality industry?

Max Starkov:

I stand firm on my assessment that social buying & flash sales sites are a recessionary phenomenon, and not some kind of a new, emerging distribution channel that is here to stay. There is nothing special about the business model (open discounts) or the technology these sites use. Social media is a mere enabler, not the cause for the emergence of these sites. The only reason these sites emerged over the past three years is the recession.In 2011 we are witnessing two defining moments for the social buying/flash sales phenomenon:
  • Over-saturation of players in this category, which inevitably will lead to market share and revenue erosion, consolidation and failures
  • Significant weakening in the supply side which has already resulted in weakening in the demand side
Social buying and flash sales sites are an integral part of the economy and the supply-demand market equilibrium. For social buying and flash sales sites to exist, there must be a Market Equilibrium (price-quantity) between: the Demand Side (quantity of members/engaged social buyers) and the Supply Side (quantity of fresh, intriguing deals).In 2011 all signs are pointing that the hospitality industry is in recovery mode.

The U.S. hotel industry reported increases in all three key performance metrics for second-quarter 2011 in year-over-year measurements, according to data from Smith Travel Research (STR). The industry's occupancy increased 4.5 percent to 63.4 percent, average daily rate rose 3.5 percent, and revenue per available room was up 8.1 percent. STR projects that all three of these key performance measurements will realize steady increases for the year as a whole.As travel demand improves, hoteliers are becoming reluctant to participate in social buying/flash sales sites and provide the Supply Side of the equation with fresh, intriguing deals.

The result? Both sides of the equation suffer & shrink. Online travel consumers, disappointed by the lack of fresh/intriguing hotel deals, are reverting back to the traditional booking channels: hotel direct, OTAs, GDS and voice.As mentioned, flash sales sites are running out of fresh, intriguing hotel deals: this already affects the demand side in a negative way. Here are only some of the indisputable signs of this weakening and shrinkage in supply and demand:
  • Visits to Social Buying/Flash Sales Sites declined by 25% since June 2011 (Hitwise) due to:
    - Too many competitors
    - Deal fatigue
    - Not enough good deals
  • Groupon and Off & Away were forced to partner with Expedia
  • Groupon: Customer acquisition costs are out of control
    - Advertising costs: $263M in 2010 vs. $4.5M in 2009. $180M in Q1 2011!
    - Revenue per subscriber has fallen by 64.2% (06/09-03/11)
    - Number of deals sold per customer have decreased by 34%
Ritesh Gupta/EyeforTravel:

While HeBS clearly states that the business model is flawed considering that the discounted rate is out in the open (goes against rate parity principles), why are hoteliers finding it attractive?

Max Starkov:

I firmly believe that the "economics" of these "open discount" sites simply do not work for the hospitality industry:
  • Flawed Business Model: the discounted rate is out in the open, which goes against rate parity principles and leads to serious price and brand erosion
  • Lack of opaqueness establishes a low market price: hotel can never charge rack rate since customer has accepted the discount rate as the market value
  • Steep discounts of 50%-67.50% are simply unacceptable in any economic environment
Here is a case study on the distribution costs for a typical full-service hotel (right):

As we see from the example, the cost of distribution via the social buying/flash sales site is 27 times higher than via the hotel own website. Why are some hoteliers still finding the social buying/flash sales sites attractive?

There are two types of hoteliers in the industry:
  • Smart, sophisticated hoteliers who understand that using social buying/flash sales sites leads to price and brand erosion, and ultimately damages the hotel's price integrity and overall online revenues in the long run
  • Hoteliers who employ a "lazy man's approach" to hotel distribution and who are more interested in the immediate results ignoring or not caring about long term repercussions
Some hoteliers participate in social buying and flash sales sites merely because their competition is doing so. My advice? Don't succumb to the devil. A smart hotelier would never repeat the mistakes or dumb moves of a dumb competitor, why do it now with the flash sales sites?

Stick to the fundamentals in hotel distribution and make sure you are covering all the bases in the Direct Online Channel, including website re-designs, SEO, SEM, email marketing, social media, mobile web, online media, the voice channel, and GDS Travel Agent channel.

Ritesh Gupta/EyeforTravel:

Can you elaborate on other negative factors be it for cannibalization, deal face value being artificially ballooned and lack of opaqueness resulting in low market price?

Max Starkov:

Social buying and flash sales sites would like to convince the industry that they bring fresh, incremental customers to the hotel. Actually this is their main sales pitch. In reality, as confirmed by many industry surveys and analysis, a participation on these sites leads to cannibalization of the existing customer base. A June 2011 survey by ForeSee determined that nearly 70% of the daily deal buyers are already existing customers: 38 percent of them are already frequent customers; 27 percent are infrequent customers, and 4 percent are former customers.

Some hoteliers are making the mistake of believing that once the hotel is "found" by travelers on a flash sales site, those people will then become loyal hotel customers. Flash sales site users are loyal only to the "50% off rack rate" religion, not even to each individual flash sales site. These customers would have never stayed at your hotel if it weren't for the flash sales site promotion and would never repeat their purchase at the hotel rack rate.

The danger of brand degradation is another aspect that should be considered by hoteliers before participating on a flash sales site. Many of the daily deal buyers who purchase accommodations at a steep discount of 50 percent or greater simply do not "belong" at your hotel. They will scare your regular guests who would feel that your hotel has been downgraded to a lower category.  They would not know the "etiquette" observed at your hotel. They will be more demanding and will have unrealistic expectations. They will be the first to write negative reviews on TripAdvisor, Google Reviews, etc.

Another negative impact comes from the artificially inflated face value of the deal these social buying/flash sales sites use in order to show value to potential buyers. This puts off potential customers by positioning the hotel as "too expensive."

Typically the face value of a 2-night deal package is severely exaggerated and is presented as being of a very high, unrealistic value (example on Off & Away: $1,500-$3,000). This creates the impression that the hotel is very expensive and "out of my price range" and pushes away people who otherwise would have considered the hotel ("$2,500 for 2 nights? Is this hotel crazy or what!").

Ritesh Gupta/EyeforTravel:

For flash sales, hotels are being recommended to make sure they display the rack rate on their booking engine so that consumers understand the value they are getting from the hotel flash sales deal. What do you make of this suggestion for finding the right price/ discount.

Max Starkov:

As discussed above, all social buying/flash sales sites would like to present very high, even unrealistic value of their deals. The bigger the spread (the gap) between rack rate and deal face value, the better.

Some hoteliers still naively believe that social buying and flash sales sites are some kind of advertising vehicle and have nothing to do with hotel distribution. They do not realize that these sites are an integral part of the online distribution ecosystem and directly influence travel consumer purchasing behavior and the other online distribution channels.

There is no doubt that flash sales sites are part of the indirect online distribution channel – the recent partnership between Groupon and Expedia to create Groupon Getaways with Expedia is clear proof of that. A similar partnership exists between Expedia and Off & Away, etc.

The highly discounted hotel rate on a flash sales site is not only in violation of the rate parity principle that has become the centerpiece of hotel distribution over the past 10 years, but establishes a new,  lower price level for the hotel and lower value point in the mind of the potential customer. In reality this discounted rate of 50 percent or less becomes the "market price" for this hotel. With this new market price in mind, how would a hotel expect to convince a potential customer to book rack rate?

There is another important consideration: working with the flash sales sites only exacerbates the situation of any hotel with the OTAs. The OTAs are monitoring the flash sales sites very closely. This is Economic Espionage 101. How would your Expedia or Travelocity rep react when they see your hotel having a 67.5% promotion on a flash sales site like LivingSocial.com or Bloomspot.com, and in the same time you are arguing about your merchant commission of 25%?

Ritesh Gupta/EyeforTravel:

It is also being mentioned that the social commerce model comes with unambiguous marketing benefits.  Pages of such sites/ offerings link directly to hotel websites, by design.  These companies say they want to create direct engagement between consumers and hotels. What do you make of the benefits emanating from this platform?

Max Starkov:

Make no mistake: social buying/flash sales sites are part of the indirect online distribution channel. Anything these sites do is strictly in tune with their own interests. Similar to the OTA content about your hotel, the flash sales sites aim to present all the necessary content about the hotel a user would need to make a purchase decision, including everything from maps and directions to customer reviews, articles and mentions of the hotel in the press, area attractions and naturally, descriptions of the hotel amenities and services.

All of this content overshadows the link to the hotel website, which is included only to re-affirm the very high value of the deal and to prove the 50 percent or bigger spread between the hotel rack rate and deal face value.

Ritesh Gupta/EyeforTravel:

Concerns have been raised about the implications of flash sales. Be it for turning hotel rooms into a commodity like an airline seat or to high cost and revenue management challenges, the industry has highlighted negative aspects. What do you make of such concerns?

Max Starkov:

I fully share these concerns. The main focus and priority for any hotelier should be to sell as much inventory via the most cost-effective distribution channels that can potentially generate the most bookings while preserving rate parity and price erosion. Hoteliers should realize the existence of "The Law of Unintended Channel Share Loss" which stipulates the following:

Any booking via the most discounted channel (e.g. flash sales sites such as Groupon, LivingLocal.com or SniqueAway.com or an OTA flash sales program) is one less booking for the same hotel via the hotel website, call center, GDS Travel Agent, or an OTA retail or merchant program (in that order).

This is why I recommend that hoteliers focus on their direct online channel (the hotel branded website) which is by far the cheapest distribution channel. A booking via the hotel website costs $8.50-$11.50 including all marketing and advertising expenses (HeBS Research).

Ritesh Gupta/EyeforTravel:

Right now it is too easy to join flash sales.  They have gone from invitation only to anyone can sign up.  There needs to be a stronger barrier to entry.

It is being pointed out that for flash sales to separate themselves from the average OTA (in both the eyes of the buyer/consumer and supplier/hotel) they will need to change their business model to become more of an exclusive club providing customers with a tailored list of products based on the customers preferences, one to one marketing. What's your viewpoint regarding the same?

Max Starkov:

Flash sale sites are not a "new and revolutionary distribution channel" as they claim to be. Member-only travel clubs have existed for at least 165 years. Thomas Cook and American Express started back in the 1850s as exactly this type of member-only travel clubs. Diners Club started as a members-only dining club back in the 1950s.

Contrary to popular claims, there is no exclusivity—anybody could become a member of any of these Flash Sales Sites.  There is no loyalty to a specific site. Members of Groupon are often members of Living Social and vice versa.

Earlier this year, TripAdvisor created SniqueAway, a flash sale "member-only club." TripAdvisor emailed an invitation to their opt-in email list to join SniqueAway. Anybody who replied (including me) got in.  Travelocity launched their flash sales program in a similar manner.

Flash sales members are only loyal to 50 percent or more off retail rate—whether it comes via Groupon or Living Social or SniqueAway does not really matter as most of these sites serve the same audience.

Changing the social buying /flash sales sites from open-to-all consumer sites into truly private travel clubs would not change the fact that the market equilibrium has shifted with the rising travel demand and hoteliers have become reluctant to provide discounts of any sort to any indirect online channel player: OTAs, opaque sites like Priceline or Hotwire, and/or discount travel private clubs.

Ritesh Gupta/EyeforTravel:

There are a lot of trends emerging that are challenging or augmenting the OTAs of today. There seems to be an appetite from consumers to always lap up special deals, discounts and special offers from these providers.  It is very important though, for hotels not to fall into a trap of working with everybody and having discounts all over the place.  It may prove too costly with all the heavy discounts and margins these players are requesting. What are you wary of as far as new options for distribution are concerned?

Max Starkov:

There is no doubt hotel distribution has changed dramatically over the past 16 years since the advent of the "commercial" Internet. Online distribution, social media and the mobile Web have all changed how we connect with, engage and ultimately convert customers. But the fundamental principles of hotel distribution have not changed that much. Hoteliers need to focus on distribution channels that pass the litmus test.

These distribution channels:
  • Are cost-effective
  • Generate the most bookings
  • Protect rate parity and price integrity
  • Reach the targeted customer segments
Therefore, the main focus and priority for any hotelier should be to sell as much inventory as possible through the most cost-effective distribution channels that can potentially generate the most bookings, while preserving rate parity and price erosion.

The direct online channel – the hotel website- is the only channel that meets all of the above requirements. By encouraging interaction on the hotel website and social media channels, by joining in on the conversation, and making changes to the business based on feedback, hoteliers show both current and potential guests that they are listening to them and that they care about their feedback. This is invaluable for building customer loyalty and encouraging guests, as well as discouraging existing customers from utilizing the OTA and flash sales channels.

The bottom line is that hoteliers need to invest in the direct online channel. Hoteliers need a robust direct online channel strategy accompanied by adequate marketing funds to be able to take advantage of the steady growth in the Internet channel and the shift from offline to online bookings in hospitality due to declining GDS and voice channels. Hoteliers must carefully employ ROI-centric initiatives including website redesign, website optimization and SEO, SEM, email marketing, online media and sponsorships, mobile marketing and proven social media initiatives.

Note: Max Starkov, President & CEO of HeBS Digital, will present during EyeforTravel's Travel Distribution Summit North America (TDS), to be held September 19-20 in Las Vegas. Starkov will participate in the "Social Buying and Flash Sales: The Pros and Cons" panel on September 20th, 2011 – day two of the conference.

About the Author and HeBS Digital

Max Starkov is President & CEO of HeBS Digital (Hospitality eBusiness Strategies), the hospitality industry's leading full-service digital marketing and direct online channel strategy firm based in New York City - www.HeBSdigital.com

HeBS has pioneered many of the best practices in hotel Internet marketing, social and mobile marketing, and direct online channel distribution. The firm has won over 140 prestigious industry awards for its digital marketing and website design services, including numerous Adrian Awards, Davey Awards, W3 Awards, WebAwards, Magellan Awards, Summit International Awards, Interactive Media Awards, IAC Awards, etc.

A diverse client portfolio of over 500 top tier major hotel brands, luxury and boutique hotel brands, resorts and casinos, hotel management companies, franchisees and independents, and CVBs has sought and successfully taken advantage of the firm hospitality Internet marketing expertise offered at HeBS. Contact HeBS consultants at (212) 752-8186 or success@hebsdigital.com.

About EyeforTravel's TDS North America 2011 September 19-20, The Mandalay Bay, Las Vegas.

North America's premier networking event for online travel suppliers and distributors: Speakers from top travel brands reveal how to lower distribution costs, control the mobile channel, maximize revenue and engage through social media. Over 300 Executives are already confirmed! See who is already attending online here http://events.eyefortravel.com/tdsusa/conference/attendees.shtml

Meet the key stakeholders of the online world: Facebook, LinkedIn, LivingSocial, TripAdvisor, Google and more. Join Starwood, American Airlines, United-Continental, Air Canada, IHG, Hilton and almost every other major travel brand at North America's favourite conference this September.

For more general information see www.eyefortravel.com/tdsusa or contact: rosie@eyefortravel.com
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