What went wrong with direct Web distribution in Hospitality? The Internet, which is the greatest direct-to-consumer medium ever created,should prove a fertile ground for the direct sales efforts of proactive,Internet-savvy hotel marketers. And yet, the sad truth is that the majorityof hoteliers, far from realizing and exploiting the Web's true potential,often fall prey to the Web-proficient online intermediaries.
In the offline world hoteliers are among the smartest direct marketers. A recent Bear Stearns survey confirmed the findings of numerous previousmarket studies and found that over 75% of all room bookings are direct-to-consumer.Here is an approximation of the room bookings by distribution channel:
Hotel direct:65%-70%In person:5% -10%Travel agent:10%-15%Online:5%-10%
(Bear Stearns, 2002)
In the online world, hotels are far less effective in their direct-to-consumersales efforts. This year, less than 54% of online hotel bookings will bedirect sales. Hoteliers have difficulty maintaining market share and findingthe right formula to deal with online discounters and intermediaries. The lack of comprehensive Internet strategies, ineffective eDistribution effortsand the explosion of the "merchant model" (online discounters such as Hotels.com)are partly to blame for the current situation.
PhoCusWright projects that hotels will not be able to increase marketshare as new online travelers are lured by discounted rates and abilityto comparison-shop on the main intermediary websites. Hotel suppliers'market share fell from 56% in 1999 to 54% in 2001 and it will take extraefforts to maintain this share in the future.
>19992000200120022003Hotel Websites:56%55%54%54%54%Online Agencies:44%45%46%46%46%
(2001 PhoCusWright)
Obviously hoteliers have not been able to transfer their offline directsales expertise to the Web and we are witnessing a new disparity emergingon the Web: Internet-savvy vs. Internet-less savvy players.
What Went Wrong on the Web?
We believe that the current situation is extremely dangerous for thehotel industry and, unless hoteliers do not adopt comprehensive directWeb distribution strategies, will have long-term negative repercussions.Here are its main reasons for the current state of affairs:
1. Lack of understanding among hoteliers on how the Internet and online distributionworks, a clear advantage for the online intermediaries.
2. Hospitality is way behind the other travel sectors in adopting the Internetas a mainstream distribution medium. The weak economy and 9/11 found manyhoteliers unprepared (financially, technologically, e-Knowledge-wise) todeal with the explosion in online bargain-hunting and bookings.
3. Online discounters/merchants exploited extremely well the desperation inthe hospitality industry after 9/11. Hoteliers, looking for a quick fix for their eroding revenues, turned to the discounters' "free" services. Most hotels didn't realize, or chose to ignore, the long-term brand erosionand downward rate pressures that those services bring. In the best scenario,these hoteliers achieved acceptable occupancy rates at the expense of muchlower ADRs and permanent damage to their rack rates.
What is the Situation in the OtherTravel Sectors?
Travel suppliers in the other travel sectors are well ahead of hoteliersin aggressively adopting direct online distribution. All major airlinesand car rental companies have embraced the Internet as their main distributionmedium and have been pushing online and non-GDS distribution for quitesome time now.
The airlines in particular have become experts in direct-to-consumerWeb distribution. Southwest Airlines' online revenue exceeded $2.19 billionin 2001, followed by Delta with $1.8 billion. JetBlue generates 65% ofits revenues from its website, www.jetblue.com and is one of the few profitableairlines today.
Airlines are the most determined among all travel suppliers to selldirectly to online consumers and are competing formidably with online intermediariesto dominate the Internet. Unlike the offline world, where only 35% of bookingsare direct sales and 65% come from agency sales, online direct sales willconstitute more than 62% of all air online bookings in 2002 (if we includethe direct sales champion Southwest Airlines) (PhoCusWright, IDC). Theairlines even established two direct-to-consumer services, Orbitz.com andHotwire.com, to compete directly with the major online intermediaries.
By adopting the \"Direct Web Distribution Model\" i.e. direct Internetconsumer sales, the major airlines were able to enhance significantly their distribution strategy. The abolishment of travel agency base commissionby the major airlines earlier this year was not only a cost-cutting measure,but also a direct result of the newly gained realization that the DirectWeb Distribution Model works.
Online distribution in the airline sector is expected to increase 90%in 2002 over 2000 and contribute more than 15% of the airline totalpassenger revenue this year and more than 28% by 2003 (PhoCusWright). Carrental companies expect 15% of their sales to be online in 2001 and 25%in 2003.
What is the Status of the OnlineHospitality Marketplace?
Hoteliers are slowly beginning to realize that online distribution ischanging the \"classic\" distribution spectrum. What is the situation in hospitality today? This year 8%-10% of all revenues in hospitality willbe generated from the Internet. Four years from now the Internet will contribute 16%-18% of all hotel bookings. Jupiter estimates that while online travelwill grow at an annual rate of 23% from 2000 through 2006, online revenuesspecific to lodging will grow over 26% annually during the same period,from $3.8 billion to $15.5 billion.
Hoteliers are beginning to like what they see: online distribution cutscosts, attracts affluent customers and lessens the dependency on more traditionaland expensive channels. Jupiter Research estimates that the sizeof the online hospitality market will exceed $6 billion in 2002, up from$4.1 billion in 2001, and will reach $7.9 billion in 2003. Some hotels already generate 20%-30% of their bookings from the Internet.
Over 192 million North Americans are active Internet users (Nielsen)and 40 million of them have already purchased travel online. The Internetoffers vast, interactive, rich media and most importantly, a growing distributionmarket.
Why Move Away From the Traditional Distribution Model?
Distribution of hotel inventory via today's main distribution channels,GDS/travel agent and call center/reservation office, is inefficient andexpensive, especially in light of the current weak economy. Focusing onlyon the traditional distribution channels will result in lower occupancyrates, higher distribution and operational costs.
Here are just a few examples of the cost savings of online vs. offline bookings (PhoCusWright):
1. Hilton: saves $25 online vs. travel agency booking
2. Hyatt: cost of a Web booking is $3 vs. $9 of a call center booking
3. 6 Continents: cost of a Web booking is $3.20 vs. $8 of a call center booking
4. Marriott: cost of a Web booking is $3.50 vs. $8 of a call center booking
A typical GDS hotel booking, at the average GDS ADR of $117.07 and a weightedaverage stay of 1.945 nights (TravelClick Q2 2002 data), would cost thehotel $24. A booking via a call center/reservation office would cost between$8 and $12 (direct and indirect costs). A direct consumer Internet bookingwould cost $3-$3.50.
Case Study:
The following case study of a Hotel Management Company with 20 brandedhotels in California, clearly shows the higher cost of offline/GDS vs. direct online bookings (as percentage of booking revenue):
.GDSDirectTravel Agent10%0%GDS$5$0CRS$5$3Total Cost$36$3Total %14.4%2.0%All travel suppliers and hoteliers are looking for alternative and less expensive distribution for their perishable inventory. The Internet is a viable alternative. Traditional channels are not only prohibitively expensive, but structurally unable to handle group bookings and block allotments, support special accounts, hotel packages, last room availability, rich media, etc.
How to Deal Successfully With the Online Intermediaries?
A commonly asked question by hoteliers today is \"How can we deal successfullywith the online intermediaries?\" Brand and price erosion have become commonplaceon the Web (See this author's article \"Brand Erosion or How Not to MarketYour Hotel on the Web\"). One can even book the landmark Waldorf Astoriaon Hotels.com at steep discount. Some independent and franchised hotelsderive 20%-30% and even more of their total revenues from online discountersand intermediaries. We even know of a hotel in New York City that generates40% of its revenues from the online discounters.
Indeed, the online intermediaries and discounters that operate in themerchant model have become the 800-pound gorillas of online distribution.While hoteliers are barely keeping afloat, some of these services havereported record earnings in the quarters since 9/11/01. For example inQ2 2002, Expedia sold 2.1 million merchant room nights and reported 300%growth of its merchant revenue compared to the same period of 2001. Hotels.comsold 1.9 million merchant rooms in Q2 2002, up 82% from Q2 2001.
There is nothing wrong with using online discounters to upload yourdistressed inventory. But it is very wrong to turn these online servicesinto your primary and, in many cases, only Web distribution channel. Why? If your hotel has not implemented a robust Direct Web Distribution Strategyas discussed above, your hotel will appear on the Web only through your discounted rates offered by the online intermediaries and merchants. In other words, the Internet users will always "bump" into your discountedrates and nothing else.
Therefore, as far as the Internet consumer is concerned, these discountedrates are de facto your published hotel rates on the Web. The result isa major brand erosion and price dilution with catastrophic future repercussions.If consumers consistently find on the Web only your discounted rates inthe $129-$139 price range, how can your hotel convince them to pay the$189-$189 rack rates -- online or offline?
So how can hoteliers deal successfully with the threat presented bythe online discounters and intermediaries? By taking hold of their Cyber-destinyand by adopting aggressive programs to:
Implement a comprehensive Total Online Distribution Strategy that ensurespriority of the direct-to-consumer online distribution model and balances favorably the direct and indirect online channels.
Beat the online discounters at their own game.
What is the Total Online DistributionStrategy?
To deal better with today's online travel challenges, hoteliers mustadopt a comprehensive Total Online Distribution Channel Strategy, whichturns the direct-to-consumer distribution model into the centerpiece ofhoteliers' Internet strategy and optimizes the balance between the Directand Indirect Web Distribution Models.
The Internet is all about positioning your hotel website at all "touchpoints" of interaction with the potential online travel customer. If theonline traveler looks for accommodations in your destination (e.g. Boston,Chicago, etc), he/she should be able to find:
* First: your website through the search engines, your destination-focusedwebsite strategy, your destination Web initiatives, pay-per-click services, online travel and hospitality directories and indexes, your website affiliates,destination portals, CVB websites,
* and Second: your inventory through third-party online channels beyond yourwebsite: major online agency model travel services, opaque rate serviceslike Hotwire, incoming operators and DMOs, as part of online packages offeredby tour operators, impulse-purchasing services like Site59, and yes, finally,via selected discounters/merchant services.
In other words, when looking at the direct vs. indirect distribution ratiomentioned above, it becomes obvious that in at least 54% of the cases,the Online Bookers should end up and transact on the hotel website in order for the hotel or major brand to be in par with the national averages.
Spheres of Web Distribution Influence
As mentioned, the Internet has created the ideal medium for direct-to-consumerdistribution.
Direct distribution over the Web is a very complex undertaking thatinvolves a variety of online channels, business models, marketing approachesand sales techniques. Therefore we call the Internet strength of a particularhotel/hotel brand "Sphere of Web Distribution Influence", which we defineas the percentage of Direct vs. Indirect online distribution influence,presence and exposure of the hotel company on the Web. The higher the Direct Web Sphere of Distribution Influence, the less dependence on online intermediaries.The goal of every proactive hotelier is to exceed the industry nationalaverage of 54:46.
The Direct Sphere of Web Distribution Influence is all about benefitingfrom the Internet as the greatest direct-to-consumer distribution medium. Direct online distribution should become the centerpiece of any hotel brand's Internet strategy. Here are some of the direct distribution channels, businessmodels, marketing programs and promotional techniques that share the samecommonality: the online traveler ends up on the hotel website and transactsthere:
1. Hotel website
2. Property pages within a major brand website
3. Hotel-sponsored destination Web initiatives, such as destination portals,sections, pages
4. Search engines (e.g. MSN.com)
5. Destination-focused search engine strategy and initiatives
6. Online loyalty program initiatives
7. Affiliate programs
8. Lowest price guarantees
9. Pay-per-click marketing E-mail marketing
10. Travel and hotel directories and portals
11. Last minute and impulse purchase services
12. Online CVB Initiatives
The Indirect Sphere of Distribution Influence includes all those intermediaryonline services and distribution channels where the online traveler hasaccess to the hotel inventory and descriptions and transacts on the intermediary's website:
1. Agency (Commission-based) Model Services
2. Opaque Rate Model Services
3. Merchant Model Services
4. Online Event and Meeting Planner Services
5. Online leisure travel
6. Online wholesalers and consolidators
7. Dynamic pricing services
8. Foreign Online Services
The three main indirect business models for online hotel bookings are theMerchant model services, Agency (Commission-based) Model Services, andOpaque Rate Model Services.
For example Hospitality eBusiness Strategies has identified 60 majoronline distribution channels that a proactive hotel company can utilizeto position its offering and benefit from these services' promotional effortsand robust Internet traffic.
Ideally hoteliers should aim to position themselves at all "points ofcontact" with potential Internet travel bookers. Utilized expertly, the Total Online Distribution Strategy and its two components, Direct and IndirectWeb Distribution, can produce immediate results, while keeping the hotelierin full control of its brand, pricing strategy and revenue management techniques.
Direct Web Distribution Model
The direct-to-consumer model should become the foundation, the mainfocus of any hotelier's online distribution strategy. Why direct distributionis so important? First of all, the Internet is the ultimate "Direct DistributionMedium". It provides the hotel with long-term competitive advantages andlessens dependence on intermediaries, discounters or traditional channelsthat are about to become obsolete. It also:
* Puts the hotel in control of its Internet presence and exposure
* Prevents brand and price erosion
* Is the shortest path to establishing interactive relationships with yourcustomers
* Provides long-term opportunities to benefit from the lifetime customervalueIs the cheapest way to distribute hotel inventory
Let's consider the case study below, demonstrating clearly the advantage of Direct Web Distribution, followed by the agency model services.
Case Study:
Here is the experience of one Hotel Management Company in utilizing various online distribution channels:
Distribution Model: Average Rate:Average Direct Web:$110.00Average Indirect Web:
Including$76.80Agency Model (Worldres, TurboTrip, etc)$102.15Merchant Model (Expedia, Hotels.com, etc)$75.15Opaque Model: (Priceline, Site59, etc)$58.55
Here is a brief overview of themain aspects of the Direct Web Distribution Model:
Website Optimization
Website optimization deals mainly with two key issues: making the websitemore user-friendly (navigation, booking technology, customer support, eCRMfeatures, etc) and preparing the website for the search engines (destination-focusedwebsite optimization, domain name strategy, target keywords, meta tags,description tags, etc):
* Domain name strategy
* Enhance navigation by introducing intuitive navigation map
* Improve "bookability" of website to increase conversion rates
* Introduce eCRM functionality and improve customer support
* Introduce customer email capture
* Search engine optimization: copy with relevant target keywords, relevantpage titles, description tags and meta tags
* Develop Destination Web Strategy to leverage the popularity of the destination
Destination Web Strategy
This is one of the most effective eMarketing strategies in hospitality.A Destination Web Strategy is a corporate-based initiative that leveragesthe popularity of the destination for the benefit of a particular hotelor a cluster of local properties. The benefits of this strategy is notonly benefiting from the popularity of the destination, but also cross-sellingof multiple properties within the destination, reducing overall marketingcost (creation, development, maintenance, and search engine submissions),etc. There are four different models for implementing a DestinationWeb Strategy.
Search Engine Strategy
As purchasing behavior continues to shift from offline to online, oneof the most effective and often underutilized approaches to building acompetitive strategy online is through the use of search engines. Numeroussurveys show that 85% of Internet users rely on search engines to locateinformation on the Web (e.g. Yahoo, Google, AltaVista, etc). A common mistakemade by hoteliers is to think that a search engine optimization vendor(SEO) can do miracles for the hotel's stale, user-unfriendly website. These"quick-fix" SEO efforts always turn out to be a futile exercise becausesuch SEO initiatives never work. Only after thorough Website Optimizationand Destination Web Strategies are implemented, as described above, shoulda hotel undertake a robust and effective destination-focused search enginestrategy.
Pay-Per-Click
Pay-per-click (PPC) or Pay-for- performance services as they are sometimesknown have become an extremely popular and smart way to position your hotelbrand and local properties as \"Sponsored Links\" or enhanced listings ontop of the search engine results. This is a high growth market: 400%increase in PPC use 2001 vs. 2000 (IAB/PWC). In the recent DoubleClicksurvey (June 2002), 57% of respondents identify keyword search/PPC programsamong the online advertising vehicles used by US marketers.
Email Marketing
Email marketing is a crucial component of the hotel Direct Web Distribution Model. The shift toward online purchasing suggests that the website isbecoming a key point of entry to establish interactive relationship withyour customers and capture client email profiles. Email can create directrevenue opportunities with past, present, and future customers. Email marketing increases revenue opportunities throughout each customer's purchasing lifecycle. An estimated 30 billion permission-based email messages were sentin 2001; a number that will grow to 150 billion in 2005 (Winterberry Group).For more details see this author's article \"Total Email Marketing Strategyin Hospitality\", co-written with Jason Price.
Last-Minute Travel Directories
The spontaneous travel market includes more than 25 million Americans(PhoCusWright, 2000). One-third of online travel consumers plan trips withintwo weeks of departure and one-in-five online consumers plan trips withinone week of departure (Travel Industry of America-TIA, 2001). One goodexample is www.TripValue.com launched earlier this year, which alreadyboasts 2 million unique visitors per month and offers \"Specials by Hotels\"feature that links back to the hotel website.
Conclusion
Whether you are an independent or branded hotel, a major hotel chainor hotel management company, you can stay ahead of your competitors andcapture new market share with an effective Direct Web Distribution Strategy. The Internet is the ideal direct-to-consumer medium and many travel suppliers have adopted the direct distribution model as the centerpiece of their Internet strategies. An experienced eBusiness hospitality consultancy canhelp you navigate and utilize the Internet to its fullest potential atminimal cost to you, with quick turnaround, and by utilizing sophisticatedtools available only to the major online players.Implementing this strategy does not have to be an expensive propositionor a lengthy process. For example, Hospitality eBusiness Strategies' highlysuccessful Internet strategy consulting services include 30-day implementationseven for its Direct Web Distribution and Total Online Distribution Strategy packages. |
