The American Hotel & Lodging Association and STR released a special report, “Distribution Channel Analysis: a Guide for Hotels,” published by the Hospitality Sales & Marketing Association International, to assist hotels in determining their optimal channel mix.
The report discusses the effects of channel mix on profitability and what the industry can expect in the near term in the distribution landscape. It reviews the size and structure of the hotel industry at a high level, with respect to hotel performance and its use of distribution channels. It also drills down to issues of distribution costs and benefits, price elasticity, and the evolving roles of marketing, revenue management, and distribution strategy in a dynamic and volatile online environment.
The report is based on interviews with hundreds of industry executives along with data sources including distribution costs, price elasticity analyses, media spending for hotel advertising, consumer clickstream data, and channel mix from more than 25,000 hotels and 100 brands representing more than 3 million hotel rooms.
The authors of the study, Cindy Estis Green of Kalibri Labs and Mark V. Lomanno of newBrandAnalytics, shared the implications of the various findings at a press conference held during the Americas Lodging Investment Summit.
Lomanno said hotels can’t create demand simply by lowering their price. “Lodging demand is basically inelastic…lowering your price cannot generate sufficient incremental demand to make it a revenue positive move,” he said.
This means if hotels move their distribution around, from brand.com to OTAs, their biggest objective is to shift share. “You’re, in effect, going to have to get somebody who’s going to stay at a competing hotel and convince them through a pricing strategy that they should stay with your hotel,” Lomanno said. This can be achieved by share shifting from property to property, or from time period to time period. OTAs are a very effective way for properties to do this, he added.
No channel is free, however, and OTAs are the most expensive channel. With the combination of merchant and opaque models, the average cost through these channels is about 25 percent, Lomanno said. Consequently, in 2010, he said that consumers spent about $2.7 billion on lodging rooms that was never recorded on a P&L statement at a U.S. property.
Lomanno added that about 30 percent of the rooms are currently booked through a combination of the OTAs and brand.com (or close to 36 percent when you include global distribution systems). “We’re pretty confident that in three to five years, about 50 percent of the rooms are going to be booked through the Internet or an electronic channel,” he said. “That’s just the way the world is moving.” Even if the cost of OTAs drops, there will still be a higher cost in total to the industry going forward.
Green said some of the emerging channels will dramatically alter the distribution landscape over the next few years. The three biggest areas are meta search, social media and consumer review sites, and mobile. “The way the data shakes out, it looks like the usage of mobile devices will pretty much eclipse the use of desktop-type devices and many travel shoppers and travel buyers are going to be accessing their travel shopping experience through one of these devices,” she says.
Meta searches, which are the travel-specific search engines such as Google’s Hotel Finder and the recently announced Room Key, will also alter the landscape. “We anticipate at least 50 percent of the business will be touched by a third party at some point along the way,” Green says. “That doesn’t mean it won’t come in through brand.com, it may very well be what we call now a direct booking, but it may go through a mobile device, for example, or it may go through a meta search engine, or it may be through a stop on a consumer review or some other social media site before it actually lands at the hotel brand.com website. There will be costs incurred all along the way.”
Although this could in effect double the distribution cost for the industry, the threat of new emerging channels also brings opportunity, Green said. A lot of hotel companies will have access to consumers and be able to collaborate with some of these third parties in ways that will bring more traffic to them. “It’s not like it’s all doom and gloom,” Green said. “Yes, the cost may go up, but there also may be opportunity to tap customers in ways that haven’t been available before. It will be up to the hotel brands and the individual hotels to take advantage of that.”
Because the distribution landscape is so fragmented, it’s difficult for hotels and hotel brands to determine where the bookings really come from. “If there are so many touch points for the consumer on the way to actually making a booking,” Green said, “how do we know which ones really make the difference and really trigger the booking?” Most hotels are actively developing attribution models to figure out all of the touch points consumers go through, and how much effect each of these, whether online or offline, have on the ultimate booking. “If they knew that they could allocate their resources accordingly in terms of marketing and communications.”
The complete report is available via the HSMAI Foundation's eConnect site, as well as via AH&LA and STR.