The price at which a product is offered for sale has been identified as one of the key motivators for encouraging customers to purchase online. This study represents the first significant investigation of the electronic pricing strategies of the major international hotel companies, and analyses the rates offered by hotels across five of the major online distribution channels. Key findings include that hotel brands currently use multiple simultaneous routes to the marketplace, and that the rates offered over these routes have to a large extent become equal. However significant differences can be observed depending on the market segment being serviced by the brand, with direct online channels being consistently cheaper for economy and mid-priced properties and online GDS based intermediaries offering the best value at the luxury end of the market.

Keywords: Pricing, hotel chains, Web reservations, e-commerce, electronic distribution.

1. Introduction

Effective distribution is particularly important in the hotel industry because of both the perishable nature of the hotel product and the industry's high fixed costs. An unsold hotel room cannot be stored and subsequently offered to the customer at a later date. Thus the sale of each room each night at an optimum price is critical to each property's long-term profitability. To achieve this, hotels use a variety of different distribution channels to sell their product, and also manipulate price in response to demand using sophisticated yield management systems in an attempt to maximise revenues. The importance of electronic distribution routes has grown significantly in recent years. According to statistics quoted in the Horwath Worldwide Hotel Industry Studies, direct reservations fell from approximately 39 percent in 1995 to just 33 percent in 1999, with the corresponding growth being focused exclusively in electronic channels (O'Connor, 2001). And while hotels continue to make extensive use of the travel agent orientated Global Distribution Systems (GDS), end user consumer adoption of the Internet as a mainstream commerce medium has prompted a change in the way in which the hotel product is being distributed. The Web has dramatically changed the way people communicate, research information, make decisions and particularly the way in which they buy goods and services. Travel products in particular have proven to be some of the most suitable for sale online. The typical profile of an Internet user - affluent, frequent travellers who spend above average on leisure and entertainment - is an attractive market for travel suppliers (NFO Plog Research, 2000). Furthermore, from a consumer perspective, in an increasingly wired world, purchasing travel online has become faster, easier and more convenient than contacting a travel agent or telephoning a supplier directly. As a result, online travel revenues are forecast to grow sharply. For example, according to a recent report by Jupiter Media Metrix (2001), online travel sales will more than triple in the next five years from US$18 billion in 2000 to US$63 billion in 2006. Booking volumes are also forecast to climb, with the Travel Industry Association of America (1998) estimating that by 2002 between 6% and 10% of all travel reservations will originate on the Web. This will make travel the highest grossing online product, nearly doubling that of the current leading product - PC hardware. Key to successful selling online is the issue of price. Studies by Gomez (2000), the Travel Industry Association of America (2001) and PhoCusWright (2001) have all identified price as being one of the key motivating factors that encourages consumers to purchase travel online. For example, the PhoCusWright study found that competitive pricing is the best way to attract customers (Pastore, 2001). When travellers who haven't bought online were asked what would encourage them to do so, 64 percent said that saving money would make them more interested. No other benefit - saving time, getting bonus loyalty club points, more control or obtaining better information, came close to this level of response.

2. Hotel Pricing on the Web

Recent studies have shown that online travel purchasers tend to be price driven. For example, according to Yesawich, Pepperdine & Brown (2000), almost six out of ten leisure travellers now actively seek the "lowest possible price" for travel services. Similarly, a recent Forrester Research study (2001) found that 66% of all buyers used an online discount in the past 12 months to buy travel online, and a study by the Joint Hospitality Industry Congress (2000) found that there is a real expectation among consumers that Internet prices will be lower than those in the "bricks and mortar" world. Such a perception has developed for several reasons. Firstly, many of the most well known Internet retailers (such as, for example, ) compete with traditional outlets based, to a large extent, on price. As a result, there is an assumption among Web users that the same is true for travel products. Secondly, many consumers are aware of the lower distribution costs associated with Web channels (Nua, 1998). As Jack Geddes, Managing Director Sales and Marketing Asia, Radisson Hotels Worldwide has pointed out "Consumers now understand that suppliers are cutting costs through this channel and expect savings to be passed onto them, as well as being rewarded for making the booking themselves" (Muqbil, 1998). Such expectations are being reinforced by the budget airline sector, which offers significant discounts for online bookings. Companies such as EasyJet, RyanAir and Buzz estimate that by avoiding telesales and travel agents, they can make savings of up to 30% - which they pass onto customers in the form of lower fares (Cooke 2000). Lastly, many hotels use the Web to sell last minute deals - packages at relatively low prices but with short lead times. While such promotions can help dispose of distressed inventory, they have also resulted in the public associating rooms sold over the Internet with cheaper prices.

These factors have combined to make consumers associate online booking with good value. However, in the case of hotel own branded Websites, industry practice seems to be the opposite of theory. In their 1999 survey, O'Connor and Horan (1999) found that , in the majority of cases, rates obtained over this channel were significantly higher than those obtained by contacting the Central Reservations Office. Often the rate quoted by the company's Web site was substantially higher, despite the associated lower cost of distribution. However this study was limited in that it only focused on direct sales over hotel chains' own branded Websites. Hotel electronic distribution is rapidly evolving and a large number of other online consumer focused channels are now available, with most chains using multiple routes to get their product to the consumer (Castleberry et al, 1998). The availability of so many alternative points of sale poses some interesting questions. Is there consistency between the availability and prices being offered over each of the channels? Research has shown that consumers shopping for travel online almost always check more than one site before purchasing. According to Jupiter Media Metrix, for the hotel product 10 percent of bookers visit one site, another 43 percent visit two or three sites and 22 percent visit four or more sites. Online purchasers have become increasingly intolerant of inconsistent information, and may react to disparate rates on different channels by purchasing from the company's competitor. Furthermore, if rates are not consistent across channels, is any one route consistently cheaper and is the company's pricing strategy logical from both the consumer's and the hotel's perspective?

3. Methodology and Limitation of the Study

Previous studies of hotel Internet use have been limited. Murphy et al (1996) focused on rating the content of hotel Web sites, while Van Hoof and Combrink (1998) attempted to measure managers' perceptions of, and attitudes towards, the Internet. Web reservations facilities were investigated in detail in a prior paper by the author (see O'Connor & Horan 1999). However the issue of pricing over multiple simultaneous travel distribution channels does not appear to have been the subject of extensive systematic research to date. The objectives, therefore, of this study were to analyse the rates being offered to consumers over hotel electronic distribution channels and to subsequently identify the pricing strategies being used by the hotel companies.

Obviously a exhaustive analysis of the rates being offered by all hotels would be impossible. However, as the use of both technology and electronic distribution has in the past been lead by the major international hotel chains, an analysis of their efforts was though to be indicative of developments in this area. As a result, it was decided to focus the study on the behaviour of the top 50 international hotel brands. While this strategy means that the findings are not representative of the industry as a whole and thus the results not generally applicable, it does allow an accurate benchmark of trends as they currently stand to be established. The companies were chosen based on the ranking of the top 50 hotel brands published in Hotels magazine in July 2000.

Two companies (Disney and Club Med) were removed from the listing as they are in effect resorts, only distribute their rooms as part of packages, and thus their products are not directly comparable. Furthermore, three companies neither offered on-line reservations facilities on their own Website, nor were they listed on any of the other channels studied. Thus the results discussed below reflect the findings in respect of the 45 hotel brands for which consistent data could be found.

Five major types of electronic B2C distribution channels were identified from the literature and leading examples of each category selected for inclusion in the study. In addition to the chain's own website, these included channels which draw their data / reservations engine from the Global Distribution Systems (Microsoft Expedia and Travelocity); those which are based upon the databases / reservation engine of the Switch companies (TravelWeb); and pure Web based channels that require their inventory / reservations database to be maintained online (WorldRes). While not collective exhaustive, these represent the majority of the non-direct-to-hotel reservations. Omitted from the study were the "name-your-price" / "auction" style websites, which, due to their bidding pricing structure were not comparable and thus could not be included. Voice channels were also incorporated into the study for comparison purposes by analysing the rates offered by the toll free number to the Central Reservations Office (CRO). Data was collected by iteratively reserving a double room for specified dates in a selected property from each of the brands using each of the distribution channels discussed above. Where the product requested was available on the system, both the number of rates displayed and the lowest rate available were recorded for analysis. The hotel company's Central Reservation Office was subsequently telephoned and the same product requested. In the latter case, the first rate quoted by the telesales agent was recorded. This process was repeated for five sets of alternative dates to reduce the possibility of error due to systems malfunctions or other exceptional circumstances.

4. Summary of Research Findings

4.1 Number of channels used

As can be seen from Table 1, each of the major hotel brands uses multiple simultaneous distribution channels, with the mean number of channels being 4.68. The most commonly used channels were over voice through the company's Central Reservation Office and through the company's corporate Website. Those companies that did not use voice were in the economy sector, and, although outside the scope of the study, it could be speculated that their abstinence from using this channel could be a reaction to its high operating costs. The level of use of company's own Websites was also found to be high, with nearly 97% of the brands surveyed offering the facility to make an online reservation in this manner. It is interesting to note that this represents a considerable advancement when compared to prior surveys (O'Connor & Horan, 1999 and Hensdill, 1998), which found that only approximately 50% of the major hotel companies provided such on-line facilities, indicating major growth in the use of the Web as a direct selling medium by the hotel industry.

In contrast, usage of the other channels investigated is lower. Approximately fourfifths of the major brands used the GDS based intermediaries Microsoft Expedia and Travelocity respectively, three quarters used TravelWeb and only approximately one third used WorldRes at the time of the study. These findings are not in themselves surprising. Both Expedia and Travelocity draw their data from the major GDS, and as the majority of the hotel brands represented in the study are business focused, representation on the GDS and thus their subsequent listing on these channels was to be expected. Similarly, TravelWeb draws its data from THISCO (The Hotel Industry Switching Company), and thus any of the hotel brands that use this as their switch service could be expected to leverage their investment by make inventory available for sale over TravelWeb - the switch's consumer focused Website. However the low usage of WorldRes is surprising. With the exception of a company's own Website, using WorldRes has the lowest potential transaction cost and thus would appear to be an attractive channel for use by hotel companies. However, in practice, it does not list the properties of many of the major hotel brands. Examination of its property database reveals a large percentage of independent hotels, bed & breakfasts and smaller hotel chains, yet the question has to be asked as to why the major brands do not exploit this distribution channel?

4.2 Rates available

With the exception of the toll free number (where the first rate offered was accepted), each of the channels analysed offered multiple rates to the customer. As can be seen from Table 2, each channel presented an average of five rates in response to the request, with more being offered to the customer in the case of Travelocity than through the other channels surveyed.

Presenting a variety of rates to the customer has both positive and negative implications. From a positive perspective, it offers the potential customer a choice and allows them to match their needs with the products being sold. On the other hand, presenting multiple rates without adequate product differentiation can create confusion in the mind of the customer as to what there are getting for their money.

This is best demonstrated by an example encountered in the study, where a property had 17 different rates available for a particular date on TravelWeb, with few (if any) discernable differences noticeable in the rate descriptions. Clearly such a scenario would be confusing and frustrating for any customer wishing to book that property.

In terms of which channel is consistently cheapest, such a broad generalisation is difficult to make. However, based on an analysis of the rates found in the study and making allowances for rounding and currency conversions, it can be seen that prices across each of the channels were comparable, with the average price for the requested room being in the range of US$163. There were two noticeable exceptions to this trend. Microsoft Expedia was consistently marginally cheaper than any of the other channels, as can be seen from Table 3, and the rates found on WorldRes were in general more expensive. Such findings are surprising in that, as was explained earlier, the transaction costs associated with each channel vary greatly. Expedia, as an online travel agency, has a higher cost of distribution from the hotel's perspective, and thus it would be logical to assume that rates offered over this channel would reflect these higher costs. Similarly, since WorldRes's transaction costs are relatively low in comparison with the other channels surveyed, it should in theory be offering the cheapest rates but in practice it quoted the highest prices. Clearly, when selling the hotel product online, there does not appear to be a relationship between the cost of using the distribution channel and the rate offered.

However simply examining averages often hides valuable information. If the brands studied are subdivided into classifications based on their targeted market segment, a different picture emerges. As can be seen from Table 4, hotels at the lower end of the market are far more likely to offer consistent rates across all channels used. While it could be speculated that the reason for this might be because economy properties are more likely to have a single fixed price for their product irrespective of demand, it could also be due to a more consistent pricing strategy on the part of the hotel companies involved when addressing a relatively price sensitive market. Furthermore it can be seen that consumers at the lower ends of the market are far more likely to obtain lower rates through direct channels. For economy brands, direct sales over the company's own Website was cheapest nearly one quarter of the time, with a further 46 percent offering the same rate irrespective of the channel used. Thus a consumer making a reservation for an economy room on a hotel company's Website would find the cheapest rate on this channel three times out four. With mid-priced products, the chain Website is even more likely to give the best rate, offering the cheapest rate nearly half of the time. However at the upper end of the market the situation was very different. Hotel company Websites gave the cheapest rate in less than 10% of cases, but quoted the highest rate in over one third of cases. The evidence is clear. If you want to stay in upmarket hotels, avoid booking on their Website if you are searching for good value! Instead the online intermediaries, (in particular Microsoft Expedia), offer the highest probability of finding the cheapest rate available for such upper-end properties. It is also clear from the data that a hotel company's Central Reservation Office, accessed through a toll free number, is not the place to obtain cheaper rates. Irrespective of the market segment, there is a higher probability of obtaining the most expensive rate through this channel, and bookings through this route were almost never the cheapest available. However this finding is to a large extent a factor of the methodology used. With voice, the first rate quoted was the one recorded for analysis. In many cases, other (lower) rates were quoted when the researcher indicated that he did not want to make a booking, suggesting that some degree of haggling would have resulted in significant lower prices on this channel.

5. Conclusions

From the above discussion, it can be seen that both the range of channels through which hotels can be booked and the complexity of these channels have grown. This study represents the first major attempt to understand hotel company's pricing strategies over electronic routes. Bookings made on five major consumer-focused online travel sites were analysed to establish if a logical pricing strategy could be established.

The study revealed that the majority of hotel brands now use multiple simultaneous electronic channels of distribution, making their product available to a relatively wide audience. While the use of voice through a Central Reservation Office has fallen slightly, there has been a growth in the availability of hotel company's own Website, with 19 out of 20 of companies now making their product available for sale in this manner. The differences between this and earlier published research indicate a major expansion in the use of the Web as a direct selling medium on the part of the hotel industry, perhaps accompanied by a realisation of its benefits in comparison with other, more traditional, electronic channels of distribution. Most companies offer multiple rates to customers over each channel utilised. It is interesting to note the large number of companies that now have consistent pricing across all channels.

Previous research found less than 10 percent of companies had consistent pricing and cited the lack of integration between the various inventory databases used to manage inventory as a possible cause. Yet over one third of brands now offer consistent pricing across multiple channels, indicating progression in the industry's management of electronic distribution in the interim. Although no single channel is consistently cheaper, in-depth analysis does reveal a link between the market being targeted and price. Firstly, cheaper prices can rarely be obtained over voice channels, irrespective of market segment. From the data it can be seen that consumers are more likely to find cheaper prices on hotel chains' own Websites in the economy and mid-price segments. More upmarket hotel brands are, on the other hand, more likely to quote more expensive prices on their own Website than on other channels. Perhaps this is a reaction by the brands at the lower end of the market to the price sensitivity of their customer, or alternatively a realisation that at least some of the cost savings generated by direct selling should morally and ethically be passed onto the consumer. In any case, it represents a more progressive and realistic pricing strategy than that of the upper-end brands, who in many cases are charging their highest prices over the channel that represents their lowest cost of distribution.

And what are the implications of these findings for the consumer? Firstly, it is clear that for those with a taste for more upscale products, the hotel brand's own Website is not the place to shop, as better value can be obtained in most cases through other channels. More interesting, however is the fact that, in general, prices have become more are less equal across many of the channels investigated, and thus by implication, across many other electronic distribution channels as well. It is well established that time is a valuable commodity in today's society. Since the number and variety of ways that a consumer can book a hotel room has become undeniably complex, the cost associated with searching through even a small number of the many consumer-focused channels currently available in the marketplace in an attempt to find a cheap price has also grown dramatically. Given that this study has found that many of the rates being offered over alternative channels are more or less the same for the majority of hotels, the question must be asked as to whether spending time and energy searching for the cheapest rate is worthwhile?

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Charles Luthi
Director, Corporate Relations
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