Hotel ADR Rise vs Distribution Channels Cost, What Hoteliers Need to Calculate?
By Ahmed Mahmoud, Founder of revenueyourhotel.com
According to the latest TravelClick data launched early May 2015, Hotel bookings from individual business and leisure travellers spiked across a variety of digital channels in the first quarter of 2015, That includes bookings made through official hotel websites, online travel agencies (OTAs), and Global Distribution Systems (GDS).
Reservations made directly through hotel websites also grew by 7.1 percent, year-over-year, while GDS bookings increased by 1.1 percent.
"Hotel Direct" reservations — reservations made via direct calls and on property — decreased by 8.4 percent, while bookings through hotel 800-numbers (the CRO channel) dropped by 6.1 percent.
But while bookings have increased the most through OTAs, hoteliers should still focus on GDS channels to boost ADR, according to TravelClick.
ADR will continue to grow strong across all distribution channels over the next two quarters of 2015, based on reservations currently on the books, according to TravelClick. As it currently stands, ADR will spike by 4.3 percent and 5.9 percent in the second quarter and third quarter of 2015, respectively.
By channel, ADR will increase by 5.1 percent through the GDS channel, 4.5 percent via hotel websites, 3.8 percent through the Hotel Direct channel, and 1.8 percent across OTAs.
"As we enter the peak travel season, the distribution outlook continues to remain consistent from last quarter with travelers continuing to gravitate towards digital booking engines. "It is evident that hotels are focusing on average daily rate (ADR) to drive revenue per available room (RevPAR) as they ramp up for summer."
"As occupancy continues to flatten, utilizing distribution partners is becoming a key part of a hotelier's strategy, making channels like the GDS even more attractive as it provides higher ADR than third party options, but the question should be , shall hotel calculate the optimal ADR or the net ADR ?.
Hotel Room Pricing Strategy vs ADR performance
Hotel room pricing is a difficult subject within the larger school of revenue management, and as such it has garnered much study over the years. At the heart of any pricing discussion is the balance between healthy average daily rate and high occupancy; the metric representing this balance is revenue per available room, or RevPAR.
Pricing strategies generally take three forms: those that try to maximize ADR, those that try to maximize occupancy and those that try to maximize RevPAR. Though each of these categories of strategy may be applicable in different situations, the only consistently workable pricing strategy is one that focuses on keeping RevPAR at a high, sustainable level.
On a property level, a hotel may be able to lower prices in certain circumstances to generate enough demand within a comp set to result in a net positive revenue outcome. However, because the rates are so transparent and prominent in current and emerging digital venues, by the time the competitors match the lowered rate, the first hotel that lowered its rates loses any benefit in terms of a demand bump and the entire competitive set may have a harder time increasing rates commensurate with the increased cost of doing business.
Hotel Distribution Channel
A disciplined approach to revenue management, backed by the appropriate technology, is essential for hotels looking to optimise their revenue and ROI. Today's consumer has more purchasing intelligence, putting greater pressure on hoteliers to make accurate forecasts relative to booking demand, room pricing, and promotions.
Due to different booking behaviour and price sensitivities across online channels, revenue managers are involved in each sales and marketing activities in order to reach customers with the right balance of price , promotion and cost . By providing a granular understanding of the demand generation forecast, revenue management can work with sales and marketing to strategies more effective promotional plans to reach consumers with the right mix of offerings across different channels with the best affordable cost for each distribution channels.
With the rise of OTAs and other online distribution channels, a hotelier's price and value perception is on public display across more digital touch points and platforms than ever before, according to several studies the hotel untraditional channel is in the rise i.e. mobile travel bookings increasing by 22%, the studies saying as well that 21% of travellers have used Facebook to research hotel information and 13.8% used the popular networking site to book a room.
Hotels rooms are for sale in a dynamic and volatile distribution landscape that is launching many markets savvy and financially well-endowed "gatekeepers" that will become a new breed of third party intermediary (e.g., Google, Facebook, and Apple); their power will grow as they gradually become the preferred points of entry for consumers to do travel shopping and buying.
Imagine your hotel is with $3 million in room revenue may have paid $120,000 to $150,000 in distribution costs few years back and may well be paying close to $200,000 to $250,000 by the end 2015.
When the hotel industry ADR in 2010 appears to be $10 below the inflation-adjusted rate charged in 2000, these added costs aggravate an already challenging profit picture for a hotel owner.
The aim of revenue management together with sales and marketing is to explore each and every channel to create demand , awareness, increase booking , thus increase revenue , so one day hotels need to count how many channel they are participating i.e. and as estimated as below:-
1- Hotel branded website
2- Hotel in house reservation department
7- Travel Agents
8- Call Center
9- Mobile Web and App
10- Social media app for hotel booking i.e. Facebook
What are the distribution costs per channel?
Why aren't hoteliers investing more in the direct online channel? In addition to the obvious reason that selling your hotel via OTAs is the "lazy man's approach" to distribution, some hoteliers assume that selling through OTAs is "free."
Independent hotels are overwhelmed by the rapid shift from offline to online distribution and the sheer dynamics of the online channel and often fail to compete for their fair share of the market. There is a lack of understanding that Internet marketing is not an expense, but an investment with immediate returns at very high ROIs. Franchised properties believe that the major hotel brands "take care of the Internet" for them, and they miss serious local revenue-generating opportunities.
Each channel carries distribution costs; the range is wide and can run from 10% to 50% of revenue. Hotel owners and managers have not always measured the full cost of distribution consistently and have not factored these costs into channel decisions. Too often, when hotels price rooms below marginal and fixed costs with an eye toward cash flow, they will withstand long-term negative effects on rate structure and profit.
Hence let us examine some of the hotel distribution costs:-
1- Direct Online Channel:
- In Hotel brand websites: US$2 to US$5 per booking. Since there is no publicly available data on the subject, these are expert assessments.
- In Independent hotels and resorts: US$8.50 to US$12.50 per booking.
The direct online channel is by far the most cost-effective channel — 10 to 15 times cheaper than the OTA channel and four to 10 times cheaper than the GDS travel agent channel. The direct online channel contributes to a significant number of voice reservations, as much as 40% of additional bookings, as
In the same time the cost of a direct booking via the hotel own website is $10-$12, including website hosting and maintenance fees, marketing spend, campaign management fees, website analytics, Bookings via the major hotel brand websites come at an even lower cost. In other words direct online bookings are 10-12 times cheaper than OTA bookings.
2- Voice Channel/ CRS and call center:
- In Major hotel brands: US$6 to US$10 per booking. Again, there is no publicly available data on the subject. These assessments are based on call center statistics from other travel suppliers.
- In Independent hotels and resorts: US$10 to US$15 per booking.
2- Indirect online channel/OTAs:
- In Hotel brands: US$40 to US$120 per booking. (Based on an average 20% merchant commission, two-night stays and ADRs ranging from US$100 to US$300 per night.)
- In Independent hotels and resorts: US$75 to US$150 per booking. (Based on an average 25% merchant commission, two-night stays and ADRs from US$150 to US$300 per night.)
At a typical 25% merchant commission level for independent hotels, the cost per OTA booking can exceed $100-$125/booking (ADR $200-$250/night and LOS of 2 nights).
From time to time use that Free OTA Commission tools to estimate your hotel cost for the OTA commission.
3- GDS Travel Agent:
- In Hotel brands: US$24.50 to US$66 per booking. (Based on GDS pass through fees of US$4.50 to US$6, an average 10% travel agent commission, two-night stays and ADRs ranging from US$100 to US$300 per night.)
- In Independent hotels and resorts: US$42.85 to US$74.50 per booking. (Based on GDS pass-through fees of US$12.85 to US$14.50, an average 10% travel agent commission, two night stays and ADRs ranging from US$150 to US$300 per night.)
There are so many more choices in channel partners that hotels will be able to decide which ones produce the most valuable business at the lowest cost."
1- Give your teams the time and space to focus on longer-term strategic objectives and tactical campaign opportunities. Revenue management systems (RMS) combined with best-of-breed channel managers can help manage your rates automatically across different channels in real-time – 24 hours a day, 7 days a week, further improving a hotel business' efficiency and speed.
2- Look for solutions that allow you to manage your rates and inventory across all relevant channels and work with your existing third-party applications. Such technology gives hotels an accurate understanding of their supply and enables informed, optimised pricing decisions – whether made by a revenue manager or an RMS. By integrating your technology solutions you can automate routine tasks, freeing up time and energy for other marketing tasks. The end result? Better results to both the hotel's bottom and top line revenue.
These are just a few ways to increase your hotel's revenue growth through better revenue management. By developing more effective ways of working together and sharing key data, hotel revenue managers and marketing teams can find common ground and meet their marketing and profit objectives.
3- Hotels have to do a better job, of agreeing to terms with distribution partners that align with business value, and their partners have to understand that they might get paid in line with what they deliver. If evaluated properly, all channel partners will be scrutinized based on profit contribution or net revenue produced, rather than on generic room nights or top-line revenue.
4- Analyze the channel mix at your hotel and see if there are any opportunities to leverage the typically high ADR, low cost proprietary channels like your hotel or brand's website. Optimizing the business mix from other channels into a channel like the hotel or brand website can give you both a higher Gross ADR and a higher Net ADR (post reservation transaction costs).
5- Look at your opaque segment rates and volume compared to your retail business to understand if the rate spread is too large or if you are selling too much on opaque segments at a low rate too far out. Compare your channel mix with the industry / leading hotel brands using benchmark reports like Rubicon Demand Analysis (Destination Insights) or TravelClick's eTRAK report to see if you are underperforming in any channel.
To develop an optimal channel mix start tracking metrics like volume per channel, channel costs, booking characteristics (lead time and day of arrival) and ancillary spend. Develop your forward looking Revenue Management strategy based on your data and lead time. Price by dominant channel depending on where you are in the booking window and fence appropriately.