The Battle For ‘Book Direct’ May Be Won, But The War Will Not
By Bill Carroll, PhD , Senior Corporate Executive, Board Member, and Educator
'Book direct' is the war cry of hotel owners, management company executives, chain CEOs and many marketing consulting groups. Like real war, the costs and benefits must be evaluated, particularly by those who will be paying for it - hotel owners. This is even more critical for a war that is unwinnable | "Wars are won and lost on the basis of superior strategy and overwhelming resources."
-Clausewitz, On War, Book 2, Chapter 2, 1873
An Unwinnable War
In this war to win the hearts and minds of modern travelers, intermediaries like Google, Expedia and Priceline have the resources and major strategic advantages. Individually and collectively, they have massive financial resources to invest in technology (website and mobile), systems, databases, marketing, talent and so forth – more than any single chain, much less an independent property.
They have strategic advantages in their market power, reach and capitalization. Their strategic proposition for the consumer is also more compelling – an efficient means to assemble, determine value for and obtain the lowest prices for a comprehensive travel experience. They also have the traveler and supplier information to execute a seamless user experience. Moreover, their mobile apps are efficient, proactive and executed in real-time.
On first glance, a war against these opponents is unwinnable.
Hotels can offer only a part of this. Their websites limit consumers' evaluations to the confines of their own brand.com, though most provide external and independent access to TripAdvisor reviews and social networks. Further, their consumer traveler assistance is limited to the property and local area via mobile-concierge-type apps.
Chains are winning some battles. They are leveraging loyalty programs as part of the now widespread 'book direct' advertisement campaigns that communicate better deals for their loyal consumers as well as mechanisms to evade intermediaries' rate parity agreements. They are also using apps, targeted at loyal guests to improve the hotel experiences and produce additional non-room revenue before, during and after the stay.
The strategic weakness of this approach is that consumers are often members of multiple chains' loyalty programs and multiple mobile apps. All of these typically provide points and assistance only for the hotel stay. On the flip side, OTA intermediaries provide both points and assistance for the entire travel experience. They are a 'one stop shop'.
As well, the hotel's loyal customer is not a new or incremental customer. In effect, the owner is paying (to the chain or others) more to keep an existing customer and, hopefully, produce a better room rate margin. The question for the owner is whether the investment is worth the result.
Strategically, intermediaries have resources and advantages to counter the bottom line effects of chain loyalty program actions. They can offer better deals for the intermediary loyalty program customers – for example, prices that are below parity or chain discounts. Intermediaries can also offer their loyal consumers last minute prices below that of a chain's at competitor properties right up until check-in. With this capability, they can make trip arrangements to accommodate a change and cost-efficiently manage the entire travel experience. They can even force major hotel brands to lower their loyal customers' rates as the chains try to preserve guest bookings with value ads or the promise of lower rates (that is, the best rate guarantee). In either case, owners' margins are reduced and intermediaries are well-positioned to manipulate chain rates and reduce loyalty program benefits.
Alas, there's always hope. The most significant weapon that owners have to drive direct business is revenue management. Hotels can and should execute revenue management where the highest margin rates are offered on available inventory and the lowest rates – that is, those offered to the OTA merchants – are rejected.
Increasing revenue management efficiency is a battle than can be won, but only when market or property inventory demand exceeds supply. The risks here come during economic downturns or off-peak periods when intermediaries have the clear strategic advantage. They can choose to benefit their well-behaved partners – for example, through better results page position – or punish them accordingly.
With the hotel industry as fragmented as it is, there is little that an individual owner can do. Hence, owners must carefully evaluate the importance of a viable relationship with intermediaries versus waging an unwinnable war.
Measuring the Effects of War Accurately is Essential
Consulting groups frequently estimate the margin effects of intermediaries solely on the basis of their merchant rates and commissions. On several occasions, I have been critical of this methodology. My major criticism is their failure to explicitly include media effects of presence and prominence on their sites, otherwise known as the Billboard Effect. Despite disagreements over the exact size of this effect, the actions of properties that have left and returned to OTA sites confirm the existence of a statistically significant impact.
Intermediaries' market power emanates from profitably driving consumer eyeballs to their visual display real estate. The majority of their hotel-based profits comes from the economic rents levied for properties to appear on their websites. Like the real estate industry, intermediaries compete with one another on creating valuable digital displays and the rent they charge suppliers to occupy this space.
Both activities could eventually benefit owners. The missing element for intermediaries and owners in all of this is an accurate metric of the net revenues generated for owners by appearing on their digital real estate. It is the same element missing in aggregate measurements of intermediary margin impacts. An additional collective downside for owners is that one owner's net gain is, for the most part, another's loss. In effect, intermediaries mostly shift share rather than create new market business.
Wrapping your head around all this takes time, so don't panic. A reasonable approach for owners is to first recognize that a war with intermediaries and OTAs is unwinnable. Next, participate in battles that are winnable, only after evaluating the costs and benefits. Thirdly, find ways to work effectively with your intermediary opponents based on joint efforts to measure the net revenue generating impacts of the business relationship.