Industry Update
Opinion Article24 August 2016

Distribution vs Profitability – the future of hotel revenue management

With technology and data beginning to play a bigger role in global hospitality, properties may need to rethink their revenue management strategies and take a closer look at the relationship between optimal distribution and higher profits.

By Kiran Sunny, Content

share this article
1 minComments
Sunny

Long periods of market uncertainty are becoming increasingly common in today's highly fragmented industry and hospitality professionals are always on the lookout for better ways to maintain consistent profitability. Revenue management strategies have played a critical role in enabling hotels to cover their operating expenses during periods of low demand. By employing dynamic pricing strategies based on market variables and accurate forecasting, properties began to witness significant improvements in the bottom-line.

However, guest trends and spending patterns are subject to a high degree of unpredictability in our current digital landscape. The rapid onset of smartphone technology has seen OTAs capitalize on mobile platforms by offering travelers an unprecedented level of convenience in the form of apps and mobile-optimized websites. Unsurprisingly, the online agencies now dominate a sizeable portion of global distribution. According to data released by the HAMA Study & Kalibri Labs, while industry-wide revenue had witnessed incremental growth over a three-year period, commissions grew twice as fast. In fact, revenue management leaders Duetto recorded customer acquisition costs as high as 40%! In light of these developments, it may be time for revenue managers to modify their approach.

Segregating all booking sources

Although it's a fairly common industry practice among revenue managers, general managers and other hotel decision makers; estimating factors like ADR evolution targets and customer acquisition expenses can be costly if there's no objective information to back the projections.
Analysis of each of the channels currently in use at the property is the first step to gathering objective data. At most hotels, the prominent channels are OTAs, direct booking centers including the hotel's website and front desk, corporate relationships, and travel agents connected to the GDS.

All channels need to be studied for three key metrics:

  1. Gross Revenue – The total revenue being generated by each channel for a specific period
  2. Customer Demographics – The segment of travelers which each channel attracts 
  3. Channel Costs – The total cost of customer acquisition associated with each channel

With sufficient information on each channel's gross revenue, demographics and cost of acquisition, revenue managers can evaluate the profitability of individual sources and identify areas that need to be prioritized.

Measuring the performance of each channel

While the information gathered by the above channel-wise segregation provides hotels with a clear picture of the profit breakdown, it fails to account for the opportunity costs. Put simply, a profitable scenario could have been significantly improved if certain transactions had taken place on different channels. This is where revenue managers can begin to have problems with the increasingly complexity, although the cutting-edge it can provide a hotel with is worth the effort.

This is better illustrated with an example; consider a hypothetical scenario involving a 100-room property Hotel A, with four primary sources of bookings – two OTAs, a direct booking site, and a GDS network. Rooms sell for $100 on all channels.

Now we analyze each channel's profitability,

  1. OTA 1:
    Costs – Commission of 25% for each booking
    Net profit per room – 
    $75
  2. OTA 2:
    Costs – Commission of 15% for each booking
    Net profit per room – $85
  3. Hotel website:
    Costs – SEO, SEM, hosting/subscription expenses $400 ($4/room*)
    Net profit per room – $96
  4. GDS:
    Costs – Sales and marketing expenses, transaction fees ($10/room*)
    Net profit per room – $90

[*in the most profitable scenario]

At first glance, it would appear as though the most profitable channel is the direct booking portal. However, the customer acquisition costs here depend on the final number of rooms sold on the hotel's website for that period. For instance, if Hotel A were to sell 50 rooms through it's website, the costs incurred would be borne by those bookings and the cost of each acquisition would subsequently rise to $8. If this number is too low, costs can rise dramatically.
GDS costs can fluctuate too, based on the hotel's objective. Costs will increase in the case of hotels that opt to lower their rates in order to maintain relations with agencies. OTAs tend to provide more stability when it comes to this aspect, albeit at a high cost.

Analyzing results and uncovering the opportunity cost

Although it's tempting to focus solely on direct bookings, most hotels simply can't generate the sort of exposure they get through listing on OTAs – these are companies that spend several billion dollars annually on marketing and site optimization. Moreover, online agencies provide hotels with a powerful distribution platform and connect them to specific guest segments, such as last-minute travelers. The key is to uncover the opportunity costs associated with each of the hotel's channels – this allows revenue managers to take informed risks and determine the right blend of distribution and profitability.

Once the objective data has been compiled, successful implementation of any strategy cannot take place without a coherent understanding between all the hotel's business units. The team should evaluate each channel's priority and ROI, as well as the customer segment they attract.
This is important as certain channels are better suited to certain types of guests – bookings from families and last-minute travelers could be more likely to come from better connected platforms like OTAs while frequent business travelers and returning guests may prefer to book direct. This information enables hotels to improve their targeting by customizing specific emails and packages for different guest segments.

Demand generation is a continuous process. Revenue managers need to constantly stay abreast of the latest political, economic and industrial news in order to take those crucial decisions at the right time. However, with the help of objective data and a robust strategy, the task can be significantly simplified.

Kiran Sunny

    More from Kiran Sunny

    About Hotelogix

    Hotelogix provides a robust cloud-based Hotel PMS that helps hotels to automate and manage their end-to-end operations with ease. It also assists hotels to drive growth, increase revenue and to enhance their online reputation. The PMS is hosted on Amazon Web Services, and thus offers the much-needed stability and security to hoteliers. The company has rich experience in serving global markets with customers in 100 plus countries including developed geographies such as North America and Europe.

    Contact
    Avinash Udayakumar
    Senior Digital Marketing Analyst
    Send email
    Visit website
    Latest News
    Advertisements