E-rooms - A New Market Segment? - By: Elaine Sahlins - HVS International

As consumers have become more and more comfortable with using the Internet to research destinations, locate hotels, and then book the hotel room, the importance of these reservations has skyrocketed. These room nights are consistently being categorized by individual hotel properties as leisure demand. Leisure travelers, according to the major hotel companies and consultants, are the only strong growth segment of hotel demand. But is leisure demand, as tracked by individual hotels, really made up of recreational travelers?

Nearly 37 million of America's more than 162 million active Internet users have already purchased travel online. Online travel bookings exceeded $23 billion in 2001, and are expected to reach $63 billion by 2005. During 2002, while the use of the Internet for hotel reservations was surging, the hotel industry was suffering from the downturn in travel and tens of thousands of hotel rooms were empty. What happened when technology and new consumer behavior met a hotel industry in need?

Increased consumer savvy and the need of hotels to fill rooms have combined in a sort of "Wild West" sales and marketing event. Hotels began to provide rooms online at exceptionally low rates to attract business as the economy receded. While discounting is not a new strategy in the hotel business, the proliferation and breadth of the availability of low-priced hotel rooms have reached new heights. Using with Smith Travel Research numbers of sold rooms in a sample of major market areas, TravelClick discovered that Internet bookings in the first three quarters of 2002 accounted for over 23% of rooms sold in New York, and over 15% in Los Angeles, Chicago, and San Francisco. Anecdotally, for some properties, hotel managers are reporting Internet bookings ranging from 30% to 50% of all room nights in 2002.

The use of the Internet by all guests to book hotel reservations has blurred the traditional market segments. Correlating the number of Internet rooms sold with the traditional segmentation techniques of market analysis is one of the challenges posed by the changing trends. During the course of our fieldwork and research, we have interviewed management from numerous properties where Internet bookings from auction sites and discount sites have accounted for over one-third of the rooms sold in the first three quarters of 2002. For lack of a thought-out strategy regarding Internet bookings and their effect on yield management, these rooms are consistently tracked as "leisure" or sometimes "wholesale" demand. These hotel operators are literally in the dark about their true market mix and the purpose of their guests' stays. Hotel management companies are struggling to identify and implement corporate programs to adequately track demand and effectively manage Internet bookings. And despite all of the technology available to hotels, many property management systems do not interface with Internet reservation systems resulting in faxed reservations to the hotels from Internet bookings sources and front desk clerks querying guests orally as they check in about the purpose of their visits.

The lack of effective use of the Internet by hotel operators is resulting in an erosion of effective yield management. While internet hotel reservations are viewed by the consumer as a source for obtaining discount hotel rooms, hotel operators need to reeducate the consumer and yield manage internet reservations with the same motivations as airline pricing. Higher rates will be offered on intenet sites during periods of peak demand, particularly for travelers generating short-term bookings. Market segmentation is still critical in that hotel operators need to know their customers and seasonality, and market and price room inventory to maximize revenues. Room inventories on the internet should adhere to the same seasonality and be priced according to demand.

This year, we have all been hearing and reading about the growth of leisure demand and its importance to the post-September 11th recovery of demand for hotel rooms. Similar to trends experienced in the early 1990s, drive-to destinations are performing better than fly-to destinations and weekend travel has increased. But room rates in some of these markets continue to be depressed and, in some areas, continue to decline. Looking at the specifics, a great deal of the decline can be attributed to the Internet bookings. But labeling the Internet room nights as leisure is a misleading and dangerous trend. In fact, hotels would be better served to identify more specifically those guests that are booking online. During the week, most of those guests are probably the same guests that have a higher preferred corporate rate or used to pay rack rate, some six to 12 months ago. In fact, many corporate travelers are now required to book online. According to the results of a survey released by GetThere, a Sabre company, in August 2002, "43 percent of [the respondents'] employee trips are now booked online." In addition, the majority of respondents (52%) are "either using or considering a full or partial mandate of their online booking site; a trend which continues to increase due to economic pressures, executive awareness, and employee comfort booking online."

Distinguishing between the source of demand and the purpose of the stay remains a challenge for yield management. With true recreational (leisure) travelers, business travelers, and meeting and convention attendees using the same site to book the same hotel for the same rate for the same nights, how should the room night be categorized?

If the purpose of the stay is business, should the room night be classified as commercial and resultantly, the overall commercial rate tracked by the hotel is then diluted? If meeting attendees can book on the Internet outside the meeting or convention block and obtain lower rates, whose responsibility is it to guarantee the room block? Hotel management and meeting planners are reacting to this conflict with short-term strategies such as charging meeting and convention attendees who book outside the block higher fees and/or requiring hotel management to identify all attendees registered for the meetings and conventions but booked outside of the block to manually determine if the room block is meet. With all this confusion, how can hotel managers confirm that true leisure demand is actually increasing?

Effective use of the internet as a yield management tool requires a knowledge of the guest and their reasons for booking the hotel but now also means managing the room inventory on line for rate maximization. We are aware that many of the large hotel companies are actively working to deflect the impact of discounting from Internet bookings. By carefully regulating their inventory available to online sites such as Expedia or Priceline and by offering lowest-price guarantees on their websites, hotel companies are attempting to influence market share and pricing. Using frequent guest programs and user interfaces, these companies are likely to be able to track demand segmentation from their users. But even if demand can be identified, how will yield be managed?

These issues remain to be uniformly approached by hotel managers during the next 18 to 24 months. Many hotel companies are formalizing yield- and revenue-management policies and accounting, however, the process of identifying, tracking, and anticipating consumer behavior regarding room bookings has to be managed to effectively improve average rates.

Elaine Sahlins, Director, HVS International San Francisco, joined HVS International in 1987 as a Director in the San Francisco office. Prior to joining HVS, Elaine worked as a real estate review appraiser with Bank of America and as a senior hotel analyst with VMS Realty Partners. Elaine received a MPS degree from Cornell University's School of Hotel Administration and an AB degree from Barnard College, Columbia University.