HSMAI Section: Demystifying the Digital Marketplace: Highlights from Part II of the Largest Hotel Distribution Study

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March 01, 2017
HSMAI
Cindy Estis Green - cindy@kalibrilabs.com

©2017 Hospitality Upgrade
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Five major themes emerged from Part II of the special report from Kalibri Labs, Demystifying the Digital Marketplace: Spotlight on the Hospitality Industry.

The study is based on hotel transactions and associated costs for 25,000 hotels in the United States from July 2013 through June 2016, and examines the patterns of performance by hotel type over time to provide insights into what drives business today.


1. Dynamic Hotel Demand and Cost of Customer Acquisition
Good to Know: Hotel demand is strong and revenue growth has been healthy. This is encouraging and reinforces the strength of industry fundamentals. More consumers are traveling and staying in hotels for business, leisure and meeting purposes.

Could be Better: On the cost side, hotels continue to pay third parties to deliver more and more business each year. On average, hotels will pay 16 percent to 18 percent of guest-paid revenue in customer acquisition costs, but this ranges from about 15 percent to 25 percent, with some hotels as high as 35 percent to 40 percent. The makeup of these costs is split roughly with half being internal direct sales and marketing expenditures and half spent externally. The third-party payments generally run 7 percent to 15 percent of guest-paid revenue, with the costs incurred for internal sales and marketing costs making up the remaining 7 percent to 10 percent.

 

2. The Role of Third-party Intermediaries
OTAs: The traction in the market by third-party intermediaries is becoming more pronounced over time. Within the OTA segment, two companies and their affiliates represent about 96 percent of consumer demand on a room night basis. The OTA share of total room nights is up 28 percent from 2014-2016 to an average of 12.4 percent of demand, while Brand.com grew 9 percent to reach an average of 20 percent.

Third-party Intermediaries: As a relatively small number of aggregators attract a growing portion of consumer demand, it drives higher total costs for those who want to tap into the demand flow, even as commission fee percentages come down. Metasearch is gaining share in the third-party intermediary space, and while it is often charged through auction models and media fees rather than commissions, these costs are rising quickly. In fact, metasearch players are adding to the overall market costs, pitting the OTAs against brands and individual hotels for position in search results.

What This Means for Hotels: Being downstream of the aggregated demand, hotels are experiencing a decline in the amount of guest-paid revenue they can capture. That differential varies by hotel segment, with some able to capture more of the value in the market than others.

Across all U.S. hotels in the two years of the study, guest-paid revenue grew 4.6 percent while net revenue* only grew 4 percent. Even in a period of robust economic growth, this gap has widened over time as third parties are sharing in a higher proportion of the incremental value coming into the market.

*Net revenue subtracts out commissions, transaction and channel costs as well as total sales and marketing expenses.

 

3. The Imperative to Manage Revenue Capture
What is Revenue Capture? Revenue capture is the percentage of guest-paid revenue a hotel keeps once all acquisition costs are paid. Managing revenue capture is imperative to sustain profitability in the digital marketplace.

Why is Revenue Capture Important? The 2014-2016 data trends examined in this analysis bring into sharp focus the fact that a traditional topline view of revenue performance has masked a weakness in true hotel profitability; this weakness is driven by the unrelenting growth of acquisition costs. In the period from 2014-2016, OTA commissions rose at three times the rate of the growth of guest-paid revenue. Metasearch costs are still small in absolute terms but are a growing component of customer acquisition.

What This Means for Hotels: When a rising tide of guest-paid revenue does not result in a corresponding rise in profit contribution to hotels, owners and operators are constrained in their ability to reinvest in property improvements and staffing.

 

4. Diversity of Business Mix and Impact on Profit Contribution
A Lot of Options:
There remains a wide range of channels and segments through which hotels receive their business, and this diversity is important for hotels to leverage as they deploy resources to acquire their customers.
Shifts in the Mix: There have been shifts in this mix of channels and segments that have had direct implications for profit contribution. The most notable is the transfer of bookings from property direct (drive-in, call-in), to the OTA channel. That change is particularly evident in the middle and lower tier hotels, or upper midscale, midscale and economy chain scales, causing a reduction in revenue capture.
 
On the other hand, upper tier hotels, or luxury, upper upscale and upscale chain scales managed to shift within the OTA channel to improve profit contribution by dramatic reductions in opaque OTA business while growing the Brand.com business, yielding higher revenue capture.

What Hotels Can Do: Managing this diverse mix is at the root of what hotels can do to improve their profit contribution. Each hotel has a wide range of channels and segments available in its market and can tap this to get a healthy balance of business at the lowest cost possible. This target, based on each hotel’s market situation is referred to as the hotel’s unique optimal business mix, and achieving that objective will be explored in detail in Part III of Demystifying the Digital Marketplace.

 

5. Customer Acquisition Techniques — Loyalty, Leisure and Profit Contribution
Loyalty Programs Matter:
As the U.S. market is dominated by hotel chains, their brand loyalty programs seem to be at the heart of many acquisition strategies. Results from the recent wave of campaigns by most chains have proven that consumer behavior can be influenced by these member programs. For the first time in five years, Brand.com grew more quickly than OTAs, corresponding with the introduction of book direct/member rate campaigns to the market. Additionally, the proportion of room nights booked by loyalty members is at an all-time high, well beyond the traditional strength in the business travel segment. In 2016, the incentive offered to prospective members was discounted rates which may have limited the profit contribution for the hotels in the short term, with the longer term objective of engaging them as recurring customers. Incentives to book on Brand.com that do not incur direct costs would prove even more beneficial to hotels.

What This Means for Hotels: Overall, Brand.com delivers higher net ADRs for the hotels when compared to the net ADRs they would receive through any other channel. Acquiring guests through OTAs appears to be most effective during typical leisure periods. However, no hotel can expect to receive all of its business through any one channel, and learning optimization techniques to attract consumers through a mix of low-cost channels will always be the best path to higher profit contribution.

Cindy Estis Green is the CEO and co-founder of Kalibri Labs, a Big Data company that benchmarks hotel revenue performance net of customer acquisition costs. She can be reached at cindy@kalibrilabs.com.

 

To access the full Part II report from Demystifying the Digital Marketplace: Spotlight on the Hospitality Industry, please visit www.ahla.com/ddm; passcode KALIBRI2016.

Due in March 2017 — Part III will focus on the concrete actions that hoteliers can take to improve a hotel’s revenue capture and its net revenue performance.

(Download the full report at www.ahla.com/ddm, with passcode: KALIBRI2016.)

 
 


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