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HSMAI Section: Hot Trends in Distribution: Innovation, Investments and the Superfast Changing Landscape

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June 30, 2016
Kurien Jacob

Revenue management and distribution have evolved over the last decade and success in the field has come from a combination of in-depth demand forecasting, strategic pricing and optimization of the distribution mix. The best business model has been a balanced mix, through online travel agencies (OTAs) and healthy direct channels.

As part of Highgate Ventures, I have the opportunity to evaluate cutting-edge technology companies that can truly impact the industry as well as be commercially successful.  Recently, there’s been a surge in venture capital as well as high-caliber talent looking to play a part in the fast-changing landscape of the hotel industry. Sitting at the cusp of technological evolution and adoption of these trends gives us a lens on what is happening now and how the future will be reshaped. More startups have emerged in this realm over the last 12 months than in other travel tech areas. They promise to drive direct business for hotels and reduce reliance on OTAs. They are solving for a need in the industry and hence may become commercially viable and successful companies.

When it comes to the future of distribution, hotels can all agree on one thing: it’s time to focus on direct distribution. This has been on the back burner for too long. Granted, it took years of OTAs chipping away at market share and gaining immense bargaining power over commission fees to finally wake hoteliers up, but we’ve reached a tipping point where some hotels are ready to invest in getting their fair share of direct bookings.

Controlling the Search Phase

OTAs have used their enormous budgets, outbidding hotels and brands on just about every travel keyword imaginable – and in most cases, the hotel’s own brand name. Booking.com has gone a step further to capture the middle between generic destination keywords and hotel keywords. For example, doing a search for “boutique hotels New York” will find the following website http://boutiquehotels-newyork.com/ that ranks at the top of the organic results. With relevant and strong content, the customer is drawn to the website, however the bookings are made on booking.com. It uses all methods available to dominate the start of a traveler’s journey, this just one of them.

Dominating Metasearch

Go to any metasearch – KAYAK, trivago, Hipmunk and TripAdvisor – it is apparent that the OTAs control that space with very few direct hotel booking links. This qualified traffic is a key piece of their customer acquisitions. So much so that it made sense for Expedia and Priceline to acquire trivago and KAYAK, respectively.

Fabulous Content and Internationalization

The content on the OTAs is exhaustive, multilingual and presented in a clean and efficient manner. The pictures, the amenities and facilities, reasons to choose a hotel, review scores, local attractions close to the hotel together with consistent messaging of best rate guarantees drive relevant organic visitors to the exact content the customer is looking for. The customer gets what they are looking for and conversion is higher.

Building the Best Conversion Engines

OTAs have found enormous success with sales tactics on their websites such as: popularity/social proof – “139 people have booked the hotel within the last two days,” and “10 other people are looking at this hotel now”; scarcity/urgency – “5 rooms left”; educational – “It’s a busy time in Miami, hotels will sell out quickly”; and  convenience at the expense of hotels – “Free Cancellation”.

Booking.com has effectively trained customers to cancel for free and even book hotels without providing a credit card. Hotel cancellation rates are at their highest level ever, causing huge issues. This wave has spawned a number of companies which alert guests when prices drop, who then easily cancel and rebook at a lower rate, exacerbating the problem.

Adoption of Mobile Apps

OTAs today offer customers tremendous incentives to download their apps, creating a loyal customer base that can be targeted without future acquisition costs.

Pricing Discounts and Geo-targeted Promotions

Many OTAs offer various pricing discounts, some cutting into their promised minimum markups, which are hard for hotels to police. These are offered based on device type (mobile), OTA apps, through metasearch websites and in different geographies, either independently or in a combination.

Margins Used to Fund Loyalty Programs

Many hotels offer special discounts to loyalty members of the OTAs. The pitch to the hotels is that this group of customers is most valuable and in a closed loop. The hotels don’t realize that they are funding these OTA programs and they should instead spend to build their own direct guest base.

Embracing of the “Shared Economy”

While hotels have been busy fighting the new wave of home sharing, Expedia acquired HomeAway, TripAdvisor bought FlipKey, and Booking.com purchased Villas.com and added vacation rental homes to its core offering. Hotels, once again, stand to lose as OTAs gain a foothold in this new sector.

Wake up! Are Hotels Too Late?

Hotels, both independent and branded, have finally begun to push back against these practices. Hilton invested heavily in its “Stop Clicking Around” ad campaign to educate consumers about the benefits of booking direct. Marriott and Hyatt have followed suit. However, offering a lower discount for direct bookings is a knee-jerk reaction and is definitely not a magic pill to counter this trend. Hotels need to have the best tools and a comprehensive strategy to strengthen their direct distribution and compete effectively with OTAs. We’re now witnessing a technology revolution in direct distribution, driven by the following trends:

Adopting to Search

Google, which earns billions in revenue from the OTAs, has recently shifted its search engine results page to favor paid results, putting organic results more than halfway down the page for hotel searches. In light of this, many hotels have put restrictions on bidding their brand name keyword on their partners. The progressive ones are bidding for their own keywords. Coupled with relevant content and SEO, they get to regain their space. 

E-commerce Conversion Techniques

New developments in CRS and booking engine technology now allow hotels to apply the same tactics of scarcity, urgency, popularity, social proof and convenience on their own websites to help drive direct bookings. Highgate Hotels have seen the direct and measurable impact of adopting these dynamic messages as well as the ability to offer geo-location and device-based promotions.

Metasearch Price Checking Widgets

Realizing that price is often one of the most important determinants for consumers, hotels have begun to implement price comparisons on their websites as a way to guarantee the best price to their guests. Companies such as Travel Tripper, Triptease and Clicktripz have all introduced new metasearch widgets that integrate into the booking engine and show customers hotel direct prices vs. prices from third-party booking sites. Travel Tripper goes a step further and in real time matches the price on direct if a lower rate is found on a third-party website. This ensures that the customer benefits, creating long-term loyalty to the direct channel.  

Personalized Loyalty Programs and Direct Booking Incentives

New startups like Voyat and StayWanderful have developed unique plug-and-play tools that offer guests loyalty and instant rewards on the hotel website. Voyat takes advantage of social logins to track customers, offering personalized incentives through targeted campaigns, while StayWanderful takes advantage of local partnerships to secure instant rewards for guests from retailers and service providers, such as free Gogo in-flight internet or local shopping and restaurant discounts. These instant reward programs overcome the inherent disadvantage of an independent hotel not having the scale required for successful loyalty programs.

Mobile User Experience

eMarketer predicts that, in 2016 more than 50 percent of travelers who book digitally will do so on a mobile device. As customers get more comfortable booking on smaller screens, and as mobile payments become more commonplace, this number will only continue to rise. Hotels will need to optimize their mobile presence in order to stay competitive, but that doesn’t just mean building apps. New front-end development tools like HTML5 and CSS3 have vastly improved the mobile experience, and hotels can now develop websites that offer an app-like experience on a mobile browser.

All-in-one Website and Booking Solutions

There has been a major disconnect between a hotel website, its CRS and Web booking engine. The transition from browsing the hotel website and initiating a reservation is experientially clumsy and results in lower conversion rates. Moreover, the content displayed on the website is largely brochure style, which does not respond to the guests’ browsing behavior or profile. Recent solutions developed by the major hospitality technology providers such as Travel Tripper and Sabre Hospitality are attempting to close that gap, providing a seamless solution that offers the website and reservations system working in tandem with one another. Content from the CRS populates the website in real time and soon we will see the websites react to browsing behavior and customer profiles in much the same way as Netflix reacts to viewing behavior.

Instant Booking through Metasearch

Many of the major metasearch sites now offer “facilitated booking” through their own sites, instead of linking to a third-party site. The most notable one for hotels is TripAdvisor’s Instant Booking feature, rolled out recently to allow travelers to book directly on the TripAdvisor hotel page. Many of the major CRS providers have introduced a TripConnect integration that allows hotels to participate directly in instant booking.

Dream On! Bringing the Future in View

It is clear the battle is on for distribution, with hotels wanting more direct business and the OTAs wanting to grow their share. However, OTAs are now moving to the B2B side of direct business, as is evident from the rollout of Booking.com’s Booking Suite. New tech companies serving the needs of hotels will continue to emerge because there is a genuine and strong market for it. Hotels are willing to pay these companies a percentage (currently 3 percent to 4 percent) of the measureable business they generate, typically claimed as incremental. This may tilt the scale slightly in favor of direct business. However, since many of these new entrants that help hotels secure more direct business are often single-feature products around which entire companies are built, this will spur hotel CRS technology companies to innovate more, incorporating some of these new features as native to their own booking engine products. This will allow hotels to benefit from more powerful products that generate more direct business and allow CRS companies to have less commoditized products and earn more money from direct bookings.

The competition for the direct business technology provider of choice will intensify between traditional service providers and OTAs. The OTAs are aggressively trying to secure inventory for their core business and create further dependence. Hotels will probably be signing their life away with this model as there is no recourse to all their eggs in this basket. If direct business is eventually dominated by the OTA's then costs will also be dictated by them and there will be no turning back.

Now what happens if Google, Apple, Amazon, Facebook or TripAdvisor enter this space and provide a B2B platform of websites, social profile and instant booking capabilities for hotels at a cost of 3 percent to 4 percent of revenue for every booking irrespective of where it comes. Take the example of Google, where the search could start from the search engine or Android devices with relevant content and instant booking directly from Google results. For customers wanting more information, Google could deep link to the customer website and still power the booking path. Google then would control the entire cycle – from search to booking. Enough knowledge about the customer and keeping the customer in their ecosystem will enable them to effectively own this space. Google could enter into this space through acquisitions and penetrate the market with a low cost approach.

The high cost of OTA business, major consolidation amongst the OTAs, an audacious new push by OTAs to offer B2B solutions for hotels allowing them even greater control of hotels profit margins, and the sharing economy (Airbnb) have all conspired to make this a ripe time for technology companies (big and small) and hotels to come together to put forward solutions that will define the distribution landscape.

Get ready for the ride!

Kurien Jacob is a principal for Highgate Ventures. With over 18 years of experience in revenue management, distribution and marketing, he's a specialist in the field who's regularly called upon to deliver keynote addresses at leading travel events and conferences. He currently spearheads Highgate’s investments in disruptive technologies related to revenue management, distribution and marketing in the travel business. Prior to this role, he was chief revenue officer at Highgate Hotels.

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