Hotel Distribution Channel Players - Use Your Channel Partners Appropriately and On Your Terms

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October 01, 2010
Revenue Management
Tim Coleman

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The most overlooked aspect of revenue management is the inner workings of the primary distribution channels, like travel agents, wholesalers and merchant model resellers. That’s why it is essential for hoteliers to understand the basics and dynamics of this important area. Unfortunately, in my travels around the world, I have found that the majority of hoteliers have major misconceptions of how these channels work. Please see the box below for a simple test you can take to try your knowledge. For the record, all these statements have two things in common: they were told to me personally by industry experts, and they are all false.

A fair question is, so what?  We are getting our brains beat out by today’s market rates. I agree that now is not the time to try to restructure your distribution channels and their costs. On the other hand, now is the time to position your property to take corrective actions increasing net revenue when business improves and you can be more selective. The best way to prepare for these strategic discussions is to understand the proper roles of your current channel partners.

Travel Agents
Travel agents are important channel partners because they can reach disparate market segments and can translate your hotel offerings for their local markets around the country and world. But travel agents are not legally due 10 percent commissions, or any commissions for that matter. While some chains may have established a standard commission rate and a commission paying policy, there is no law saying the policy or the rate can’t be changed.  For example, as Marriott tried several years ago, it may make more sense to pay a higher commission rate to agents who really promote your property and provide you a higher market share.  And, perhaps you should pay less than 10 percent to agents who only book your hotel when nothing else is available.  (Admittedly, implementing this is not cheap or risk free).

The 10 percent figure started back in the 70s and 80s before automation. At that time, travel agents had to rely on the Hotel Travel Index, a tome larger than the NYC telephone book that contained the features of most hotels and all the contact numbers to make a reservation. Travel agents had to scan through multiple, small print pages to find hotels and then make countless long distance phone calls to make a booking.  Those processes alone probably justified a 10 percent commission. Today however, that same reservation is made via GDS or Internet with little manpower or telecom costs, so why is the commission still 10 percent? More importantly, from a cost standpoint, why are some online travel agents being paid much more than 10 percent. (Hint, the commission rate is determined by market power, not costs.)

Travel agents are not agents of the guest because hotels are paying them and therefore they are subject to hotels’ rules to earn their commissions. When the airlines were deregulated and had to stop appointing agents jointly through IATA and ARC, the hotel industry simply appointed all current IATA and ARC agents. Nonetheless, if you find a travel agent that is not representing you properly, just repeal their appointment and stop paying commissions to them. Also, your sales office should know who all your large producers actually are. You probably have some large travel agent producers whom you do not call on or recognize. Hint: In the best case, they are simply online travel agents who purchased an IATA number; in the worst case, they are an employee embezzling by putting their own IATA number on bookings in your system.

So what should you do? Make sure your sales people understand the relationship and provide direction to your travel agents. Ensure that they know your property well enough to properly sell it.  Make sure that you keep good track of your supporting agents and thank them for their business and make sure you are getting your money’s worth for your commissions. Remind them you pay commissions to reward their behavior.

Other Channel Players OTAs, Merchants and Wholesalers
Many hoteliers think there is no real difference between online travel agents, merchants and wholesalers. After all, Expedia is all three of these.  However, it is very important to note that these three entity types represent different business models and relationships that have differing cost structures that may require you to market and compensate them differently.

Merchants take control of your inventory and stand between you and the guest.  In fact, the guest is their customer and that is why they pay the credit card fees. As we come out of this recession, make sure your merchant model agreements are a win/win proposition and work both ways. If you have a merchant who always delivers high market share and does not play games by making you offer special overrides just to keep your current share of their business, then they are probably your best partner. You should treat their customers well and there is not much need to steal them and market direct to them. On the other hand, if a merchant is making you grovel and is constantly withholding market share and increasing markups, you need to protect your property by seeking a direct relationship with those guests when they arrive on property. I have often heard it said that he who has the e-mail address owns the customer relationship.

Make sure you are treating the merchant as a true merchant. When they book your room and charge their customer, they are the merchant of record and they have effectively purchased the room from you for the duration of the stay. In essence, you have taken the room out of inventory and given it to them for the entire stay. Make sure your accounting office is billing them for the stay as booked and not for the nights consumed. Most PMS and accounting systems are set up to charge only for nights consumed; so once you decide to allow merchant model agreements, you must make an allowance to bill properly for them. Failure to do this could cost hundreds of thousands of dollars in pure profit for even smaller hotel companies. Many properties are reluctant to bill properly, but if your merchant is really your partner, he will gladly pay. He is not refunding the money to the guest. If the merchant does get an occasional guest that he must refund, that is his own responsibility and come out of his margin.

Wholesalers play an entirely different role since they are packaging an entire vacation with sightseeing, airfare, ground transportation and hotel. Since this has always been a more complex purchase for consumers, most of these packages sell through retail travel agencies. This causes the wholesaler channel to require a 20 percent commission. (10 percent for the wholesaler and 10 percent pass through to the agent.) This sounds like a high rate, but you should focus on three elements: The net rate you will receive, advance purchase and the disguised rate in the retail market. Wholesalers offer a unique opportunity for you to sell unused inventory where the retail market is shielded from the actual room price. Properly forecasted and used, this will enable you to stop offering last minute fire sales. Worry less about the commission and more about how a low rate in this channel can yield a higher rate in the last minute retail market.

Travel agents are really two different animals today. “Online” travel agents provide some content and a booking engine. “Brick and mortar” travel agents are agents who sell in person in an office or through home-based agents. In a perfect world, we should pay more to the in-person agents because they spend more time with your customers. As an example, before phasing out broad commission structures, airlines paid online agencies lower commissions than traditional agents.

Rate Parity
Some hoteliers bemoan the rate parity clause because it does not allow hotels to undercut OTA prices on their own Websites even though the net rates on their own sites may be 30 percent higher. This is ironic, since the reason hotels demanded the rate parity clause many years ago. 

In the rate parity evolution, there were two missed opportunities by the hotel industry to control their own destiny.  In each case, hotels were more interested in short-term revenue improvements than long-term distribution channel strategy.

The first was a hotel owned Website called Travelweb, which was the first OTA and was owned by THISCO (The Hotel Industry Switch Company) that was, in turn, owned exclusively by 17 hotel company stockholders, including Hyatt, Westin, Marriott, Hilton, Holiday Inn and Sheraton. Unfortunately, the hotels could not see the future where distribution would assume such market importance and Travelweb lacked the marketing investments that were needed to compete with the huge marketing dollars that would be spent by the OTAs.

The second involved some travel agents booking hotel rooms in major markets, like New York and San Francisco, way in advance at low rates. Fortunately for them, market compression ultimately occurred and the market price escalated as availability disappeared. The agents then offered rooms in the market at over $500 per night and after changing names on their reservations reaped a profit. You can call this as opportunism or a scam; but, in either case, the hotels themselves were complicit in it because they chose to keep short-term revenue flowing rather than fight the strategic distribution battle to control their channels.

Once hotels had acquiesced to the merchant model concept, they formalized merchant model contracts. It was not long until merchants were holding inventory until hotels were full and then marking up the price above the hotel or undercutting hotel rates to build share. This was an unintended consequence so, hotels asked for a rate parity clause that kept travel agents in the merchant model from overcharging and making huge windfall margins or undercutting the hotel Website.  The OTAs agreed as long as the rate parity cut both ways and kept the hotel from undercutting them. So, rate parity did not just drop out of the sky; it was a stipulation asked for by hoteliers who had been shortsighted in not controlling their distribution channels.

So, armed with this background, you have some tools to open your mind to consider new possible distribution channel strategies and use your channel partners appropriately and on your own terms.

Tim Coleman is a revenue management consultant and chairman of HSMAI Revenue Management Special Interest Group.

©2010 Hospitality Upgrade
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Take this simple test and see how you rate.

TRUE or FALSE
  1. By law, all travel agents must be paid 10 percent commission.
  2. Travel agents are called agents because they represent the customer.
  3. The only difference between agents, wholesalers and merchants is the rate we pay.
  4. Rate parity was forced on hotels to protect the OTAs from being undercut by direct bookings.
  5. ARC and IATA maintain the official list of travel agents.

All these statements have two things in common: they were told to me by industry experts, and they are all false.



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