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The Top 10 Fallacies About Distribution

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March 01, 2006
Hotel | Distribution
Caryl Helsel

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© 2006 Hospitality Upgrade. No reproduction without written permission.

In the hotel distribution world things have been changing rapidly the past few years. It is often extremely difficult to determine strategies and actually stick with them, due to the dynamic environment that is currently our life as we know it. As a result of the past few years of change, many people have come to believe certain ideas about distribution that are not necessarily true.

As hoteliers, we must continually stay abreast of changes in consumer buying habits, as well as expectations. We must also know what is truth and what is fallacy. The following fallacies are issues that are not hotel specific, but can be applied to the travel distribution industry as a whole.

Fallacy No. 1–The consumer will purchase how and where I want them to

Although this seems hard to believe, there are still suppliers and intermediaries who believe this to be true. They are myopic in their approach to customers and do not believe the power has shifted to the consumer, nor do they understand the rule that this fact plays in their future distribution success.

Customers choose the channel and the vehicle used to purchase travel. They vote with their wallets.

Fallacy No. 2–If distribution costs come in line, the industry will be healthy

Distribution is a portion of marketing, and marketing is a key cost component for suppliers, but other costs (like labor and capital) have a much greater impact on the bottom line, as does top-line revenue.

In many sectors of the industry, pricing and yield management functions are flawed. Suppliers are shifting distribution to lower cost channels, but are getting less for their product on average as a result of the focus on price as the channel differentiator.

Distribution cost control can help the P&L, but it does not ensure the health of any industry.

Fallacy No. 3–Revenue is king

All revenue is not good revenue. As you operate on a P&L basis, if your costs constantly exceed your revenue, you will eventually fail. That is why rate offer assessments and cost assessments are so important to decisions about what business to take at your hotel and what channels to maximize in the process.

Top line growth may appear beneficial, but cost (versus revenue) and displacement of more profitable business as part of the success equation cannot be denied. Profitability is king, long live the king.

Fallacy No. 4–A customer is a customer is a customer

Customers come in all shapes, colors and sizes. Once you think you know your customer, they change behavior (and channels) without notice. Sometimes it is a shift due to a change in purpose of the trip, who they are traveling with or who they are working for.

Segmentation of your customers, as well as channels, and understanding their purchasing behavior are important steps toward establishing a rational multichannel distribution strategy. The long-term value of a customer and incidental revenues gained from that customer are important in making overall decisions about pricing strategies. All customers are not equal.

Fallacy No. 5–Technology is a business driver

Technology may be an enabler, but it is not a driver (unless you are a technology company). Technology should support the business needs versus drive how business is done and how customers are serviced.

Your business should seek out the best solution based on your needs or those of your customers. However, new technology offerings should not overly influence your business strategy.

Create your strategy, then obtain technology solutions as part of your operating plan to facilitate the implementation of your strategy.

Fallacy No. 6–Business travelers will pay whatever we charge

It has been proven that businesses are indeed price sensitive. They can and will shift their travel spending or even eliminate it altogether if the price is too high. Hotels must be willing to take risk on price, but they must also consider how far they can push the envelop before they risk losing the business.

With the price transparency that the Internet facilitates, business travelers are finding the rates that are clearly intended for the leisure/occasional traveler. This historically has dramatically eroded supplier revenues – in many cases, savings in booking fees and commission pales loss in revenues. Thus price integrity and congruent strategies, with all segments and channels, has become the mantra.

Fallacy No. 7–GDSs (and travel agents) are dinosaurs

GDSs and travel agents may be part of the travel distribution heritage, but they are not extinct. If the longevity of the dinosaur is any indication, both the GDSs and travel agents will be with us for some time to come.

Although challenged by the hyper-growth of the Internet and the shirt of business to new players and channels, each are utilizing the Internet in new and unforeseen ways to expand their businesses. Those who are smart businesses, led by visionaries, will be with us for many years in the future.

Fallacy No. 8–Build it and they will come

Although this phrase is normally attributed to technology vendors, it can be applied to almost any business. A key problem with many new products and services is that market research isn’t completed in advance. Additionally, the business model and/or the market penetration process is not well thought out or well executed.

Customer acquisition does not necessarily follow a decision to shift (or even eliminate) channels. It certainly isn’t automatic.

Fallacy No. 9–Going direct is always the cheapest channel

Many businesses do not consider all of their costs when making this assumption. All overhead costs must be included, not just booking fees. This includes human resource, as well as development costs.

Direct distribution may offer lesser costs than some other channels, but if customers desire to purchase via these other channels, it may not be the cheapest route – especially if you lose the revenue and the customer altogether.

Fallacy No. 10 – The travel agency channel is the first one I should eliminate

Though this has not been the trend for hotel companies, by observing the airline model we can see that this does not always pay off in huge dividends. The agency channel can be a cost-effective channel and can produce higher average revenue per booking than many other channels.

Analysis of your revenues and your costs for this channel are essential, if you sell higher priced or margin products and services through this channel than you are able to on your own Web site, then you may be losing more in revenue than you are gaining in the reduction of booking fees and commissions. You may be gaining more revenue from these channels, after costs are subtracted, then you do from your most profitable merchant model agreements.

Article written by Chicke Fitzgerald, Kathy Misunas and Caryl Helsel of the Solutionz Group International (www.solutionz.com), a business development and strategic consulting group headquartered in Tampa, Florida.

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