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The Quest for an Optimal Channel Mix

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June 01, 2012
Cindy Estis Green - cindy@kalibrilabs.com

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If there is one thing I learned researching and writing Distribution Channel Analysis: A Guide for Hotels, it is that each hotel has to examine its own channel mix in the context of the market in which it operates and compared to the hotels with which it competes. Aspiring to achieve the mix of the market leader may lead hotel management down rabbit holes that can cause them to burn through marketing funds with limited results. There are factors that a hotel should consider to derive and achieve an optimal channel mix.

By assessing its own channel mix first, and determining how much each type of business contributes to operating expenses and profit, a hotel can begin to set internal benchmarks. What constitutes channel contribution? Estimating the direct distribution costs such as commissions, transaction fees and other direct costs associated with acquiring each type of business, and in each channel will yield a net amount that feeds into the hotel’s operating expenses and profit. Once a hotel puts a stake in the ground as a starting point, it can test different tactical plans to steadily improve the overall contribution.

Being realistic about a hotel’s potential is an essential part of the process. Once focused on managing channel mix, there may be an inclination to quickly reduce low contribution channels or to expect rapid growth in high contribution ones. There are often seasons and weekparts that are limited demand periods and, at times, a hotel may have to tap any available channel to fill them, even those that carry higher costs. Provided there is sufficient contribution to operating expenses and profit, and that a hotel is not diverting demand from higher value sources, these lower profit channels can still be a reasonable choice. There are also limitations with respect to how much the direct channels can deliver. The Distribution Channel Analysis study data implied that brands with a broad reach and critical mass tended to perform at higher levels in the voice and brand.com channels. For lesser-known brands in a market, especially independent and smaller chains that may not have many properties in any one market and are competing with well-known national brands, the objectives for these channels need to be set with a realistic expectation of what they can deliver.

When looking to explain why a hotel is not performing as well as a manager or owner would like, there are some data variables that can be tapped. How is a hotel viewed by its consumers? All the best marketing initiatives cannot combat poor consumer feedback. Besides traditional customer satisfaction surveys, tools like Revinate and newBrandAnalytics can help a hotel consolidate social commentary and review the same for other hotels in the same market.  This brings to mind an anecdote about a hotel underperforming in its wedding business. The sales manager was highly motivated, well trained and capable, but was hardly able to book any events. The mystery was solved when the management reviewed the social commentary. The hotel got two black eyes from the litany of negative feedback pulled together and documented through social media channels.  It took a concerted effort by the operations team over several months to correct the internal service issues and get the word to social advocates to convey the image of a highly responsive professional catering team. Success in the operation led to tremendous success for the eager sales manager, and the team effort resulted in dramatic revenue gains in wedding business. The intelligence picked up by monitoring the two-way consumer discussion found in social media forums can clearly and quickly illustrate a hotel’s strengths and weaknesses with a lot of valuable insights. Further, it opens a platform for conveying important messages, especially when a hotel needs to get the “we fixed it” message into the marketplace. In contrast, depending only on the one-way conduit of a customer responding to management in a formal satisfaction survey may constrain the quality and speed of feedback.

Looking at the hotel’s direct channels is an important step to assess optimal channel mix. If a hotel is not doing well in its brand.com channel, the hotel management team has to ask a few questions. A good starting point is an investigation into what consumers think about the hotel’s website. Avinash Kaushik, a respected Web analytics author and digital marketing evangelist for Google, suggests asking the simplest of questions to help examine the effectiveness of a website. Was the consumer able to accomplish what they set out to do on your website? What percentage of site visitors came to make a booking and actually did that? Answering these fundamental questions can go a long way to determining if the most essential functionality of a website is in place. If not, it is not worth focusing on improving other details if the basics aren’t yet working correctly. Companies like iPerceptions and Foresee provide low-cost tools to monitor consumer feedback about a website.

The voice channel is another direct-to-hotel channel that warrants some attention for many hotels. One can evaluate conversion rates to determine if the reservation operation is converting at an optimal level. If not, there are many factors to consider: Do the reservation agents have sufficient product knowledge? How extensively are they trained in sales techniques? Are they judged primarily on their sales performance (e.g., sales revenue per lead call taken) or on their operational efficiency (e.g., talk time)? Getting this channel to deliver a top-notch result takes some effort and attention but it will pay off with dividends since average rates and lengths of stay through the voice channel trend higher than most other channels.

In the quest for optimal channel mix, management needs to have a good grip on transaction costs but it would be appropriate to also have a focus on acquisition costs. Examination of the spending in each media and marketing channel can point the hotel marketer to how much “bang for the buck” they get for the marketing funds committed. There will be  a repeat customer base and the marketing funds that are retention-based are often spent on loyalty program initiatives along with email campaigns; this amount is generally less than the cost of acquiring business for the first time. The higher the base of returning customers, the lower the budget needed to acquire new customers. This equation is one of the factors in determining how efficiently the hotel is running its marketing operation. 

Another valuable metric is based on the ratio between revenue generated and marketing funds spent. This can be viewed by individual marketing channel or by calculating all the channels together. Once a hotel determines a target revenue-to-cost ratio for its marketing initiatives, it can monitor its results each month, shifting its spending to those channels that are most productive.

Determining a hotel’s optimal channel mix requires an assessment of demand and performance by channel along with a corresponding evaluation of transaction and marketing costs applied to each type of business.  A shift away from revenue management and toward profit contribution management is in order. Calibration and refinement on the channel targets and marketing spending mix may take some trial and error, but will lead a hotel to results yielding the optimal contribution to operating expenses and profit.

Cindy Estis Green, CEO and co-founder of Kalibri Labs is an industry veteran with more than 30 years of experience in data mining, analytics, distribution and online marketing. She is the co-author of Distribution Channel Analysis: A Guide for Hotels published by the HSMAI Foundation in 2012. She can be reached at cindy@kalibrilabs.com.

©2012 Hospitality Upgrade
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