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Hospitality Revenue and Channel Management Converge

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June 16, 2006
Hotel | Distribution
William J. Carroll

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A new breed of manager is entering the market with one intellectual foot on the revenue management road and the other on the channel management road.

There’s a new, popular sport in hospitality right now. It consists of distribution service providers, consultants and managers racing to be the first, or among the first, to reach the crossroads of two unique disciplines in hospitality: revenue management and channel management. The reward for hotels is an opportunity to gain increased control over price, marketing and market share versus competitors.

Chains have led the way toward this goal. Their efforts to integrate revenue and channel management have been spurred by a desire to take back control of distribution from online intermediaries, grow direct bookings, enhance customer relationships, and better manage demand across distribution channels. Distribution service providers such as Pegasus, SynXis, IDeaS, TravelCLICK/iHotelier and Hotel Booking Solutions have partnered, merged and been acquired as ways to expand capabilities and customers in hospitality channel and revenue management.

A new breed of manager is entering the market with one intellectual foot on the revenue management road and the other on the channel management road. They are a rare breed and in short supply. They possess a unique combination of financial, analytical and marketing skills critical for work at the crossroads.

This article examines the convergence of revenue and channel management and the impact on chains, property managers, property owners, distribution service providers and educational institutions. It considers convergence as a market reality, a managerial activity and a system requirement.

Distribution Channels in Evolution
Hospitality distribution channels continue to shift and change with Internet usage as the catalyst. Business, leisure, group and combination users increasingly rely on the Internet, and its enhanced functionality, to plan, shop and buy travel and lodging. Online adoption rates and usage patterns will continue to evolve, affecting hospitality distribution in several ways, such as:

• More shopping and booking online,
• Increased use of search engines and metasearch sites,
• Multiple site usage for shopping and comparing,
• Less traditional (offline) travel agent usage,
• More online supplier-direct shopping and buying and
• Less (or different) call center usage.

How revenue and channel management will work together in the future remains uncertain, but there are some guiding principles for action and response:

> Have a channel distribution strategy.
> Price consistently across channels.
> Support and preserve brand in distribution channels, particularly in search engine channels.
> Understand and account for distribution effects as they impact revenue management with respect to: channel costs (explicit and implicit), consumer intimacy and competitiveness.

Adopt solutions that facilitate integrated demand management decision making with execution.

As suggested by Larry Hall, CEO of Hotel Booking Solutions Incorporated, a new discipline, demand management, is evolving in hospitality. That discipline includes: 1) traditional revenue (yield) management where revenue is optimized relative to capacity constraints, 2) marketing planning where revenue-driving marketing decisions are quantified and integrated across the enterprise with decision support tools, and 3) channel management where marketing decisions are executed across the channels that link properties to their guests. Implementation of these principles is the core of demand management.

Understanding Costs and Opportunities at the Crossroads
To effectively execute revenue management in a multichannel environment requires a precise understanding of the costs (and benefits) of each channel. Those costs include explicit costs such as fees to a GDS and/or a switch, commission payments to a traditional travel agency and merchant margins on net rates. Implicit costs include those associated with positioning an intermediary between a chain and/or property and its customers. Another not so obvious, but nonetheless relevant, implicit cost is the potential marketing value of intermediaries to address short- and long-term occupancy shortfalls. Both explicit and implicit costs must be understood and accounted for in channel and revenue management.

"Go direct!" has been the major chains’ distribution battle cry. The perceived enemy has been the online intermediary (perhaps soon to include search engines) that separate hotels from their guests and collect, at least from the chain’s perspective, an undeserved share of ADR. The battle cry seems to have successfully rallied chains and their properties. Hotels have shifted distribution share to themselves and away from intermediaries.

Yet in near Alice in Wonderland fashion, things in hospitality distribution are not always as they seem. Conventional wisdom suggests that a single-minded, go-direct strategy is warranted. A direct booking, particularly one made through a branded Web site, is often viewed as the low (or lowest) cost channel. As well, it supports enhanced brand management of guest expectations, loyalty and experiences. Such wisdom extended to revenue management would suggest that systems be "tuned" to account for intermediary distribution costs for the purpose of "bucketing" inventory. For example, inventory with the same gross ADR that carries a merchant distribution cost (for example 30 percent of gross ADR) should be "bucketed" below (e.g.., made unavailable before) the same gross ADR inventory that does not carry that cost.

An alternate view, and one espoused by intermediaries, is that a distribution channel, particularly one with mass market, media-like appeal, has the capacity to drive volume in off-peak periods and at lower marketing costs than a self-funded chain (or property) effort. While traditional yield management could easily include the explicit cost of a merchant booking (i.e., the net rate), it is limited in its capacity to include off-peak volume benefits in optimization algorithms. Yet, its inclusion, however quantified, is critical.

The PhoCusWright Consumer Travel Trends Survey Eighth Edition suggests that nearly one third of online travelers have consulted an online travel agency for a rate comparison and then went on to book direct with the property. This, and shrinking merchant margins, may be why major online travel agencies such as Expedia, Travelocity and Orbitz are helping consumers shop for a fulfilling travel "experience" rather than just low price.

The promotional benefits associated with online travel agencies suggest that revenue management actions, at least over the long term, must account for a channel’s capacity to drive volume at times when the property needs it. Otherwise guests may be lost to competitors in such periods.

Ultimately, channel and revenue management decision tools and/or their users will have to find some way to account for online travel agencies’ mass marketing (media) capacity to promote and reserve travel experiences. For revenue management, this means that transaction costs must account for some percentage of bookings being made by the intermediary at a lower rate, but which is offset by a larger percentage of incremental transactions directed from the intermediary, to the property or chain, at a higher relative ADR and/or during volume-deficit periods.

Operationally, this means hard wiring revenue management systems to include only the explicit costs of merchant inventory is misguided. Measuring the incidence and value of direct bookings driven by online travel agencies is much more efficient.

Equally misguided is overlooking the negative customer relationship effects of having an intermediary interposed between the guest and the property or chain. It means understanding and quantifying the impact on consumer loyalty and repeat business when dealing with intermediaries. This is why chains are favoring brand or price opaque merchant programs, which clearly appeal to mercenary or price-only motivated guests.

All of this suggests that more needs to be known about the implicit costs of intermediation. As well, that information needs to somehow be explicitly included in the practice of demand management.

With the increased availability of electronic booking path behavior information afforded by the Internet, hotels should be able to perform more complex analysis by channel performance (ROI) and include results either explicitly or implicitly in revenue management processes. As a result, participation in merchant programs with associated "top of page" display or inclusion in packages once judged imprudent may now appear rational in the context of marketing activity designed to produce incremental direct (higher ADR or off-peak) bookings. In a similar context, search engine keyword spend can be tied to potential business generation (i.e., click throughs and conversions) supported by electronic consumer electronic path behavior analysis and site ROI evaluation. This can be augmented by similar information garnered from call centers. Here too traditional call center metrics and analysis can be augmented with information about the electronic path the customer may have taken that lead to the call. For example, the path taken by the consumer is linked to an associated or dedicated toll-free number and subsequently to the likelihood (conversion) and value of the booking.

The bottom line is that "electronically traceable" consumer behavior can be used to perform analysis that can, in turn, be used to tune revenue management systems. As well, the richness and depth of the information about consumer behavior can be used to elevate the role and activities of the revenue manager to that of demand manager or marketing planner. The latter role would include responsibility for the near-term control of rates and availability along with generating long-term demand by understanding and managing the way guests shop for and buy rooms. Such a manager would be charged with both traditional revenue management and with protecting and preserving the distribution channels for the long term.

Special to Hospitality Upgrade. Reprinted with permission. Copyright PhoCusWright, Inc. 2006. www.phocuswright.com



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