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Hoteliers look to innovation to save industry
November 13 2013

The rising cost of acquiring customers is reaching an inflection point where profit margins are unsustainable, panelists said during the Revenue Strategy Summit in New York.

Highlights
  • Most profit margin cuts come by way of third parties.
  • Study: Third-party commission costs are growing at twice the rate of hotel revenue.
  • Brand fees and search-engine fees stack up against and on top of OTA fees.
     
By Jason Q. Freed
Contributing Editor, Tech Impact Report

NEW YORK—After the economic recession at the turn of the century, hoteliers looked to innovation by way of Internet distribution to bring demand back.

A little more than a decade later, hoteliers are looking at innovation to regain control of that same distribution and thus save an industry that is on the brink of succumbing to terminal profit loss.

The industry will sooner than later reach an inflection point where margins are cut so far that operating a profitable hotel as it is known today will be impossible, said Patrick Bosworth, CEO and co-founder of Duetto Research. Most of those profit margin cuts come by way of third parties who provide a sales and marketing platform to send travelers to hotels.

“Our guests will suffer,” Bosworth said Tuesday during the inaugural Revenue Strategy Summit at the Affinia Manhattan. “We could be giving up share to everyone in such a way that it permanently destroys the industry.”

Online travel agencies such as Expedia, Priceline Group and now TripAdvisor took the brunt of the blame from panelists. Cindy Estis Green, CEO and co-founder of Kalibri Labs, cited recent Hotel Asset Management Association research that showed third-party commission costs growing at twice the rate of hotel revenue, which she said is “not sustainable.”
 
“Commissions are growing at an exponential rate versus revenue,” Green said. “We’re getting sales, but at what acquisition cost?”

Green presented her latest research, which provides a look at what hotels are spending as percentage of room revenue to acquire demand. Brand fees and search-engine fees stack up against and on top of OTA fees, she said.

A study of 250 hotels in New York conducted by Green’s Kalibri Labs showed hoteliers paying 10% to 20% on transaction fees and commissions to third parties. In addition, hoteliers were paying another 20% on sales and marketing costs to acquire consumers, such as keyword buys, digital advertising and brand fees. In total, the hoteliers were spending 20% to 40% of their net revenue to acquire business.

“There’s just not enough left to operate a profitable business,” she said. “It’s unacceptable and we need to stop it.”

Lee Pillsbury, co-chairman and CEO of Thayer Lodging Group, echoed Green’s sentiments later during his keynote address. Pillsbury said there are “enormous consequences” if the industry doesn’t address the rising costs of driving demand.

“Mr. Expedia wants 18%, and Mr. Marriott wants 6%,” he said. “At the end of the day it isn’t going to work. You’re not going to buy, build, maintain a hotel with those economics. The consumer does not want to pay 40% in marketing acquisition costs. They want more value than that.”

Pillsbury said the situation needs addressed immediately.

“If all the members of the value chain aren’t making an economic return, then the value chain will collapse,” he said. “It may not happen right away—it took GM a number of years—but if it doesn’t work for all of us it isn’t going to work for any of us.”

Innovation to the rescue
Pillsbury and other panelists throughout the day called upon internal innovation from within the hotel industry to figure out a solution to lowering acquisition costs.

Rachael Rothman, senior gaming, lodging, leisure and restaurant analyst with Susquehanna International Group, said a shift in forecasting models would help. She said hoteliers can forecast their revenue-per-available-room picture but that “the truth is no one really knows.”

“You’re really only looking and getting a read at what’s on the books on the group side,” she said.

Gian M. Fulgoni, executive chairman and co-founder of comScore, said it is imperative for the hotel industry to lead the charge in adopting mobile strategies and mobile marketing.

Fulgoni called mobile a “fundamental shift, maybe even bigger than the Internet desktop shift from some years ago.”

He said the number of people who use the Internet on their phone is still growing by 25% year over year. Tablet use is growing at a 55% clip year over year, which is “the fastest adoption rate for an electronic device in the history of electronics.”

“If you aren’t optimizing for mobile, you’re missing an opportunity and will potentially run into challenges down the road,” Fulgoni said.
 
Larry Hall, president and CEO of PAR Springer-Miller Systems, said innovation starts with an idea that can come from anywhere. However, the idea is the easy part, and the difficulty comes in selecting the right idea and moving it through the innovation process, he said.

One example of potential innovation in the hotel industry would be re-thinking the 24-hour stay and instead accommodating for people who have flexible schedules and can check-out earlier or need to leave later, Hall said.

“How hard could it be to let people leave when they need to leave?” he said.

Hall suggested hoteliers don’t have to be able to justify the return on investment to get the ball rolling. “A lot of times we get hung up on ROI,” he said.

Julie Cottineau, founder and CEO of BrandTwist and former VP of branding at Virgin Group, suggested hoteliers start small when innovating.

“Take calculated risks,” she said. “Rich Branson launched Virgin Atlantic with just one plane. He said he wasn’t going to bet the farm on it.”

At Virgin, she said, the culture is set up in such a way that all employees are expected to innovate. “There isn’t a department of innovation,” she said.

“It should be a culture, not a project,” added Gareth Gaston, senior VP of global ecommerce for Wyndham Hotel Group.

No matter what the innovative project entails, Pillsbury said it’s critical that it comes from within the industry rather than from technology companies, or “vultures,” that prey on the industry’s profit margins.

“Expedia went to Bill Gates 25 years ago and asked for $25 million for an idea,” Pillsbury said. “I wonder today how many young entrepreneurs could be coming to us with ideas but instead are going to venture capitalists and third parties.”

COMMENTS   Show All
Mike Hendrix
12/12/2013 6:14:00 PM
Question for the group, would most hotels prefer to trade 1 full room per night to the OTA and pay zero commission for the remaining rooms the OTA books?
Paul Peddrick
11/21/2013 10:25:00 AM
Two thoughts: 1: I think it is interesting that Room Key has not provided a viable acquisition channel for hotels. I think this is primarily because the brands can't figure out a way to get behind a real advertising and marketing budget for the venture. They are half pregnant with it because they want an OTA that is "friendly" to hotels. What they need is to be owners (and profit-takers) of an OTA that competes against Expedia on its own terms. 2: Internet sales have a trackable cost per sale yet hotels confine marketing and advertising budgets to fixed numbers instead of associating them with cost of sale percentages. However, with OTAs, the individual hotels assume that once the brand has cut the deal with Expedia, then they can fill occupancy as they need it without regard to the total cost of sale of the OTA channel. The rule across all acquisition and sales channels should be that the budgets on the channel should only be limited by a total cost per sale percentage. That way, if your OTA deal stinks, then you are free to push more dollars into an advertising channel that delivers for a lower costs. This is why revenue management software like Duetto should be configured to manage ad spend on search and online display.
Eric @ Meridian Reservation Systems
11/18/2013 8:41:00 AM
The lowest acquisition cost is through generic traffic from your local Destination Marketing Organizations (DMO's)...Working with them to circumvent this problem is one possible solution that our company has been preaching with an incredible push back. The hoteliers are addicted to the volume of distribution the OTA's offer and therefore the consumer has now been conditioned to buy through Hotwire, Expedia, etc after they leave the Destination website where they researched for their vacation. Support your DMO and inject some of the 40% of that acquisition cost through them... at least they will be reinvesting that revenue into driving more traffic through their website to their members. Priceline spent $53 Million on keywords last year! Think of what could have been done with that money through DMO's...
Curt P. Baker - Ivy Inns Consulting
11/17/2013 12:07:00 AM
There are two things that strike me after reading this article. First is that in speaking with numerous managers and even regional managers, many companies are not seeking entrepreneurial spirits. More and more frequently, the decision is made to make a safe hire or safe play, instead of looking to be innovative, or as I was taught to think, to embrace the entrepreneurial spirit either as an individual, or as a corporate entity. Second, who is going to break the cycle. Hotels as individuals can't (and shouldn't) be the ones to cut out their bottom line. This is a brand decision in exploring which OTA's if any provide actual partnerships, and letting those who are to parasitic die on the vine. Unfortunately, the brands have not been willing to make the tough calls that are necessary to lead. Instead they try not to ruffle the waters and in winning the short term battle, they are ceding the power to win the war.
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