Last week's #ExpediaMarketplace Tweet chat covered a number of relevant industry topics, such as how hotel visibility works in the marketplace and how the new Accelerator tool comes into play.
NB This is a viewpoint by Melissa Maher, senior vice president of the Global Partner Group, at Expedia, Inc.
One of the questions that raised a great deal of discussion was Question 4: "Why might publicly available loyalty rates be bad for hotels?"
Whether hotel owners choose to affiliate with chains or not, Expedia still considers them as partners and works to provide them with a service that meets their needs effectively and cost-efficiently.
To better understand the potential impact that these public loyalty rates could have on owners’ revenue, Expedia created an analysis based on reasonable assumptions and data to illustrate the hypothetical revenue cost of public loyalty rates.
This conservative scenario shows an 8% loss in revenue to owners.
(NOTE - Click on the image to see a larger version in a new window, if necessary)
Reading the graph from left to right:
- The Pre bar represents revenue based off online bookings for a hotel. In this example, it’s made up of 75% direct brand.com revenue and 25% OTA revenue.
- The loyalty rate discount is the discounted rate offered to the booking public. This equates to a reduction of revenue due to the lowering of the rate. This discount can vary from 2-10%. This chart assumes 3%, so when applied to the 75% of revenue from the brand.com-generated revenue, it equates to a 2.3% revenue reduction.
- The brand.com price elasticity illustrates incremental revenue to increased volume driven by lowering the rate. This assumes a 75 cent revenue increase for every dollar of discount from the member rate discount for brand.com bookings. That equates to 1.7% increase in revenue.
- The OTA Bookings bar showcases the loss of overall OTA production, based on the natural effect in Expedia’s Marketplace algorithm as an example. The graph assumes a conservative 30% dip in bookings on an OTA. It’s important to note that this is a natural consequence of how Expedia’s Marketplace works. A hotel’s visibility on the Expedia Marketplace is calculated by offer strength, quality score and compensation. Therefore, when a hotel is, for example, not offering its most competitive rate to consumers shopping and booking via Expedia, those consumers are more likely to book a room at a hotel that is offering its most competitive rates. Expedia’s algorithm recognizes this natural shift in consumer preference and adjusts the visibility of these hotels in the marketplace accordingly.
- The billboard effect is the concept that hotel partners get more bookings on their direct sites due to their exposure on an OTA’s marketplace. For example, Expedia, Inc. has 200+ points of sale around the world across all of its brands. Some travelers find their hotel with Expedia, and then choose to book direct with the hotel. Expedia receives no payment for these travelers, which effectively amounts to free advertising for hotels. In this case, the assumption is for every two bookings made on an OTA, brand.com receives one booking from the OTA exposure. Hotels with lower visibility in the marketplace see a lower billboard effect as well. The loss of this is measured at -3.8% reduction in brand.com revenue.
- Recaptured OTA bookings shows an assumption of 50% of OTA traffic recaptured by the chain’s direct marketing efforts. This represents a 3.8% increase in revenue.
- Savings of the OTA compensation represents the absence of the OTA commission from the loss of OTA bookings. This example assumes the 18% comp. (This does not imply an average or median comp rate).
- The recaptured demand to brand.com is at the member rate discount price, so there is an assumed reduction in revenue of 0.1%.
- A conservative 4% loyalty program cost to the hotel is assumed for each loyalty booking. That equates to an assumed revenue reduction 0.1%.
When all of these impacts are added up, this particular hypothetical hotel owner is experiencing an 8% loss in revenue in online bookings.
This is just an illustration; owners should utilize this analysis with their own numbers to determine how public loyalty rates impact their revenue.
In recent years, Expedia’s average compensation rate has gone down several hundred basis points to make the OTA value proposition to owners even stronger. Unfortunately, the chains, who are mostly asset-light marketing and distribution companies, have yet to make a step in the same direction for the benefits of their owners by reducing their franchise fees.
Expedia has outpaced the chains’ direct channels growth by demonstrating consumer value and, as a result, increased the OTA share of the mix of chain hotels’ bookings. This means that owners are now feeling the pinch of the large franchise fees that chains charge on bookings made via OTA channels even more.
Instead of moving to reduce the amount they charge their owners, the approach taken by some of those chains is to try to reduce the growth of the OTA by restricting what consumers shopping and booking through non-brand.com websites can access.
This could be their most competitive publicly available rates or blocking non-price benefits such as free Wi-Fi. They are discriminating against these consumers in the guest experience by, for instance, making online check-in available only to their loyalty program members who book on the chain’s own channels.
Many brands find value in working with OTAs. In MGM Resorts’ recent earnings call, Corey Sanders, COO, highlighted the benefits of working with Expedia:
“You are seeing that (third-party/OTAs) business increase significantly and for many reasons including the investments that Expedia has put in. They are a very strong partner for us and I think there are opportunities for our websites and our loyalty programs to shift some of that business and that would obviously increase our RevPar.”
Owners of franchised hotels should take a step back and consider how these actions by their chains impact their results.
If an owner agrees that making great rates available for consumers shopping and booking on Expedia is not only in the best interest of consumers but also in their own best interests, they should contact their chains and let them know.
More generally, they can work with their Expedia contacts on how they can better serve their mutual customers.
NB This is a viewpoint by Melissa Maher, senior vice president of the Global Partner Group, at Expedia, Inc. It appears here as part of Tnooz's sponsored content initiative.
NB2 Expedia has produced a white paper, Understanding the Science Behind Expedia's Marketplace. Click here to access to document.