The past month has been a "wow" moment for hotels, at least when it comes to distribution and merchandising.
Last week, Priceline Group abandoned its resistance and signed up to provide its hotel inventory through TripAdvisor'sinstant booking platform.
Earlier this summer, Google debuted a commission-based model for metasearch for hotels worldwide.
Meanwhile, Amazon bowed out, while Airbnb tip-toed closer in.
Against this backdrop, many hotels are re-thinking their distribution and merchandising tactics.
For insights, we chatted with Valyn Perini, a contributing Node to Tnooz and the Vice President of Strategic Relationships for Nor1.
Perini was most recently the CEO of the OpenTravel Alliance. But her travel career includes stints with InterContinental, Westin, and Swissôtel, plus with PricewaterhouseCoopers as a travel technology consultant, and as the director of product strategy for Newmarket International.
Tnooz: What are your thoughts about TripAdvisor and Google expanding and refining their efforts at hotel metasearch? Commissions seem to be hovering in the 10% to 15% range.
Valyn: I was expecting a lower cost of commission from some of these new entrants like TripAdvisor and Google, because they're not traditional OTAs or metasearch providers.
I don't have a lot of optimism honestly for the industry in the short-term.
I know a lot of hoteliers were hoping that when TripAdvisor and Google got into this, that there would be competition amongst the intermediaries, which would drive the commissions down.
That may happen someday, but it doesn't change the fact that there are now more intermediaries in the space.
Over time, a lower commission rate is going to be obviated by more third party providers attracting more user eyeballs to the third parties, and by the hotels just not having the expertise, or the funds to be able to compete.
Tnooz: You don’t have much optimism right now?
Valyn: No, I don’t. But I also will say that it's very early days with the entry of TripAdvisor and Google, so I could be wrong, and I hope I am.
Tnooz: You’ve given a lot of thought to how the hotel industry works. What are your views about the fundamentals of the hotel distribution?
Valyn: The primary challenge for the hotel industry and third-party distribution is the differing abilities of hotels versus online retailers to allocate marketing dollars to capture guest attention.
The inherent challenge for hoteliers is their CAPEX dollars have to be spent on things like carpets and beds and housekeeping and labor and things that are not expenditures for online retailers.
The online retailer's expenditures can be focused on e-commerce, on advertising, on user experience, all the things that can be used to draw the customer to the third party site.
That puts the hotel industry at a disadvantage to the intermediaries. They'll never be able to catch up to that -- ever -- because of the differing nature of the two businesses.
The other challenge to the hotel industry is its fragmented ownership structure, with brands, individual or small group franchisees, and owners and operator companies. There are a lot of intermediaries in the actual business.
That fragmented ownership model is not replicated in any other travel industry segment. It's certainly not replicated in the airline space, or the cruise space, where the brands own their assets.
In the car rental space, they have a franchise structure, but there is no other middleman between the franchisee and the brand, and the brand has a lot more control over the asset.
Tnooz: Last winter, we chatted and you said, "People often ask me why doesn't the major hotel chains don’t build their own Expedia?" You said, "But that idea's stupid, if you actually understand the dynamics." Is that critique related to what you were just saying?
Valyn: Yes. Look at how much Expedia and and Priceline spend on marketing. It’s in the billions.
There's no hotel brand that can match that. They just don't have it. That underlying fundamental puts the hotel industry on the back foot.
It’s possible to build an industry-owned OTA but it's challenging because of the fragmented ownership structure. Every stakeholder would have to be involved: brands, owners, operators, and small franchisees and/or franchisee associations - because everybody has to agree, has to be bought in.
Franchisees of course, just want to distribute their inventory on the channels where they get the most return. They see a lot of return coming from Expedia and Kayak and all the rest of those established third parties.
It’s not appealing for a franchisee to allocate inventory to an unknown industry-owned distribution point. Franchisees are in the business to make a profit. If they think that that a channel isn't going to give them the return they need because the channel’s not well known enough in the market, they're going to keep giving their rooms and inventory to the household name distribution points.
I know it's been tried and that's what Room Key was and sort of still is. Room Key was a joint venture by five brands. Getting Room Key up and running was not easy.
And the output of Room Key itself is not material. It's a blip on channel distribution graphs.
Tnooz: Do you think that if TripAdvisor stays in the 10-to-15 percent range for effective commissions, can TripAdvisor become a category killer?
Valyn: TripAdvisor has so many products and so many reasons why a user comes to TripAdvisor and stays on TripAdvisor that they’re in an enviable position.
They're a smart company. They do a lot of things right. When they do something wrong, they get rid of it or they fix it quickly. They iterate really quickly and they have proven their value in the marketplace to users.
Because they've proven their value to users, unless they just really do something stupid, they're going to be very successful in this new initiative.
They could be a category killer, yes. Their user base is big enough that that outcome is pretty easy to imagine.
Tnooz: Because individual properties live and die by the TripAdvisor ratings, the connection between the positive review and a person searching it, makes it a very valuable channel?
Valyn: Yes. If you think about it strictly from a user's standpoint, a user has no idea of how the hospitality industry runs. They just know it's a super-convenient site.
I'm looking for a hotel in Orlando, I'm on the TripAdvisor site. I'm looking at reviews, and there's 15 great reviews in a row of a property -- and there's a book now button. Why wouldn't I book through it?
As a user, it is a supremely rational behavior. So TripAdvisor could be super successful.
Tnooz: The margins generated by each distribution channel are different, but do hotels account for that? If you have guests coming in through intermediary, you have a guest coming through the front door walking in, you have a guest through a mobile partner like HotelTonight, and if you have a guest coming through a group booking site for a wedding or planning an event, each of them would have different profit margins because of length of stay, revenue per order, whether they're going to order food and beverage, how easy you can retain them or upsell them. Do hotels understand the full cost of distribution by channel?
Valyn: The short answer is no. Hotels don't understand the full cost of distribution by channel.
The cost of the channel isn't just the commission the hotel pays for that reservation. The cost of the channel also includes any integration costs, any service costs or any other guest-related costs.
For some of the more high-end channels, hotels pay a commission plus the hotel is contractually obligated to provide an amenity to the guest. Some channels have service or incentive fees, but hotels do not regularly track non-commission costs of channels.
The other challenge is that there has been no standardization of where channel costs, other than commissions, should be allocated at the property level.
That cost of the amenity is an example. An amenity's cost could get tracked anywhere in the properties P&L. It could be tracked in the main food and beverage budget. It could be tracked in the mini-bar budget. It could be tracked in the general manager's VIP discretion budget.
HFTP publishes a guide that provides recommendations on how to allocate expenses at the property level, and I’m aware of some movement to include all channel costs in a future edition.
Until that standardization occurs, it's very difficult for a property to understand how much a channel actually costs.
The AH&LA has been doing some work to help their hotel constituency better understand this, along with companies like Kalibri Labs, so I would expect a lot of movement in this area in the short- to middle-term.
Tnooz: With private equity firms, like Blackstone, investing in this category, wouldn't some of them invest in innovations in the accounting property and that trickle down to the rest of the industry?
Valyn: It's a good question and I don't know the answer.
These costs don't usually get allocated up to the brand, because operators can't go back to the brand and say, "All right, you negotiated this 15 percent commission and this bottle of champagne for this high-end travel agency distribution point.”
I would think that Blackstone and the other investors would want to take a much closer look at how costs are allocated because these are operating costs.
Tnooz: Ancillaries, upgrades, upsells. Your new favorite topic!
Valyn: The hotel industry needs to see the linkage between distribution and merchandising. Merchandising is not just a revenue play, especially as more third-party channels are looking for more than just room inventory to generate traffic and loyalty.
Tnooz: Hotels struggle with merchandising and loyalty programs. What is the education that needs to be done for hoteliers?
Valyn: Part of the education is actually how to merchandise. Hotels historically have just sold their rooms, or their catering services.
It's not that they've not done a good job. They just don’t have much experience with this type of selling.
Tnooz: What do you mean?
Valyn: I mean that they've not had to historically sell anything other than the room. They don't have any expertise at it.
That's a challenge we have here at Nor1 is helping hotels understand the value, because what we offer is the ability to generate ancillary revenue by selling something other than the room.
We help hotels understand the value of its ancillary products and services, and help hotels implement it in their operations.
Tnooz: How long will educating the industry take?
Valyn: In the early days of revenue management in the hotel industry, the hotel managers used to just pluck somebody out of the reservations office to be the revenue manager because the industry didn't understand what it takes do effective revenue management.
But now they get it and some of their most experienced people are in charge of revenue management and optimization. The same will be true for this next layer, the merchandizing of ancillaries.
Tnooz: I find that really fascinating.
Valyn: Obviously, I do too.. Companies like Nor1 could really help the industry generate additional revenue on top of just that room.
Also, that revenue, that merchandising revenue generated by the property or by the brand stays at the property. It's incremental revenue that hotels get themselves and they can keep.
For us, we find ourselves in the position of educating a lot of the industry on why merchandising matters. We have a great product, it works well, it generates revenue. But what we're finding is that's not always enough of a sale. Part of our sale is talking about why merchandising matters.
Tnooz: Is there something that drives you crazy when it comes to how people discuss ancillaries?
Valyn: Hotel people hear the word “ancillaries” and immediately start thinking about the airlines, and lots of times say something snarky about ‘charging to store bags.’ Drives me crazy.
Airlines actually have an easily commoditized base product – the seat. Then there’s a limited number of products and services they can sell as add-ons to a consumer that are distinctive. But the opportunities to enhance a guests' stay at a property through effective merchandising is practically unlimited.
Tnooz: Maybe give an example to bring the point to life?
Valyn: It could be an upgrade to a suite, it could be an offer of flowers, it could be an offer of a spa treatment, it could be an offer of court time, it could be premium wi-fi if they're a business traveler. It could be a room with a bigger desk, it could be tickets to a local attraction, the possibilities are broad.
There's so many ways to influence or to impact a stay, but there’s just not many ways to impact a flight, because the base product is the same. It's a plane. It doesn't change, but when you're talking about a property, every property has complex facilities.
There are a lot broader, deeper, and relevant opportunities than a flight.
Tnooz:You recently tweeted that hotel brands should be careful. Loyalty programs shouldn't become data harvesting initiatives. There has to be true guest value. Do you have anything to elaborate on that?
Valyn: Hotels walk a really fine line. They have to ask themselves: What is the purpose of my loyalty program? Is it really to enhance the guest's stay or is it to acquire guest data?
I don't blame hotels for wanting to acquire a guest's data. They should do that, especially when guests book through a third party, which are notoriously stingy with the data they provide to the hotel as part of the reservation. Almost none of them give email addresses, as an example.
Which means that the hotel has no way to contact that guest pre-stay to merchandise to them.
Hotels need data about a guest so they can communicate. They can try and shift that guest from being a third-party booker to a direct booker, but hotels have to give something back to the guest in return for that data.
I see a lot of branded loyalty programs teetering on that edge of just being a data acquisition plan versus a guest-stay-enhancement plan, a true tool for generating loyalty.
It just has to be done well and it has to be done with the right objective. It should be to drive guest loyalty, and the way you do that is not through just accumulating email addresses.
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NB: Room image courtesy Swissôtel. Guest in hotel room image courtesy Daniel Zedda/Flickr/Creative Commons