Investigation: Hotels and online agencies battle on three fronts (Part Two)

* This is the second part of our look at the distribution and marketing challenges facing hotels and online travel agencies. Part One is here.

Rewards ≠ Loyalty

Logically, hotel reward program members have always booked a disproportionate amount of business.

In 2016, 52% of Hilton’s and 50% of Marriott’s system wide room nights were generated by members of their respective reward programs.

This is an important and highly lucrative hotel brand cohort – the same guests that over-index for booking via the brand website and downloading the mobile app.

The problem is that rewards programs trade in gamification, not loyalty.

The hotels groups are building the brands off the backs of the developers, it's not their money... But we are buying what they are selling.

Suril Shah – managing director for acquisitions and asset management, Starwood Capital

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Frequent business travelers, the lifeblood of every hotel program, are fundamentally translating employer corporate travel spend into personal benefit for future leisure travel.

They are playing with their bosses’ money. Behaviors often change when those travelers are paying their own tab.

Phocuswright calculates 69% of hotel reward program members participate in multiple programs, with 41% enrolled in more than three.

Jumpshot’s research saw that hotel guests who booked three or more times (i.e. frequent travelers) were 40% more likely to buy from another hotel site or OTA.

Only one hotel brand was listed in Brand Keys listing of the 2017 Customer Loyalty Leaders Top 100 list for 2016 – Airbnb (#31), a most decidedly un-hotel brand, which coincidentally lacks a reward program.

For years, OTA bookings have not qualified for reward program points or received perks like free internet access, but beginning in 2016, a number of the largest global hotel groups tried to further thumb the scale by offering discounted rates to reward members to capture more direct bookings.

This strategy has nothing to do with loyalty; it’s a transactional gamification tactic combining a price discount and value-add to incent program registration and booking channel shift.

The good news for hotel brands was considerable growth in program membership.

A study by Kalibri Labs indicates the discounting strategy has also slowed OTA share growth, yielding direct bookings that are approximately 8.6% more profitable when considering direct costs.

However, one key statistic that was omitted in the calculation was the profit dilution from existing rewards members that were now booking at lower rates.

While there is insufficient public research on booking channel trends for hotel reward program members, Phocuswright found that prior to the launch of the hotel brand "book direct" campaigns, the OTA booking channel was used by 25% of US hotel guests.

It can be argued that the blanket discounts offered to all reward program members are designed to alter the behavior of the one in four leisure travelers who patronize the OTA channel.

The resulting profit dilution could potentially be significant.

It should also be noted that the hotel brands are not footing the bill for the direct booking programs.  The bad news is for the hotel owners that are bearing the full brunt of funding the rate discounts, free wifi, and accrual of loyalty points.

Winner: Hotel Brands & Loser: Hotel Owners

Encouraging Bad Habits?

Before electing to offer retail discounts to the brand’s most frequent, and arguably least price sensitive guests, many hotel brands dedicated themselves to transcending the use of price as a differentiator.

Now, they are training all program members, even those that never ventured to OTA websites, to expect a discounted rate.

Given the increasingly transactional nature of hotel reward programs and their members, hotel brand-guest relationships run the risk of resembling a series of one night stands as opposed to committed monogamous relationships…

Consumers are ultimately seeking a combination of five critical product/user experience attributes:

• Selection (A range of product that meets a specific need)
• Convenience (Access where and when needed)
• Simplicity (Intuitive ease of use)
• Speed (Fast purchase and service delivery)
• Value (Greatest relevant benefit at the lowest available cost)

Loyalty adds an additional, unique dimension to the mix.  True brand loyalty is best measured by the price premium one is willing to pay, because they love that brand.

Monetary value calculations may drive transactions, but true loyalty is earned–the values the brand represents and reflects onto the consumer create the emotional connection that inspires long-term loyalty.

otel brands would be well advised to proceed with caution when employing strategies that create value by reducing prices.

That strategy can work if enhanced customer lifetime value can be demonstrated within reasonable risk parameters, but those results have not yet been published.

As a point of reference, Apple has no rewards program and eschews discounts.  Amazon charges $99/year for its frequent buyer (Prime) membership (although they do offer six months free and $49/year to encourage trial and indoctrinate college students as new members.)

Two New Fronts Emerge

OTAs are launching hotel tech stack development initiatives, and not for altruistic purposes.

Booking.com’s Booking Suite and Expedia-backed ALICE are seeing adoption rates pacing faster than many hospitality technology vendors.

OTA-backed booking engine, packaging, revenue management and guest communication platforms will help hoteliers better price, convert, engage and measure their business, with most offered on low cost Software as a Service (SaaS) or performance-based models.

With rate parity disappearing in favor of special pricing to closed groups, both Expedia and Priceline are also experimenting with "Insider" rates to frequent bookers and their own reward program members.

For hoteliers willing to work closely with an OTA, opportunities exist to shift share from competitors.

These new weapons of war are being developed in preparation for future battles of alliances made directly with hotel owners.

Of course, there is no guarantee that the cost of reliance on an OTA won’t increase due to changing market or competitive conditions.

War Is Hell

One underlying dynamic must also be considered.  Intermediaries have traditionally grown share during economic downturns.

The US hotel industry is currently enjoying record occupancies, daily rates and RevPAR. Holding high ground, the hotel brands launched an offensive with the direct booking initiatives.

In a 2016 research note, Morgan Stanley weighed in on the potential outcomes of the hotel brand v. OTA battle, its impact on each party, and hotel owners.

The worst-case scenario was a pricing war.

If the hotel “book direct” battle turns into a legitimate pricing war, hotel brands and hotel owners have a considerably worse downside than OTAs, by more than a factor of 2x.

While revenues are strong, hotel owners are able to cope with their high fee burden.

However, during the next downturn, sustaining operating standards and profitability on 2/3 of a gross revenue stream will become untenable for many.

Allegiance of hotel owners will inevitably swing to those capable of generating the greatest incremental business volume.

Hotel brands and/or OTAs unable to prove their worth will see fee levels squeezed, directly impairing their ability to attract, convert and retain business.

However, the winner of the OTA v. Hotel Brand battle won’t ultimately be decided by the hotel owners.

Signs of flagging growth or share shift will invite scrutiny from investors. Notoriously impatient equity markets will then reward the victors and mercilessly vanquish the losers.

This could turn ugly.

* Part One of this investigation is here.