Why hotels should think of themselves before embracing Facebook and flash sales

NB: This is a guest article by César López, business development manager at Mirai, a Spain-based hotel technology and consultancy service.

A well-known story for hotels: powerful middlemen that dominate the market and put pressure on the property managers to lower prices and increase the commission.

Before it was the tour operators, now it is online travel agencies that have managed to continue with the same model adapting it to the new ways of doing things.

However, they are not really interested in having innovation break the structure of the market or, at least, are the gatekeepers seemingly deciding where and when such innovation takes place.

Starting this year, the new episode in the series comes in two forms: Expedia has come to an agreement with Groupon, while Booking.com has launched Flash Deals - 50% discounts only for Booking’s fans on Facebook. The page already has close to 200,00 and many hotels have already received a call from Booking.com to participate.

It doesn’t matter how advanced the new social networking platform, online vouchers look, there is nothing innovative about the business model. It’s the same vicious circle:

1. Hotels need clients, many and every day
2. Middleman offers clients and the hotel accepts them happily
3. Clients are never enough. There are many beds, the year is long and the fix costs put pressure
4. Middleman offers more clients in Exchange of more commission and less money
5. The competing hotels also need more clients and they also accept the offer
6. Hotel competition is forced by intermediaries by price lowering and the commission raise.
7. In the short term, this works, it gets them more guests, stolen from the competitors
8. Client base doesn’t grow because the other hotels react and do the same thing
9. The hotel pays more and more to the middleman to find it clients
10. The clients get the message: if they want to book, they have to do it through the middlemen
11. The middleman reinvests the huge commission in marketing and making himself visible
12. The hotel doesn’t invest the same amount to do the same things to promote itself directly
13. The middleman, fed by the hotel, increases his market share
14. The hotel loses market share on direct sales, because it can’t afford the same level of investment

This free-fall operation is as valid now as it was 30 years ago, when the market was dominated by the tour operators, now substituted by the supposedly sophisticated operations of Booking and Expedia.

The Expedia-Groupon vouchers or Booking’s Flash Deals are not going to save any hotel from the free-fall - on the contrary, they are likely to push them down. In the past, the middleman invested its mark-up in brochures, traditional ads and commissions for retail.

Now, many OTAs use the commissions they get from the hotels to pay for Adwords, SEO and affiliate and loyalty schemes. New names for similar actions.

Great ideas are not that great after all

The middlemen that have been present in this sector throughout the years have always found an innovative excuse to convince the hotel that the next step would be up instead of down. Time has come to prove that the so called technological revolution has only benefited commercially to those more astute middlemen. The hotels, years on, are still as subdued as usual.

Some examples of false revolutions:

• "Selling on the internet", just like that. An supposedly great and liberating technological advance. Many online agencies sold this idea successfully as the next push that no hotel could turn down. 15 years on, the same old dependence pattern has emerged in the new platform, the price is still low and the commission and dependence have been increasing.an
• Opaque prices: The attraction in this case is an invention that avoids the loss of prestige of showing the public a super-discount. Isn’t it the same argument that the tour-operators used when they hid the superdiscounted net price of the hotel in holiday packages with flight?

Every one of these ideas has had some special condition that has made it slightly different and that has helped ease the hotel manager’s conscience when having to lower the price and increase the commission for this new way of distribution. Besides, there is always a powerful argument behind "going with the times".

What happens if I stay behind? What would happen if my competitors do it and I don’t? What happens if it really works? And of course, it does work in many cases… short term.

Now, "going with the times" is vouchers or Facebook.

In some case, OTAs only distribute to "registered users", which would justify being able to get lower prices than those that are public. This is what one OTA tells the hotel: "Give me superdiscounts, because they are confidential."

It’s a double trap:

• OTAs are asking hotels to break pricing policy in their favour, when they don’t want to do the same for its direct sales.
• For users, registering on flash deals is so easy as clicking "Like" on Facebook, so calling it confidential would be a joke.

The good news: not everything is black and white in this situation.

For some, flash sales or vouchers will be successful, but only in moving clients from one hotel to another. Fortunately, a quick check of participating hotels shows there is hardly any in Madrid, Barcelona or Paris, for example - the opposite to the huge offers of holiday hotels. Is this proof that traditionally urban hotels are more advanced than holiday ones?

Another reason for optimism is that 20 years ago a hotel did not have any alternatives to the middleman’s dependence, today they do. There is only one thing to do, take a step forward and allocate the same amount or more of financial resources to direct sales than the amount given to online travel agencies.

Currently, a hotel can do this on its own website, using the same promotional approach as an OTA does:

• You pay an OTA a lot to place Google ads. Do you pay the same or more to advertise your own webpage?
• You pay an OTA to optimize its webpage and make it user friendly and easy to use. Do you invest and worry equally about your website?
• You pay an OTA to redistribute to third parties. Do you do the same on your website?
• You pay an OTA to be on Facebook and offer the best conditions. Do you have a page on Facebook? What do you offer?
• You pay an OTA to continuously target thousands of users with its newsletters. Do you get direct subscribers from your hotel? Do you send them your news and offers every month?

The contradiction

This isn't meant to be a criticism of Booking.com, Expedia or any other OTA, nor even of traditional tour operators. All have carried out a great work promoting our hotels and our destinations but they’ve been successful at making a lot of money off hotels. They have always innovated and adapted to every new idea, trying to reach the different stages of ecommerce that the tourism sector pioneered.

Equally, it’s not a criticism of the hotels that enter into the game, if they do it consciously and are fully aware of the drawbacks. I tend to think that it’s more to do with bad decision-making in moments of desperation.

What is a bit more difficult to understand is the contradictory behaviour of some hotel managers - they complain about these middlemen, but at the same time they keep feeding them WITH BETTER CONDITIONS than they give their official website. With this, they only manage to send this message to customers: go to an OTA.

Therefore, there are three simple rules to follow:

• Innovate in your direct sales.
• Allocate it as much or more financial resources as you do with the most expensive middleman.
• Watch out for those weak spells during the low season. If you give superdiscounts or supercommissions, do it in every channel.

And if all of this turns out to be very expensive for you, then perhaps you should start thinking about a solution based on super-discount and super-commission.

NB: This is a guest article by César López, business development manager at Mirai, a Spain-based hotel technology and consultancy service.