Mr. DiLeva

Reservations / Online Pricing / Booking Engines

Coping with Commoditization and Disintermediation: Riding the Second Wave of the Online Booking Life

By Michael DiLeva, Executive Vice President, The IDT Group

As an industry that combines hands-on services with bricks and mortar "product," hospitality is generally at the trailing edge of the technology adoption curve. Like many industries, hospitality did not anticipate the rapid emergence of the Internet, which created an opportunity for nimble upstarts such as Expedia, Travelocity and Hotels.com to exploit the growth and consumer interest in on-line travel services.

Thanks in large part to first-mover advantage, those intermediaries have not only gained remarkable penetration, but - like many Web players - have changed the operating paradigm by disconnecting the supplier from the customer (disintermediation) and driving down room rates by effectively commoditizing the hotel product.

Until now the answer has been to attempt to beat these new-breed competitors at their own game. One example is the popular "best rate guarantee" that has been implemented by virtually all major brands. While the basis is sound - encourage travelers to book via the chain's direct channel to ensure that they will get the best price - in reality, it merely reinforces the focus on price as the sole determining factor and serves to push us further down this slippery slope toward commoditization.

Doubtful? Well, consider this - despite an all out push by brands against the intermediaries, PhoCusWright reports that hotel-branded Websites' share of online bookings has actually dropped from 56% in 1999 to 52% in 2002. And 2003 provided only a minor gain - to just 53%. The report states, "Growth will not come at the expense of online travel agencies. Consumers simply prefer the property selection and choice online retailers offer."1

In the broadest terms, enterprises compete on one of two dimensions - price or value. You're either Econo Lodge or Ritz-Carlton. And as PhoCusWright notes, online intermediaries have captured the "price" mindshare in consumers' consciousness. And for consumers, perception is reality. Even if hotel Web sites truly offered better rates, they are too late, because the consumer has already decided where to expect to find the lowest price.

If competing on price is not an option, what is left? Value. And while it may be the default position, "best price" claims by intermediaries could be a blessing in disguise. To be successful marketing a product - whether hotel rooms or household goods - you need to give the consumer what they want. That's the obvious part. The trick, of course, is determining what that "want" is. It's the "holy grail" that the renowned Dr. Noriaki Kano of Science University of Tokyo focused his research on - shifting efforts from simply measuring customer satisfaction and loyalty to influencing it.

For online buying, there is some counterintuitive research regarding whether or not price is the panacea. Bryan Eisenberg of Future Now, a Web site consulting company, recently noted that an MIT study of online buying showed that "only 47 percent of consumers bought from the lowest-priced seller. In fact, price was the least important factor."

It's not all that surprising. We've been so deep in the trenches of our battles with the intermediaries --matching lowest price and building our entire value proposition and selection criteria on a difference as low as a single dollar - that we may have missed the bigger strategic opportunity available by shifting our focus to that of value.

Just consider one of the biggest success stories in recent years and perhaps in the history of American enterprise - Starbucks. At $2.39 for a Venti coffee, it's not the low-cost provider. Yet Starbucks outsells the much less expensive $.79 cup of coffee from the local diner in over 7,500 locations across the country (and counting).

Still not convinced? If water, available free from the tap, can sell for $.99 per 12-ounce bottle (more than the price of gasoline), it seems that the ability to create value around a product and charge for that value is virtually limitless.

Here's where we as hoteliers have been remiss. In the quest for efficiencies and standardization, we've done more to commoditize our product than Hotels.com ever did. With the broad exception of the generic ratings criteria (3-star, 4-star, budget, upscale, and so on), our products are remarkably similar - bed, shower and TV. It's no wonder that, if all else is essentially the same, travelers are looking for the best price and that they are showing a propensity to visit the channels that offer them the greatest variety as they look for that lowest rate.

But just as hospitality is on the trailing edge of adopting technology, we're on the trailing edge of adapting to it as well, which gives us the benefit of looking at what cycles have occurred in other industries. A great place to start is with what IT industry analyst firm Gartner calls the "Hype Cycle." (See the illustration below.) This research "characterizes the typical progression of an emerging technology from over enthusiasm through a period of disillusionment to an eventual understanding of the technology's relevance and role in market or domain."2

Applying Gartner's Hype Cycle to the online booking lifecycle, the "technology trigger" occurred around 1996 with the founding of Hotels.com, Travelocity and Expedia and hit the "peak of inflated expectation" around 2001 with the rampant dumping of inventory throughout various channels without regard to optimization strategy or long-term impact on rate, brand or customer loyalty. As this impact sank in and the industry was struck with what industry expert Peter Yesawich of YPB&R labeled the "triple witching hour" of the combined effects of the September 11 attacks, a weak economy and new patterns of consumer behavior, we hit the "trough of disillusion" and began to fight back via the creation of TravelWeb and the introduction of "best rate guarantees."

Looking forward, what occurs as we move onto the "slope of enlightenment"? Many chains are still holding out hope that the Maginot Line that is their loyalty (read: frequency) program will maintain their differentiation and deter switching behavior. Unfortunately, that will most likely be the next barrier to fall as Hotels.com has already announced their intention to build their own loyalty program, creating fully "liquid" points that will dramatically dilute single-brand affiliation.

Since affiliation is not going to hold the line and we're not going to win the battle for "price" mindshare (even if we do win the battle for price), then we need to focus far more of our attention on value. But what defines value? Eisenberg noted that "value is so subjective that you can often be more successful charging higher prices, provided that you pay close attention to all the other factors that influence the buyer's perception of your product's value." With spring water, it's not as much the commodity itself, but the focus on satisfying the consumer's need for reassurance in the purity of the product.

For the tangible things, this move along the "slope of enlightenment" has already started. Look at Starwood. They've been very successful branding two of the three core commodity components of the hotel product - bed and shower - with their "Heavenly" brands. However, just as Starbucks is more an experience than it is just coffee, hotel rooms are more of an experience than a simple collection of bed, shower and TV.

In that MIT study referenced earlier, we noted that price was the least important factor in selecting a product online. The most important factor, however, was "familiarity." How much effort do we place into adapting the little nuances that dramatically impact the hotel experience to the specific requirements of the guest? At present, very little.

Fortunately, technology can help and the costs are not insurmountable. Customer relationship management (CRM) has been difficult to implement in our business due to the lack of contact points to make a meaningful impact.

However, with the increasing adoption of high-speed Internet access and, to a lesser extent, digital interactive television, platforms are moving into place that can allow us to implement operational CRM. Specifically, to be able to use those channels to finally figure out and deliver on those "chestnuts" of value that so many pundits have been predicting for years - the guest's favorite or hometown newspaper and radio station, stored preferences for wake-up calls and room service, automatic access to frequently called phone numbers, and other benefits.

And while commodity services can be replicated (i.e. in a world of copycats, what happens to your differentiation if the hotel down the street introduces their "Blessed" bed?), services that are based upon learnings that you've obtained from guest history and interaction can't be duplicated.

Overall, little is going to be achieved in trying to "boil the ocean" -- by trying to shift consumer behavior away from the intermediaries that they trust and are comfortable with. Rather, to achieve the "plateau of profitability," we need to accept that those channels have value and aren't going away, and instead we need to focus on what makes our hotel a better choice to the consumer that has a list of properties up on their screen.

If we offer value and differentiation, we'll reach true channel optimization, because every channel will just be a communications vehicle for our unique value proposition, informing more customers about why we should be chosen and diluting price as the primary decision factor.

Michael DiLeva is executive vice president of The IDT Group. He has near experience in the hospitality and gaming sectors, and has provided marketing, technology, CRM, networking and consulting services for major hotel companies in the US, France, UK and UAE. He holds a BS in Marketing Management from Rutgers University and a MBA from Saint Joseph's University. He completed an executive leadership program conducted by the University of Virginia's Darden School of Business and serves on the Technology Advisory Board for Penn State's School of Hospitality Management. Mr. DiLeva can be contacted at 215-487-3522 or mdileva@theidtgroup.com Extended Bio...

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