Mr. Kohlmayr

Revenue Management

Revenue Management and the Growing Influence of Channel Management

By Klaus Kohlmayr, Senior Director - IDeaS Consulting, IDeaS Revenue Solutions

There’s no doubt that the speed with which the hotel industry is evolving is accelerating, and more often than not, hoteliers are being forced to constantly evaluate and re-evaluate throughout the year to ensure that revenue is being maximized. Given the growing influence of channel management in recent years, hoteliers across the globe are having to plan very carefully for the future and ensure that the right strategies are in place to work with organizations like Online Travel Agencies (OTAs) – who wield more power than ever before.

In a report by PhoCusWright, it is stated that “The downturn in 2009 clearly favored OTAs. The dramatic fall in demand pushed excess supply into the open arms of OTAs, whose strategic removal of booking fees – initiated by Expedia in March and quickly adopted by all others – prompted price-conscious travelers to not only shop with them, but to book with them as well”. This trend is expected to carry on well into the future, as sales channels grow and continue to reap the benefits of revenue being leaked out of the hotel sector.

In 2003-2005 the industry lost an estimated 1 billion and more in revenue due to pricing pressures and lack of controls of third party channels. In 2010, at least one company estimated the “revenue leak” to be 5.4 billion2 due to ongoing pricing pressures and the growing reliance of hoteliers on OTAs like Expedia, Travelocity and others. Hoteliers are now making moves away from being as heavily reliant on OTAs as they previously have been. Just like in 2004, when InterContinental Hotels Group walked away from Expedia, at least one chain (Choice Hotels) took a similar step in 2010.

While the major international chains are now controlling their channels much better, the independent Hotels are still overly reliant on the third parties to drive demand for them – at a significant cost: 25% in the case of many merchant commissions. The most significant issue lies in the fact that hotels are still shell shocked from the economic decline and are hesitant to raise rates for fear of upsetting the competitive equilibrium in the online market.

OTAs are a valuable part of a Hotels Distribution Toolkit, but they should not make up the majority of sales or distribution. While some in the industry unfortunately only see OTAs as a necessary evil, the industry is by and large moving on from the last economic downturn, and while backwards-looking hotels who work against OTAs instead of with them - will suffer, forward looking hoteliers who engage OTAs in a meaningful and mutually beneficial manner will ultimately profit.

2010 also reaffirmed the fact that social media will be a defining factor for the hotel industry over the coming years. While social media is on everyone’s mind, effectively monetizing it still escapes most hoteliers. The issues lie in the fact that a majority of hoteliers don’t know how to appropriately use social media to their advantage – it’s like the internet back in mid-to-late 90s. Acceptance and industry-standard practice will come over time, but it is important to note that only a small minority of potential guests use any of the new media like twitter, foursquare or yelp! when it comes to their hotel choices.

While social media is commonly addressed through a hotels marketing department –revenue managers need to think about how their targeted promotional initiatives through these new channels can complement their existing revenue optimization strategies. Many see Facebook as “the place to be” in the future, as the ability to create specific applications for booking and engagement allow tangible results to be tracked and traced.

This ‘new paradigm’ of “monitor – communicate – engage” means that hotels need to carefully listen to what is being said about their hotels/brands (and competitors), implement sustainable communication strategies and work to engage their clients across the various social media platforms. Where a one-sided communication would previously have been sufficient, the modern (and future) consumer will demand a relationship based on collaboration – and in many instances insist on shaping the conversation about services, products and pricing.

This collaboration presents hoteliers with a combination of advantages and disadvantages. On one hand, guests now have more information available at their fingertips than ever before, allowing price-conscious travelers to use other channels (such as OTAs) to compare pricing and choose rooms based on the best price being offered. However, the rise in hoteliers being able to engage with their customers on a one-on-one level through direct promotion and now social media also helps to build customer loyalty. Utilizing a collaborative approach to engaging potential guests (via social media and some forms of direct communication)can help hoteliers build a strong brand personality and loyalty allows hoteliers to be more inelastic with their pricing for some markets as guests will choose loyalty over price.

There is significant talk about 2010 being ‘the year of the missed opportunity’. Essentially, this boils down to the fact that many hotels have not put appropriate long term strategies in place to effectively and proactively raise rates as soon as demand came back, preferring instead to engage in a price-war that was detrimental to the entire sector.

Hoteliers around the world should recognize that aggressive discounting, or participating in / encouraging price war tactics to help stimulate demand can have serious long term consequences. Consumer behavior research has shown that customers establish a reference price for a good or service based on previous experience and use this reference price to evaluate whether a future price they’re offered is reasonable or fair. The more and longer hotel room rates are discounted, the more likely that the discounted rate will become the reference price, and the more difficult it will be for hotels to recover their value in the minds of the consumer. Maintaining rates reduces the risk that the reference price will be replaced.

Consequences from discounted room rates to generate demand through the most recent economic downturn are already being felt by many hoteliers. For example, many low negotiated group rates that continue post-recession will mean that rates will remain depressed for some time to come. Corporate customers will be unwilling to yield the power that they had in negotiations when the industry was struggling to fill rooms. Hoteliers are stating now that they regret pricing decisions they made earlier this year to retain clients, wishing instead that they would have stood firm on some of the demands from their clients.

The industry will struggle to return to pre-recession levels in the corporate market as quick as they have in the personal travel market. Returning to hotel rates of the mid-2000’s will require hoteliers to gradually force corporate bookings to relinquish some of their perks, while promoting their unique points of difference beyond pricing.

There is no doubt that 2010 has been a watershed year for the hotel sector across the world. As the battle between OTAs and hoteliers reached a peak, it became apparent that the future lies in a more collaborative effort, focused on fairer merchant commissions and driving demand back into the hotels sector, while limiting the revenue being ‘leaked’ out. Social media is quickly becoming an integral part of the marketing process, which impacts on revenue management (and will continue to influence it in more pervasive ways). Additionally, the industry is still struggling to return to pre-recession rates, particularly in the corporate bookings sector. It remains to be seen what 2011 will bring, but with the right level of attention in the right areas, the hotel industry will continue to mature and opportunities to connect with customers (both corporate and personal) will be maximized.

Klaus Kohlmayr currently holds the position of Senior Director - IDeaS Consulting for IDeaS Revenue Solutions, the global leader in Hospitality Revenue Optimization. (www.ideas.com) He is responsible for leading and growing the revenue management consulting and advisory division assisting clients in the Hospitality and Travel sector worldwide to develop, implement and enhance best practice revenue optimization, pricing and forecasting strategies and tactics. Mr. Kohlmayr can be contacted at 612-840-3301 or Klaus.Kohlmayr@ideas.com Extended Bio...

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