Mr. Koestler

Revenue Management

The Role of OTAs in Revenue Management: The Only Constant is Change

By Christian Koestler, President & CEO, Lixto, Inc.

The practice and profession of revenue management in the hotel industry is a relatively new phenomenon. While the first hotels probably began catering to the pleasure traveler during the Roman Empire – and records show the first inn in the United States opened the year Jamestown was founded – it was not until the 1980s that hotels, hotel schools and academic institutions started to seriously examine and quantify the field of yield and revenue management.

Not until even more recently have hotels begun to implement formal revenue management policies, programs and systems. Fueled by technology, the field is now a true science. Increasingly powerful computer systems can handle many tasks essential for revenue management. The growth and proliferation of the Internet has changed core communications for travelers and hotels alike.

Amid these developments, the online travel agency (OTA) has arisen, changing the rules of revenue management – and the professionals who practice it – on an almost-continuous basis.

Leveling the Playing Field

OTAs have, at their base, added another layer of complexity into the mix of sales channels in the hotel industry. In a positive sense, hotels of all sizes can leverage OTAs to increase and enhance marketing efforts and sales revenues. For hotels without a strong brand presence and technology tools, OTAs – even with their sometimes-onerous commission structure – can level the playing field, and often make the difference between success and failure, surviving and thriving.

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At the same time, OTAs constitute only one distribution channel. Hotels realize that they cannot depend solely, or even primarily, on OTAs. They need to find ways to be their own primary booking channels. Today, in the United States, about 45 percent of booking revenues derive from hotels’ own websites. As advanced price intelligence systems help hotels assure their own rate parity strategy, the trend – and that percent – will continue to edge upward.

This does not mean that OTAs no longer occupy a critical spot in the revenue management mix. It does mean that their role is changing in some key ways, and that the future will likely bring changes the industry cannot yet imagine.

Dynamic Pricing

Dynamic pricing, which is based on response to market fluctuations or data gathered from hoteliers’ guest databases, allows OTAs to adjust rates to correspond to a customer’s willingness to pay. OTAs are already starting to work more closely with hotel chains to provide them with individual pricing support. At the same time, however, many hotels would prefer to move away from OTAs, taking initiative to drive more traffic to their own websites, avoid OTA fees, and add more to their own margins.

The reality is that the market provides room for both OTAs and the individual hotel/hotel chain’s marketing. Understanding that OTAs will provide information based on their own needs, larger chains can use advanced revenue management and price intelligence systems to derive their own demographics. Smaller hotels may need to rely more on OTAs for this service for now. In the near future, more cost-effective revenue management and price intelligence systems for individual properties and smaller chains will be coming available, further equalizing the relationships with OTAs.

Marketing and Communications

The demographics data that OTAs now can provide from consumer bookings can change the way hotels market and communicate with their guests and prospects. For the revenue manager, this creates both an opportunity and a challenge to create a new paradigm of communications.

Managers now can create individualized promotions, packages or specials for individual travelers, based on their needs, interests, time and frequency of stays. Creating such individualized communications is an art in and of itself, requiring more time, talent and/or resources, and often, automated programs. In some ways, the OTA creates more costs for a hotel between commission and the requirements resulting from individualized information. Yet in the big picture, the OTAs still provide what most revenue managers need to stay competitive.

Rate Parity

One of the most important – and controversial – areas in which OTAs are affecting revenue management is in rate parity. For an OTA to remain competitive, it must retain the ability to negotiate best rates with providers, and ensure “best price” guarantees across the web. Since OTAs are dependent on their providers for the most competitive prices, lack of solid information is a real threat to the OTA’s long-term business.

As a result, OTAs themselves rely on advanced revenue management and price intelligence systems to monitor thousands of properties, rates, reviews and rankings online. OTAs can see exactly what properties are offering what rates. By systematically catching each rate parity violation, an OTA can actually help hoteliers manage their rates more conscientiously – and lessen or eliminate risk of losing preferred status, which eliminates the risk of losing substantial revenue. For one European-based OTA, for example, time savings and productivity gains have resulted in savings of 12-15 percent in total operating costs each year.

Mobility

There’s no question that mobile devices, apps and usage are here to stay when it comes to booking travel. They are changing the field of revenue management dramatically for OTAs and hotels. Industry statistics portray a clear picture.

Late last year, Google released data showing that year-on-year, mobile searches for hotels had risen by 7,000 percent(1). Specifically, searches for travel-related terms have risen by a factor of 12. Hotel-specific terms are up 30 times(2). Another industry leader, Priceline, sees similar trends in mobile device use. The company has reported that more than 80 percent of its mobile app customers booked hotel rooms within one day of arrival, compared with 45 percent name-your-own-price customers online. Almost 60 percent of customers on Priceline's mobile app were within 20 miles of a hotel at the time of booking; 35 percent were within one mile(3).

What do these figures mean for the field of revenue management? They show that consumers using mobile apps are booking hotels differently than those doing so from a desktop. Prospective guests often are searching OTAs and booking places to stay within a day of arrival at their destinations, or even once they’ve reached their destination area. Revenue managers will increasingly find that individualized communications and dynamic pricing integrate closely with these trends. They will need to find unique, value-packed ways to get the attention of prospective guests through their own websites as well as compete strongly on OTA sites.

Individual hotels are seeing similar trends. Choice Hotels International Inc., which operates through franchisees more than 10 brands and 6,000 hotels across the globe, says its mobile sales reach well into the seven figures each month, and account for more than 1 percent of all online sales. Mobile revenue is up 250 percent year over year, reservations are up 205 percent, mobile page views 130 percent, and mobile conversion 106 percent. Mobile traffic to the site has grown an average of 190 percent each month since the company introduced its mobile site in 2008(4).

Besides a booming mobile business, the mobility trend means that hotels and chains that want to compete in the mobile world will need to invest in custom mobile apps. Asking a consumer to view a website designed for a PC on a mobile device will not work. To go mobile with travel booking, consumers need very easy-to-use, fast apps designed specifically for their devices. Fortunately, development of these apps is coming down in price with good options available even for individual properties. With the ability to work with their own content management systems, revenue managers can create, edit and publish their own content, posting special offers and news updates as often as they wish.

The Future of OTAs in Revenue Management

In a field fraught with change since its inception, trying to predict the future is difficult at best. But there are some things we do know:

  • Proliferation of sales channels: Additional sales channels will emerge through new OTAs as well as social media outlets, mobile apps and other methods. Revenue management professionals, and systems, will need to be flexible and scalable enough to handle the increasing numbers and types of sales channels, and learn to use OTAs as one element in their revenue mix – vs. rely solely on them.

  • The mobile world: The mobile world is fast emerging as a major channel of choice for consumers to make reservations and conduct travel business. Strong (and ultimately, the surviving) OTAs will be investing heavily into dedicated apps for mobile transactions while still maintaining capability to handle traditional online bookings. Revenue management systems will need to be able to handle traditional online information as well as pull data from mobile sources.

  • Dynamic pricing: The work that OTAs are doing now in the area of dynamic pricing will ripple outward to smaller chains and individual properties. New price intelligence systems will be coming on the market for the small and independent hotels and chains, making it possible for these properties to compete even more strongly with larger counterparts, and have the means to create even more tailored guest programs.

  • Multi-channel support: Hotels and OTAs alike will need to support both mobile and traditional web channels. Guests today are becoming more accustomed to practicing the new “shopping art” of multi-channel booking. They may start the booking process at home on their personal computer, discuss options the next day with friends at work, and then finally book the hotel on a mobile device during the ride home. This requires that hotel chains and OTAs need to support each channel to ensure the exact same rates and booking processes across each – and ensure guest ability to access saved, not-yet-completed itinerary and price information on is/her device of choice.

Fulfilling the job of revenue manager has never been easy. As technology advances, more OTAs come on the market, and the sales distribution channel picture becomes increasingly more complex, this fact will not change. Revenue management will need to be at once more rigorous and more flexible, working in parallel with the changing nature of OTAs.

References:

(1) http://www.htrends.com/article50791.html
(2) http://adage.com/article/digital/mobile-marketing-travel-related-searches-dominate/147362/
(3) http://adage.com/article/digital/mobile-marketing-travel-related-searches-dominate/147362/
(4) http://www.internetretailer.com/2010/12/01/mobile-sales-grow-250-choice-hotelshttp://www.internetretailer.com/2010/12/01/mobile-sales-grow-250-choice-hotels

Christian Koestler is president and CEO of Lixto, Inc., a global leader in web data extraction and analysis for the hotel, retail and consumer products industries. He also holds the position of managing director for sales and marketing at Lixto Software GmbH, the company’s headquarters, in Vienna. Mr. Koestler brings a broad background in software technology to his work in the hotel industry. He previously served as vice president of manufacturing for Lixto Software GmbH in Vienna. He has held sales and sales management positions in Europe with Agile Software, Eigner Inc., and Siemens AG Austria. Mr. Koestler can be contacted at 408-952-9200 or christian.koestler@lixto.com Extended Bio...

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Feature Focus
New Developments and Best Practices on Maximizing Revenue Management
Revenue Management is the application of precision analytics that predict consumer behavior and optimize product availability and price to maximize revenue growth. The primary aim of Hotel Revenue Management is selling the right room to the right customer at the right time for the right price. The essence of this application is in understanding customers' perception of product value and accurately aligning product prices, placement and availability with each customer segment. In the hotel industry, implementing an effective revenue management strategy is a vital component of its operations. In fact, in a recent survey of nearly 500 revenue management professionals in the hotel industry, they predicted that revenue management strategies will become even more targeted and will be supported by increasingly sophisticated technology, as they are applied to other areas within a hotel. In particular, revenue management techniques are likely to be integrated into other hotel income streams, including spas, restaurants, conference/groups and golf courses. As a consequence, the revenue management function will become more crucial to hotel operations, and will likely become a separate department that is under the general manager’s supervision. The October issue of the Hotel Business Review will address these significant developments and document how some leading hotels are executing their revenue management strategies.