Revenue Management and the Growing Influence of Channel Management
By Paul van Meerendonk Director of Advisory Services, IDeaS Revenue Solutions | January 2011
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.