The HeBS Perspective: Members-Only, Flash Sales and Group Buying Sites

Are These New Retail Concepts a Good Idea for Hotel Distribution?

. December 16, 2010

By Sara O'Brien

Emerging as a result of the recession, members-only, flash sale and group buying sites have gained traction and paramount growth over the past three years. Although originally associated with limited, discounted, higher-end products, these new retail concepts are now encroaching on all consumer product categories, including travel and hospitality.

The business model for these types of sites are based on steep discounts due to group buying (discounts can only be redeemed if a certain number of users opt into them) or flash sales (products are deeply discounted because the merchandise needs to be sold quickly). Examples include Hautelook, idelli, Gilt Groupe, Rue La La, Groupon, LivingSocial.com, and the newly launched travel-oriented site, SniqueAway. Four of the leading members-only flash sales sites are predicted to generate $900MM in revenues in 2010 and double the number of visitors to the category over the previous years (eMarketer.com 2010). Groupon, a group buying site offering a daily deal on the best stuff to do in local markets, has a subscriber list of over 35 MM. In a short amount of time, these sites have experienced a significant increase in sales and users. For example, ideeli's 2010 site visits have grown more than 150% over last year, and Gilt expects to generate between $400MM and $500 MM in 2010 (eMarketer.com 2010).

The newly launched site, SniqueAway, part of Expedia, Inc., provides exclusive rates on top, luxury hotels with the highest ratings in TripAdvisor. The development and inception of this site has invoked the question among hoteliers: Should hotels participate in these members-only flash sale or group buying sites?

Here is the HeBS Perspective on the subject:

In HeBS' view, while these 'new retail concepts' may be a good fit for certain product niches like fashion retail and local services such as yoga classes and day spas, they are not a good idea for hotel distribution.

Here is why:
In many cases, hotels are required to sell rooms on members-only flash sale and group buying sites at more than a 70% discount! These sites charge fees from 35 - 50% of whatever the customer pays. For example, if you are a hotel and negotiate a promotion with Groupon at 50% of your best available rate (BAR) of $200, the math works in this fashion:

50% of this rate is $100
Groupon gets 50%
The hotel receives $50 net

This can be likened to selling your rate on Expedia at a 75% discount! With the economy improving and travel demand rising, these steep discounts simply do not make economic sense.

Not only would the hotelier be giving away rooms at an exorbitant discount, these sites lessen the value of the relationship between the brand and the consumer. People who book on these sites typically won't become hotel loyalists. The next time they want to book a room, they will go back to the members-only site to find a deal for that period of time, whether or not it's your hotel.

In addition, many of these sites do not tell the retailer exactly when the blast will go out, leaving the hotel in a precarious situation of unpreparedness, which is never advisable. This may overwhelm the front desk and reservation office, diverting attention away from every day customer service.

Lastly, the rush of business on a hotel that has a fixed number of rooms could result in angry customers looking for that weekend getaway. Rooms are not like t-shirts or other consumables that can be shipped and back ordered.

Below are two examples of a hotel selling room nights at steep discounted rates on a group buying site:

Example 1:

Here's the math for the rate on this New York hotel:

Regular rate: $310
Groupon rate: $179
Groupon gets 50% of this
The hotel gets: $89.50, which is 70% off the regular rate!

Example 2:

Here is the math for the rate on this Charleston, SC hotel:

Regular rate: $373.50
SniqueAway rate: $189
SniqueAway gets 35% of this
The hotel gets: $122.85, which is 67% off the regular rate!

HeBS Recommends:

HeBS does not recommend that hoteliers invest in members-only flash sale or group buying sites; instead, hoteliers should focus on their direct online channel. By encouraging interaction on the hotel website and on social media channels, joining in on the conversation, and making changes to the business based on feedback, hoteliers show both current and potential guests that they are listening to them. This is invaluable for building brand loyalty and encouraging positive reviews.

If a hotel needs additional distribution, they should work in a rate parity fashion with the online travel agencies (OTAs), where the merchant discounts are up to 25%, not 70% as is the case with group-buying sites. Another option is to launch a competitive deal on the TravelZoo Top 20 newsletter, or Kayak.com's weekly deals newsletter.

If a hotel needs more help, another option would be to work with opaque OTAs such as Priceline and Hotwire. In these situations, the hotel information remains hidden until after the purchase has been completed; this allows the hotel to provide a deeper discount outside of parity without lessening the value of the regular price.

It is HeBS' perspective that members-only flash sale and group buying sites should be considered by hoteliers only in dire circumstances and as a last resort.

About the Author and HeBS:

Sara O'Brien is Senior Account Executive at Hospitality eBusiness Strategies (HeBS). HeBS is an award-winning, full-service Internet marketing and Direct Online Channel Strategy firm, strictly dedicated to the hospitality and travel verticals. Having pioneered many of the "best practices" in hotel Internet marketing and direct online distribution, HeBS specializes in helping hoteliers profit from the Direct Online Channel and transform their websites into the hotel's chief and most-effective distribution channel, establish interactive relationships with their customers, and significantly increase direct online bookings and ROIs. Visit us online at www.hospitalityebusiness.com

A diverse client portfolio of over 500 top tier major hotel brands, luxury and boutique hotel brands, resorts and casinos, hotel management companies, franchisees, independents, and CVBs has sought and successfully taken advantage of HeBS' hospitality Internet marketing expertise. Contact HeBS consultants at (212)752-8186 or [email protected].

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