How Hotels Can Beat the OTAs

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There is a way to sell unsold rooms without disrupting the demand and pricing of our primary product. It involves looking at other industries to see how they can deal with the product that they cannot sell.

At the basic level, hotel inventories can be divided into two categories:

(i) The salable inventories, and

(ii) The non-salable residual inventories - the leftovers - our daily waste. In most industries, to generate incremental revenues, waste from one product is reused to produce a different or modified product.

This is not new to hotel business either, ex: in F&B the extra fat from a cut of steak is added to the ground beef and not thrown away. As a matter of fact, some of these unsold rooms are used by hotels to create packages, still a large portion of these unsold rooms are left vacant and written-off as "waste".

Can this "waste" be sold at a lower price point or even at "scrap" value (in the least)?

In retail business it's a common practice, even expensive brands have clearance outlets. Many clothing suppliers differentiate the products sold at the clearance outlets by calling them "seconds", implying there are some minor flaws with the product hence the lower price.

While hotels can create their version of a "seconds" product, the challenge, the major stumbling block, has been our inability to find appropriate distribution channels to sell them without disturbing the price equilibrium of our primary product.  We need a distribution platform to sell these "seconds" that doesn't unravel the price we are getting for our sold rooms.

What ingredients can be combined to create a "seconds" product?

It could be rooms with limited level of services, laced with various flavors of rate hurdles specific to each property - a "stripped down" price, blended with a mixture of customized rate barriers - advance booking, advance payment, multi-night stay, day of week, multi-rooms, non-refundable, non-changeable, non-cancellable, among others.

Will the resulting "seconds" product be sufficiently different so it may be advertised and openly sold through online channels of OTA and direct sales? I do not believe so.

At best we may marginally reduce the segment over lapping if it's carefully planned and fenced with appropriate rate hurdles. (Can the new emerging models (flash sales, private sales, last minute specials, mobile deals and similar channels) be the right conduit to sell these "seconds"? While the verdict is still not in, some "experts" are labeling them as ground breaking models. I'd venture to predict that they will not work and would actually hurt the hotel business in the long run. In Yogi Berra's words "This is like déjà vu, all over again!" Reminds me of the late ‘90s and early '00s when the OTA model was considered a secondary channel for selling excess inventories resulting in a pricing chaos.)

In this soft economy consumers are already leaving the hotel booking decision to couple of days out instead of the typical 5 - 7 days. The obvious reason - consumers know they will find a room at a good price even if they book a day or two in advance.

By introducing last minute "desperate" sell-offs conveniently flashed online and on mobile, we are in essence telling the consumer not to book at all until the day of arrival since better deals are available on the last day. This is an extremely short sighted, irresponsible solution to generate a few extra bucks.

We are contributing toward changing the consumer behavior that works against us. A change in consumer behavior to book on the arrival day will throw our demand forecasting in complete disarray. It will make measuring of future demand almost impossible because there will be none (at least not until the economy improves dramatically and demand returns).

Hotel occupancy could ultimately become a function of who has the cheapest room on the last day.

Opaque models are the solution. These models have the potential to fit our need and should be examined in depth. 

The obvious advantage - Price is not publicized and the lower rate offered remains confidential between the hotel and the buyer.

I think if rates on these models are properly fenced they should not disturb the price equilibrium of our primary product.

Opaque models may be grouped into two categories.

(i) The ‘Price Driven' models

a. Priceline - , where both the product and its price is opaque.

b. Hotwire -, where the product is opaque and not the price.

(ii) The ‘Value Driven' models

a. Travelsurf's [email protected] -, where the price of the room is opaque and not the product.

b. Packages - where the price of the room is opaque and not the product.

Both these categories can help generate incremental revenues through sale of unsold inventories. The ‘Value Driven' models have a better potential of improving yield.

In the ‘Price Driven' opaque models price is the only differentiating factor. On Priceline, the consumer makes one flat offer solely based on a star category located within a certain area.

Or, in case of Hotwire, a ‘mystery' star rated hotel is available for a certain low price. This approach to selling tends to commoditize the hotel room.

The models treat all hotels within a classification as generic commodities that have no unique differentiating features. Therefore it falsely assumes that the best "deal" for the consumer is the one with the lowest price. In reality no two hotels are the same.

Hotels compete on many fronts, service standards, facilities & amenities offered, cleanliness, brand, location, security, etc. price is used as an incentive to drive traffic and should not be the only distinguishing factor among hotels.

A consumer may not necessarily place much emphasis on a particular type of hotel, or even its star rating for that matter, but rather on each hotel's real "value" to the consumer. Plus, the "value" for the same hotel will vary among different consumers or, even for the same consumer at different times.

For example, a consumer may be willing to pay a higher price for a four star hotel located within a block from where he needs to be, rather than a five star hotel located a number of miles away. I call this the consumer's "PainConsideration Factor" (PCF), the lower the PCF the higher the perceived value for the consumer.

‘Price Driven' models ignore this reality. In a 'Value Driven' model the consumer can examine and understand the value proposition of each hotel product, create a short list of hotels, and place dissimilar (different) offers for each property on the list all at the same time ([email protected] model) or, in the case of Packages the consumer reviews the package and understands it's benefits before purchasing it.

‘Value Driven' models typically deliver higher yields, as the buyer is not making a blind offer but understands the value and the benefits of the product he is planning to purchase.

I believe, by introducing a ‘seconds' product in the marketplace hotels would not only improve their occupancies and RevPAR but would even help boost the overall demand for hotel rooms in their market segment.

This has been a guest post by Jim Burney. If you wish more information on this solution, please go to Travel Surf or write to Jim at [email protected]

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About this Entry

This page contains a single entry by Jim Burney published on November 1, 2011 6:27 PM.

The Failure of Another Franchisor was the previous entry in this blog.

Private Equity & Restaurants - The Good, Bad and the Ugly is the next entry in this blog.

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