Distribution Channel Management: Walking The Tightrope

To increase reach and ultimately revenues, companies have long sought to build new relationships with distribution channel partners.  In the hotel industry for example, there is a variety of distribution channels with whom hotels can partner to accomplish this goal, and new partners arrive on the scene seemingly every day (including the recent news that Amazon has now officially launched its own service and Tripadvisor may now want in the game).

Among the most utilized of these partnerships are online travel agencies (hereafter referred to as OTAs).  To oversimplify, we’ll identify these as the Expedias and Booking.coms of the world, any website where a user can search hotel options in a destination and return a myriad of options for places to stay.  As hoteliers will attest, it takes a considerable effort to balance these partnerships – receiving the greatest benefit, yet not becoming overly dependent on the distribution channel.

What can happen when things get out of hand?

Love At First Sight

As a partner to hotels, OTAs present several great opportunities for revenue generation:

They have much larger advertising budgets and can market a hotel to a larger number of people than the hotels can themselves (both major brands and independent hotels and resorts)

They have the means to hire the best talent – smart folks in the realm of e-marketing, statistics, and technology development to ensure they’re staying ahead of the competition when it comes to marketing a hotelier’s product

They have fostered relationships with partners like Google for optimal paid and organic search placement

The way the partnership between a hotel and an OTA works is this: The hotel signs an agreement with the OTA stating that it will provide a certain number of rooms for the OTA to sell, and in return, the OTA will receive a commission on each room sold.  To level the playing field in the marketplace, there are rules set forth to which each party agrees, and certain accommodations are made to the OTA.  For example, the hotel and OTA agree to sell the same room for the same price across their respective channels, and the OTA is given permission to use the hotel’s assets such as brand name and images in order to help sell the rooms.

As the marketplace has continued to grow, becoming more crowded with supply, OTAs have demonstrated their potency and played an increasingly important role in hoteliers’ revenue generation strategies.  Indeed, during the recent economic recession, hotel marketing budgets were reduced to save on operating expenses, and to survive, hotels had to find other means of generating the revenue.  Many accomplished this by increasing their use of other distribution channels like OTAs.  And although revenues increased, so too did the costs to achieve those revenues.

What Lies Beneath

In the years since, as hotels have used these channels to achieve revenue goals, future year budgets are being written to include year over year increases in revenue.  When a hotel has increased revenue goals and a relatively stable marketing budget, there is little choice but to use the same distribution channels again to hit its numbers.  But if the hotel is achieving its revenue goals with the help of the OTAs, why is there cause for concern?

As illustrated below, if a property sells a room on its website for $200 a night, it has generated $200 in revenue for that available room (this “revenue per available room” is called RevPar and is a primary benchmark by which hotels measure success).  If the hotel sells that same $200 room via an OTA, the hotel receives only a portion of that $200 because of the commission it must pay to the OTA (direct buying costs in the illustration below).  But there’s another cost to the hotel that is not as visible on the property’s P&L – the shopping cost to acquire that booking.  Remember, the hotel wants the consumer to book with it rather than other hotels in its market, and it works to acquire that reservation utilizing its own marketing budget using tactics such as pay-per-click, targeting and retargeting advertising, etc.  But the hotel is competing with its OTA partners for that booking as well.

Because the OTA is allowed to use the property’s brand name and images to generate bookings for their hotel partners, it can – and does – bid on the hotel’s brand terms in PPC and utilizes the hotel’s brand assets in its own online marketing tactics.  Therefore, the hotel’s marketing budget is having to work that much harder to drive the revenue to its direct channels, making it much less efficient.  If one takes these added shopping costs into account, the property is getting far less than $200 for that room.  Multiply that one room on that one night by 80,000 room nights per year, and the hotel starts to have a problem.

According to Cindy Estis Green, industry expert and CEO of Kalibri Labs, a data modeling and consulting firm specializing in evaluation of hospitality revenue performance asserts, hotels would be better served to measure net RevPar.  Net RevPar is P&L RevPar after the cost to acquire the customer has been removed, painting a more accurate picture of the hotel’s actual RevPar achieved, as illustrated below.


Hoteliers know they need to manage OTAs more effectively.  They realize that, despite short-term revenue increases using OTAs, their overall profitability has steadily decreased over the past several years.  Indeed, according to recent study Estis Green conducted for the Hospitality Asset Managers Association (HAMA), in the post-recession era since 2009, revenues have increased for hoteliers; however, the total cost paid in commissions has increased at a rate twice that of revenues.  Despite the clear evidence of a problem, knowing change needs to happen and making it happen are two very different things.


Getting A Grip

For all the benefits they provide hotels in short term revenue gains, OTAs come with costs.  The proliferation of their use among the hotel industry has caused what could be argued as a commoditization of the hotel product, with properties relegated to a thumbnail image and a price among a long, scrolling list of other hotels in the consumer’s mind.  However, in the middle of this sea of commodity lies opportunity for hoteliers to take back their brands , and with it, increased profitability.  Some small changes can have an immediate impact; other changes will require expense and patience.

Formal hotel distribution management channel training is needed in the industry , and often, those people making decisions do not have such training.  To date, Cornell University is one of the only institutions of higher education to offer a hospitality revenue management curriculum.  Industry organizations like the American Lodging & Hotel Association and the Hospitality Sales and Marketing Association International offer revenue management training and certification programs.  While some hoteliers take advantage of these resources, many revenue management professionals are left to learn from their predecessors, and this sometimes means learning their bad habits.

Onsite marketing managers who have backgrounds in lead generation, campaign development and execution, database management, email marketing, social media, direct mail, and other areas of the marketing discipline may also prove handy in assisting the revenue manager with driving revenue to the hotel’s direct channels.  However, many hotels don’t have this resource.  If fortunate, the hotel has an agency or two handling public relations, creative and digital, and often the direction the agencies receive is from a general manager or sales team leader.

However, these individuals a) may not have the marketing background necessary for determining how to best utilize these resources and b) already have full time jobs running the hotel and driving group business, respectively.  If hotels are truly fortunate, they do have an onsite marketing manager to assist the revenue manager.  Traditionally though, these two positions have operated in silos, each with his or her own goals and benchmarks for success.  In order to be truly impactful, there needs to be a partnership between the two functions with common goals, and clear and cohesive communication.

Finally, the utilization of OTAs as a primary source of revenue has been ingrained in the infrastructure and culture of hotels large and small, both big brands and independent hotels, for decades.  To effect lasting change – to decrease reliance on the OTAs – will likely come with a hefty price tag for many hoteliers.  Not only is the hotel owner looking at the cost of adding new resources needed to replace the decreased revenue from the OTA, but also there is potential for year-over-year revenue losses caused by the learning curve that is part of investing in new resources.  New team members need time to learn how to best work together, develop new strategies, test new ideas, determine the best strategies for allocating budgets, and best utilize new technologies.  Efficiencies are gained over time, but hoteliers will need strong stomachs to reap longer term rewards and win back the delicate balance of power in the distribution channel management game.