“Minimize costs, maximize revenues” — the quest is ubiquitous across all businesses. With no exceptions for the hotel industry.
NB: This is an article from RateGain
With the costs running high into labor, debt, franchise fees, utilities and real estate taxes, little can hoteliers do little to really ‘minimize’ the cost of operation. But an area does exist where the beast can be trapped – the distribution system.
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One of the main defies of hotels today is to reduce the costs going into distribution channels, thereby increasing RevPar (Revenue per available room) and ADR. But with a steady increase in inflation, the rise in customers’ expectations and harsh competition, balancing costs and ADR becomes difficult.
Distribution cost; not just a one-time cost
First, we need to look at distribution cost from a different perspective; cost of distribution to online channels need not be considered as a one-time cost of publishing your inventory and getting bookings. Rather, the cost of distribution needs to be spread into short term and long term costs. Cost of distribution, may appear like an expensive affair for achieving bookings when compared to direct bookings. However, if we change our perception and start believing it to be an acquisition investment for procuring a customer, whom you may turn into a loyal repeat customer too, then this cost will automatically look apparently low.
A holistic approach to occupancy
Although it sounds intuitive, high occupancy is not always the breadwinner of high profit a.k.a. the bottom line. For instance, a hotel with 90% occupancy and no price reduction may earn more revenue than its competitor, who decided to charge 15-20% less than the former and achieved 100% occupancy. This is specifically a case for transient booking, however, when it comes to corporate/group bookings, business dynamics is absolutely different. In the era of dynamic pricing, forecasting occupancy is not always yielding accurate results. What hoteliers must forecast instead is the demand level and tune their pricing and revenue maximisation strategy to it. Hence, hotels must focus to maximize profitable bookings as well as booking volume.
Prioritize direct bookings but don’t ignore the OTAs
- Despite Online Travel Agents taking more than 20% (range of commission is very varied; for high results channels, rate is even higher than 20%) of the booking cost, they continue to dominate the market share in distribution systems. According to a European hotel distribution study in 2015, three big OTAs have a common market share of 92%. Direct booking systems, as an obvious corollary, remain under-invested.
- Although hoteliers may love the broad reach and brand promotion OTAs provide them, now is a great time for hoteliers to leverage the various benefits technology provides them to promote their brand on their own.
- Direct bookings outperform several other distribution channels such as Global Distribution Systems, Travel Agents, Online Travel Agents and Call Centers in terms of profitability and cost-cutting. According to a Hospitality Upgrade study, direct bookings were reported as up to 18% more profitable than other systems, while factoring in all possible spend.
- Although a vast majority of hotel revenue management staffs may have habituated to relying on OTA bookings to meet occupancy targets, incentivising them to maximize direct bookings and reduce reliance on other distribution systems is an effective way to bring the much needed change. Even smarter technique will be striking an optimal balance between direct and indirect business sources, as it will ultimately result in a hotel enjoying higher profit contribution.
To summarize, it is not just about trying to replace OTAs with the hotel’s own website. In fact, it is about utilizing OTAs for increasing occupancy and as initial guest acquisition cost and there after using these bookings to establish a more one to one and direct connect with your guests for building loyalty and referral business in future.
