Life is challenging for the hotel industry

When asked what industries to be disrupted next, the hotel industry would be in the top list among the banking industry and the alcohol distribution industry. In my previous job, I had to interact with my hotel colleagues very often. I was always intrigued by the industry structure and the mindset of people. Hotels had operated the same way for many years without trying to change. That’s why when technology companies (known as Online Travel Agents or OTAs) entered the industry; it’s too late for them. Then the industry welcomed another technology company called Airbnb which was the second wave of disruption. It’s interesting to see who would bring the third wave of disruption to this industry.

The Interesting Hotel Industry Structure

Before the virus had spread over the world last year, I had an opportunity to work with a hotel team formulate a marketing strategy. I spent about a week researching to understand their terminologies, so I didn’t look silly during the process. The more I learn about the hotel industry, the more I feel there are many opportunities to disrupt how marketing is done.

The major challenge for all hoteliers is OTAs like Expedia, Booking.com, Agoda. They are like a large shopping center that sells a similar product. People, of course, like to go there because it’s a one-stop-shop. You can compare prices, and there are so many options. Furthermore, those OTAs have invested excessively in technology. They offer an outstanding personalised experience. Hotels have a love-hate relationship with OTAs. Hotels have to rely on them, pay a high commission, and don’t get full control of their own booking data. Worst of all, OTAs drive the room rates down due mainly to a competitive force.

It’s common knowledge and practice that all hotels want direct bookings. OTAs’ influence is great to the level that hotels can’t even set different prices on their websites, so they have to stick to this illusive ‘rate parity’. They are afraid to get punished by those OTAs. Another funny thing about OTAs’ influence is that all hotels have to have a big or small revenue management function. This team’s job is to do research about competitors’ rates and customer demand. They then adjust prices up and down depending on the research information. Some hotels put the revenue management function ahead of other functions to drive bookings. And, I don’t really understand this logic. Price is important, but you also need to give customers good reasons to consider your price and see that your price offers good value. By good value, I don’t mean cheap rates.

The marketing function in this industry is quite secondary. I felt amused when I learnt about this fact. It wouldn’t be easy when OTAs have trained customers to look for cheap or discounted rates. And it wouldn’t be easy when the hotels respond to this OTA challenge by focusing on the revenue management side.

Revenue management and marketing in hotels

When you look deeper into the hotel industry structure, you will see the cross over between the revenue management and the marketing function.

If you ask the hotel general managers, they wouldn’t probably be able to describe the difference between the two functions clearly. People tend to forget that the revenue management function focuses solely on prices and doesn’t generate demands. Generating demand is a marketing job.

If we use the basic 4Ps in marketing as a context behind this discussion, revenue management plays on 1 P, which is pricing. Any hotels that focus on this function (say 70%+) cannot avoid competing in a discount game. The Online Travel Agents (OTAs) role makes it even tricky for hotels. This is because OTAs is like a big shopping centre with all shops selling the same thing (in the consumer’s mind). When there are too many choices, and it’s not clear on product propositions, prices drop.

What can the marketing role do in this environment? A lot, but it takes times. There are the other 3 Ps that marketing can focus on. Most importantly, hotels’ marketing function should provide the answer to this question — Why would customers/guests choose to stay at your hotel (not the hotel next door)? The right answer we look for is ‘value’. This is because the value is a sum of what the hotel could offer to guess (prices, experience, service, etc.)

My point is it requires a 50:50 balance and partnership between these two functions for a long term success for hotels. Focusing too much on revenue management for an extended period of time put hotels at risk of relying too much on OTAs and the discount game. Focusing too much on marketing put hotels at risk of missing a near-term revenue.

A quick formula of when to use OTAs

A battle between direct bookings and OTAs will continue even after the virus situation calms down. I suspect that OTAs will put even more pressure on room rates to get quick business to sustain themselves. It sounds like a bad deal (which it is), but there is a quick formula for hotels to consider when using OTAs.

We need to be on the same page first because driving direct bookings is not free, far from it. Hotels have to pay for marketing resources as well as different types of ads, content creation, and display channels. This ‘cost of sales’ is a key factor for hotels to decide which option works best for them. One of the major benefits of direct bookings is that it allows hotels to capture guest details for longer-term marketing or loyalty investment.

• If the cost of sales is less than OTAs commission (< 20% on average) — no brainer, spend your marketing money to drive direct bookings.
• If the cost of sales equals OTAs commission (about 20%) — still invest in driving direct bookings. You will get the guest’s contact details and consent for your future marketing.
• If the cost of sales is greater than OTAs commission (> 20% on average) — shifting your investment to OTAs is not a bad idea. What kinds of situations under this condition?
• Your hotel is in a highly saturated market. Customers just search to get the best deal. Investing in display ads might cost you up to 50%-60% range.
• Your hotel is located in a low traffic market. It is likely that you have to spend a lot of money just to get the customer’s attention that you exist.
• Your hotel has to compete in the prime advertising space. If your hotel is located among big names with deep marketing pocket, OTAs could be your best friend.

There is no easy formula to work with OTAs. They have done a great job in many areas. They also invest heavily in technologies that many hotels cannot match. But, they suffer from the business environment change as well. Hotels just need to be smart to learn and try new things. I do hope that when the third wave of disruption comes, it will come from the industry, not from outsiders like the first two waves.