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Industry Insight: How hotels can fight back in the war with OTAs

Zoe 7 February 2014

Tim Cook

Tim Cook, partner at OC&C Strategy Consultants shares his advice

My dad updated his Facebook page the other night to let me know his latest holiday plans. He spends a long time plotting his trips, and has just booked a last minute holiday in the Med. Like many of us, he has developed a holiday planning addiction, researching and booking his trips late and online.

This shouldn’t surprise me. Over 50% of total travel bookings in the UK are now made online, placing us significantly ahead of other EU countries, and it looks as though this trend is set to continue. In addition, more of us are booking later, reassured by availability and discounted offers for those willing to hold out. In 2011, 20% of us were booking late in the hope of a bargain, but now more than a third of us choose to do so.

This shift to online booking and people’s increasing willingness to leave it as late as possible, has driven growth in the ‘intermediary channel’ – Online Travel Agents such as Expedia, Booking, Laterooms; Metasearch players such as Trivago, Tripadvisor, Icelolly; and dynamic packagers like Travel Republic and On The Beach.

As a result of increased visibility across the marketplace, consumers are more confident than ever that they can find and extract a good deal. Our research shows that these consumers can be grouped in three ways:

  • Those seeking certainty or choice and a premium experience. They still research and book their hotels and holidays early;
  • People willing to trade certainty of choice for price, who tend to enter the market late;
  • Those in the middle, seeking value in different forms.

It is the middle group who are especially important, because some deals (price related or product benefit-related, such as upgrades) can encourage them to book early. Critically, it is the presence of a deal rather than the details of the deal that are more relevant to this group of consumers.

This shift in consumer behaviour has proven challenging for hotel operators. Some refuse to accept the relevance of ‘intermediary channels’, while others admit they are a critical component of distribution, but are wary of actively committing to them. There is a fear amongst hotel operators that the intermediary will command excessive power and hike up commissions.

This fear may ultimately be unfounded. Firstly, the intermediary market is unlikely to have one ‘winner’ – is not the next itunes, for example. Unlike in property, takeaway food, or dating sites, there are only limited network effects. Secondly, there is competitive tension between online travel agencies and metasearch companies already. While this makes it more difficult and expensive for hotels to pursue a ‘direct’ strategy, it reduces the risk of relying on a single distributor with increased market power.

So what is the ‘right’ strategic response to the evolving distribution landscape? An interesting way to approach this question is to ask a slightly different one – what would you do if all your bookings came through an intermediary? This might sound like an odd question, but it is one that has been asked – and answered – in industries where large aggregators have taken a dominant role already – such as car insurance brokerage and retail.

Pursuing an ‘all in’ strategy would require hotel operators to do a number of things differently:

  1. Rework their rate architecture to suit consumers seeking certain prices and deals, as well as those seeking certainty, choice and service. This is not as straightforward as it sounds and, surprisingly, little new thinking has been done since hotels worked out they could charge some customers more for flexibility and breakfast. There are many possible solutions, from discounted rates with less certainty over room type, to fully unbundled rates with limited service options.
  2. More actively ‘trading’ position on intermediaries, allowing operators to know where they are positioned on price at critical booking times, and not giving away too much or too little. They need to manage their presence across multiple intermediaries, and having simple trading parameters that allow for relatively rapid price adjustments.
  3. Developing a revenue management approach which ‘works’ through intermediaries. We recently monitored about 1000 resort hotels in Europe for a study on revenue management. Plenty of progress has been made in assessing demand forecasts, pricing up key peak periods, and pricing down tricky periods. However, insufficient attention has been placed on how these prices actually look when presented to consumers or on the longer term impact on behaviours. For example, a few operators were sticking stubbornly to a high early season price followed by a significant drop six months later, which is likely to upset many of their loyal early bookers. It is better to use a combination of different rate types, smaller pricing moves and bolder promotions to engineer larger discounts on restricted rates that do not offend the full rate consumer.
  4. Set prices to take advantage of peaks and troughs in booking demand. In a recent OC&C study, we found that often only 20% of hotel/room type combinations were available 9-12 months in advance compared to later in the booking cycle. There is therefore a good opportunity to take greater share and capture early bookings with the right price and promotional offer.
  5. Concentrate and divert investment towards delivering a high quality experience that reviews well. This means reallocating spend from brand marketing (where, unless an operator is of sufficient scale, they are likely to be outspent), and investing instead in technology, training and people who can deliver a high quality and consistent service experience.

This may seem a daunting switch from the current approach, but the financial ‘maths’ adds up. Selling through an intermediary may actually be a relatively low-cost way of ensuring high occupancy, early build of business on the books, robust net yields, and good growth in new customer volumes.

This is a contrarian strategy that goes against a lot of commonly held wisdom over how to respond to the growth of intermediaries. But sometimes the results can be worth the risk.