Walking the Tight Rope; High ADR and Low Distribution Cost

Tips for hoteliers to balance online and direct bookings.

“Minimise costs, maximise revenues” — the quest is ubiquitous across all businesses. With no exceptions for the hotel industry.

With the costs running high into labor, debt, franchise fees, utilities and real estate taxes, little can hoteliers do little to really ‘minimise’ the cost of operation. But an area does exist where the beast can be trapped — the distribution system.

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 (Average Daily Rate). But with a steady increase in inflation, the rise in customers’ expectations and harsh competition, balancing costs and ADR becomes difficult. Let us look at some ways to do that.

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 maximise profitable bookings as well as booking volume.
Prioritise 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 recent 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 maximise 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 summarise, it is not just about trying to replace OTAs with the hotel’s own website. In fact, it is about utilising 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.

Optimise your website for online bookings and strategise your digital marketing plan

To reduce dependence on OTAs, hoteliers must invest in an excellent website and digital marketing system to engage both previous and future customers and bring direct bookings subsequently.

As a large chunk of hotel bookings has started happening on mobile phones, hotels must consider either optimizing their desktop website for mobile devices through a responsive design system or to make a new mobile website to target the mobile-using potential guests. Both come with moderate to high maintenance and development costs, but also offer inimitable benefits.

Working towards an aesthetically pleasing and user-friendly website interface benefits the hotel’s goodwill and hence, increases visitor-to-guest conversions. Placing effective ‘Call to action’ buttons like ‘book now’/’Call now’ on the home page also eases the booking process.

In addition to these technical considerations, hotels must come up with a plan for social marketing and work on strategies to drive more traffic to their brand website.

Also, ensure that there is minimum resistance in the process to maximise conversion and also offer some incentive to encourage the prospective guest to book directly through your website.

Target long-term customer relationships

We see the importance of tapping into new customer segments being religiously emphasized. However, devising ways to reach out to past guests helps build a better CLV (Customer Lifetime Value) for the hotel. It cuts the costs going into heavy research on new trends and markets and provides a benefit most hoteliers can immediately leverage because they already have access to their old guests’ data.

The ‘price wars’ created with an incessant emphasis on dynamic pricing and competing with prices listed at OTAs like Expedia.com make it difficult for hotels to communicate their brand value to the customer. In fact, dynamic pricing raises risks of brand devaluation due to consistent lowering of prices.

To make their booking value-driven instead of price-driven, hoteliers must strive for direct interaction with their visitors through their own websites and other digital marketing tools. This gives hotels ample room to present themselves in the most marketable way to their website visitors. Better CLV engenders guest loyalty, which can offset the consequences of the price-cutting wars among hoteliers.

What is it that should make the customer choose your hotel instead of an Airbnb accommodation that is available at less than half the price you offer? Hotels must focus on that element and integrate it in their value creation strategy.

Educating the visitor about the property features and facilities through a personal website can also justify high booking prices for now the guest has several other aspects to consider and appreciate other than the price. Whether it is a 24/7 assistance or a friendly cancellation policy, the visitor knows it all from the hotel website. This type of value-driven promotion through direct channels will bring higher ADRs without compromising occupancy.

Since distribution system is the one of the major areas of expenditure that a hotel can regulate, it is instructive that hoteliers cut costs there to maximise ADRs. Steps towards building guest loyalty, prioritizing profitable bookings along with maximising occupancy and driving as much revenue from direct bookings as possible offer the greatest cost-cutting benefits.

To draw a conclusion here; hotels should actively manage and optimise their OTA distribution to keep costs and profitability in balance and at the same time evolve their direct marketing to take advantage of lower overheads and better ways to develop direct relationships with guests.

Adopting both of these techniques together will improve profitability as online and direct bookings go hand in hand and not in- silos for maximising a hotel’s revenue.