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OTCs Declare War on Lodging Business

Editor-In-Chief Glenn Haussman has a strongly worded warning to hotel executives: Wake up or lose to the increasingly emboldened OTCs. They’re mocking you now and you’re letting it happen. Here’s what’s going on.

Wednesday, April 07, 2010
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Hey, hotel industry executives. You may not have realized it yet, but the Online Travel Companies (OTCs) have declared war on you. That’s right. It’s time for hotel executives to realize these third-party reservation sites are becoming increasingly emboldened in their desire to command your inventory. And your profit potential.

Guess what? It’s not their fault. Blame lies squarely at the feet of hotel industry executives that have time and time again allowed OTCs to control the room pricing dialogue with consumers. Now OTCs are feeling unstoppable and are upping the rhetoric to dangerous levels. If the hotel industry does not come to grips with this situation immediately, then expect to see hotel profits keep skidding along the bottom. And there is no one to blame but yourselves.

Companies like Priceline.com are becoming so brazen they’re now openly shaming hotel companies. The same ones that give them rooms inventory. And they’re doing it in prime time on television.

Take this Priceline.com ad, for example: The ad, featuring William “Priceline Negotiator” Shatner, should be taken as a colossal insult to the hotel industry. Yet other than me mouthing off about it, I have not yet heard a single peep from industry insiders. And they should be abuzz about this ad. (watch it here: http://www.youtube.com/watch?v=1U0ohKpz84Y&feature=related)

In it, Shatner tells a front desk clerk that someone has requested a price of $65 for a room. The clerk responds by saying they don’t go lower than $130. Shatner turns to a giant threatening specimen of a man named Big Deal (who looks likes like a cross between the villain Odd Job in some old James Bond films) and Andre the Giant and says, “Persuade him.” Big Deal is draped in a fur coat, has a menacing glance, cracks his knuckles and looks at the front desk clerk with a scowl. He slams his fists on the counter, revealing tattoos inscribed on his hands that read “Dollars and Sense.”

Then he speaks in a decidedly dulcet tone saying, “Is it wise to allow a perishable item to spoil?”

Shatner follows: “Yes, why leave a room empty?”
Big Deal continues: “The additional revenue easily covers operating costs.”

Shatner: “$65 is better than no dollars.”

The cowering clerk accepts the offer, saying: “OK. $65 for tonight.”

It’s a funny, spot-on and clever ad. But the undertone is essentially telling hotel operators, under the guise of a comedic threat, “Hey, you need us to dispose of your empty rooms, so you better play by OUR rules.”

It’s embarrassing to hoteliers that this kind of message could be translated to the general public, who now have better insight into how YOUR business is run.

It’s also absolutely shameful that the hotel industry has allowed the OTCs to become so powerful they can run an ad as brazen as this. Yet all I hear from lodging people is a stunning silence similar to the stone-cold denials I have been hearing for the last ten years as OTCs have perfectly engineered the ascent.

Hoteliers are hopelessly clinging to the spurious notion that these OTC sites are being only used by the occasional traveler, and that their respective rewards programs will continue to capture the most frequent travelers. Well, Hotels.com now has “welcome rewards,” which gives away one free night for every ten nights stayed. And it’s being done with your rooms inventory!

I recently paid $119 for a quasi-full-service hotel in the Gaslamp District of San Diego. And that was a “discounted” media rate. While drinking at the bar, the gentleman next to me said he had Hotels.com all figured out, and he had paid $60 for his room. Man, did I feel like sucker for paying so much for the room! Now I wonder why I even bother using branded sites and industry contacts. It is evident the public is getting punished for using your branded websites when they know how to beat the system.

By every indication it seems as if the OTCs are not going to stop until they wrestle complete control away from you.

Here’s a friendly warning: The OTCs are now mobilizing on their next effort: Getting you to believe they are your friends and partners. Expedia.com has been interviewing public relations firms to potentially hire one to get their message across. They want to make nice with the people that own the rooms they sell. So you better believe this next assault will be one of attempting to win the hearts and minds of hotel industry execs and hotel owners. It’s about to become extremely subversive, and with the hotel industry already reeling from depressed rates, expect many franchise owners to quickly capitulate. Struggling owners are trying to feed their families and don’t have the time or the concern to deal with the big picture issue described above.

Therefore, it’s up to the people at the top of the lodging food chain to do something about this. Now.

Again, let me reiterate: The OTCs are doing absolutely nothing wrong here. This is capitalism working at its best, and I wish them continued good luck. But the lodging industry must wake up, draw a line in the sand and figure out a way to put the beast back in the cage.

So the big question is, What are you going to do about it? Take a stand or continue to let OTCs run roughshod over your best interests? It’s time to wise up, or risk losing it all.
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RE: OTCs Declare War on Lodging Business article link

Taking from a Condo hotel or even a hotel that pays the following (except a 20% to a manager) is my quick take on the actual expenses

Shatner follows: “Yes, why leave a room empty?”

Big Deal continues: “The additional revenue easily covers operating costs.”

taxes (personal 28% more corporate), housekeeping ($75.00 per cleaning or 15.00 per hour with 1 hour of cleaning), Admin staff ($25.00 per hour – 20 min to book), maintenance ($28.00 per hour – 30 min to review and repair small items), wear and tear of furniture (priceless?), small items replacement ($12.00), linen at .65 per pound (ave 1 bedroom has 19 pounds of linen) Commissions (manager @ 20% AND OTC at 30% = 50% of income, etc).

65.00 per night

<18.20 (28%)> personal income tax

<15.00> houskeeping

< 5.00> ft desk

<14.00> maintenance, check out etc *

<12.00> item replacement

<12.35> linen

<13.00> 20% commission *

<19.00> 30% commissions

$96.20 expense not including profit, accounting staff, utilities, furniture or marketing and supervisory staff

* items may be removed = $27.00 or $71.00 expense. You have to tell me how this works.

Email: ghaussman@hotelinteractive.com

RE: OTCs Declare War on Lodging Business article link
Decreasing the dependency on OTAs was not the primary focus when we started to create a .hotel top-level domain a couple of years ago (www.dothotel.com). We thought that the new .hotel domain names could improve search engine positions for hotels and give many hotels a more convenient online identity.

But today we are persuaded that .hotel domain names will also increase the likelyhood of direct bookings on the hotel's website; it's just another tool for the vast majority of individual hotels to build their own successful online marketing strategy.
Posted by: Mr. Dirk Krischenowski - DOTHOTEL
Email: dirk@dothotel.com

RE: OTCs Declare War on Lodging Business article link
So - as hoteliers - let's stop trying to "fight fire with fire"! Maybe water would work better!??!

In other words, we will NOT win the war to wrestle control of our own inventory, if our defense matches their "offense" -continuing to focus/feature "low rates" INSTEAD of "high value". We need that new/improved service or product that creates new value to be game-changing, "disruptive" innovation.

If you think about it, from time infinatum...there have only been three (3) factors in someone's lodging decisions:

1. Oldest and still #1 - "Location-Location-Location"

2. Beginning when a few beads or coins were "collected" by the guy who owned the stable, cave with a campfire, etc - PRICE came into the equation.

3. Much more recent times- mostly the last 100 years - "Amenities/Features/Services...and now pretty much defined by BRAND or "limited service/full-service/resort/spa"...became the new differentiator.

What if we could come up with a new criteria - a "new choice" - a fourth dimension?! The answer just might be in the now tired/overused "leveraging of Social Networks".

What if a traveler ready to make a reservation...after "sorting" his way through a Travel website (or, hopefully, your BRAND's website!) for the right location, rate, and dates...gets to have an "inside view" of a hotel's reservations AND see if there are already any people from his "network" staying at the same time, and chooses accordingly. Pretty neat, huh?! And, most importantly, do you think that a service like this just might get some people to accept a rate that's $5, $10, maybe even $15 more than the always promised / seldom realized "guaranteed lowest rate" from the OTA site!?

Is it worth a try!? Are we EVER gonna' win this "battle to the death" by engaging in anything less than creating a MUCH better mousetrap?!

Check out www.GOBirdsOfAFeather.com to see how this scenario might work...
Posted by: George E VonAllmen - CMP
Email: geovonall@gmail.com

RE: OTCs Declare War on Lodging Business article link
What an interesting article, and timely when many hotels are discussing the rates & inventory control with OTAs. The OTAs continue to show aggressiveness in controlling hotel inventory and rates for one simple reason - hotels 'think' that they can't survive or get bookings without them! What a shame!

With the growth of online channels like search, social media and mobile, the market is more than open for even the smallest independent hotel to grow their hotel website online and get direct bookings, which in turn can help reduce cost and increase profitability.

I'd suggest hotels look at 5 major points:
a. Focus on growing your hotel website with full-force on search engines. Not PPC - the organic way!
b. Stick to Lowest Rate Guarantee only on your hotel website
c. Start/grow your brand on social media channels like Facebook, Twitter etc - most times it's free, just spare some time.
d. Do some basic revenue management(no software needed really) by comparing cost per booking by source. Then, plan how you can improve lower cost channels share and reduce dependency on high cost ones.
e. Above all, think how you can 'convert' more visitors from your website traffic. Improve the 'guest experience' at your hotel website by improving usability, ease of booking.
f. Train your staff to run online campaigns the 'right way' and cut costs in outsourcing.

I don't think any hotel would fail to grow if they follow these tips above. We know because we advocate the same on our 100% pay for performance online hotel marketing solution at hotelmarketingclub.com. Most times, it's the basics which if set right, can change the whole direction we're on. All the best.

Posted by: Ms. Norma Brandt

RE: OTCs Declare War on Lodging Business article link
Just refilled my coffee cup and read Glenn Haussman’s latest column in Hotel Interactive®, “Lodging Industry Must Wake Up to OTA Threat.” I’m still confused about the “threat” that OTC’s pose to our industry. Certainly, they do occasionally throw their weight around and, most definitely, they wield a lot of power. And, I must admit, their arrogance has irritated me on occasion. But the idea that OTC’s are the enemy seems a little short-sighted to me.

For years, we lived in an opaque world that allowed us to price our product however we pleased. Consumers had very little choice but to pay what we asked them to pay. Then, about ten years ago, the internet (and Hotels .com) changed all that. Because of the fear surrounding 9/11, our industry was suffering and we welcomed the OTC’s with open arms. Following textbook capitalism, Hotels.com saw an opportunity and took advantage of it. They ran funny TV and print ads that appealed to leisure travelers. And then the business travelers (and the business travel managers) took notice. Where is the difference today? Our industry is again suffering and disposable income is being directed into savings accounts instead of travel accounts. People need an incentive to travel again. The OTC’s have distribution muscle and a marketing budget that far exceeds that of most small chains and independent hotels. Why wouldn’t we want to be their partner instead of their foe?

For those hotels with strong pricing models and a strategic plan that encompasses all distribution channels, the OTC’s provide a valuable revenue stream for optimal profitability. A proactive team has a strategic plan in place that balances its inventory between all segments, both transient and group. The OTC’s have a role in the transient market as does each property’s proprietary website, traditional wholesalers, travel clubs and others. It’s how you leverage the demand that determines your profitability. And this is reflected in your rate strategy.

Mr. Haussman takes issue with the comical new ad produced by Priceline. Apparently, Priceline has the audacity to expose our pricing secrets to the average traveling Joe. How dare them! Frankly, most people had this figured out a long time ago. A smart hotelier has pricing models for all segments, including OTC’s. And haven’t we been playing around with that “walk-in rate” since the Nativity. Just like the characters selling aluminum siding encountered in “Tin Men,” strategies evolve. With the proper tools and market knowledge, pricing your inventory fairly and in synch with market demand is easier than ever. Deliver the service level that this pricing represents and success will be yours. As well as the loyalty and trust of satisfied guests.

Posted by: Amanda J. Dennis
Email: amanda.dennis@ajdassoc.com

RE: OTCs Declare War on Lodging Business article link

Congratulations on the courageous article! I fully agree that the industry should not allow to be intimidated by the OTAs and should draw a line in the sand.

eTRAK reports that last year 70.9% of online CRS bookings for the top 30 hotel brands came from the direct online channel (i.e. the major hotel brands’ own websites), while 29.1% came from the indirect online channel (the Online Travel Agencies—OTAs like Expedia, Orbitz, Priceline, etc).

This constitutes an increase of the contribution from the OTAs compared to 2008, when 75.2% of online bookings came from the direct online channel, while 24.8% came from the OTAs. Compare this to 2007, when the direct channel contributed 76% of CRS Internet bookings.

In the same time the average ratio Direct vs. Indirect Online Channel for the industry as a whole is 60:40.

In other words, since 2007 we have witnessed a significant shift from the direct to the indirect online channel and an increase in OTAs market share. This is a serious setback for the hospitality industry and return to the old bad practices from the post 9/11 era.

Typical of economic times such as the present, the hotel industry (similar to post 9/11) has again “succumbed to the devil” in the face of the major OTAs. Since mid-2008 travel supply has outweighed demand and hoteliers have been more susceptible to panic, resulting in deep discounting and embracing of the OTAs.

Why should hoteliers care where their Internet bookings are coming from? The following case study clearly illustrates the cost effectiveness of the Direct Online channel:

Case Study 1: Cost per Booking in the Direct vs. Indirect Online Channel:

Direct Online Channel (Hotel Website): $12.92 per booking

(Cost per Booking via Hotel Website, incl. website fees, marketing spend, campaign management fees, Omniture analytics and reporting. Based on 530,000+ bookings in 2009 via hotel websites from HeBS’ hotel client portfolio)

Indirect Online Channel (Online Travel Agency-OTA): $107.57 per booking

(Based on average 2009 ADR in NYC = $215.14 and 2 night LOS = $430.28 x 25% OTA commission)

Difference: 8.3 times!

You can see our full analysis on the HeBS blog http://www.hospitalityebusiness.com/blog/

Posted by: Mr. Max Starkov
Email: max@hospitalityebusiness.com

RE: OTCs Declare War on Lodging Business article link
There is an old saying that those who do not learn from history are doomed to repeat it. Everything being described in this article is exactly what the industry experienced after 9/11, but the enemy of the day was Hotels.com. It was only 9 years ago but many of you speak as if you don't remember. A brief reminder for you...

Knowing that the industry was weak and that consumers needed incentive to start traveling again, OTAs ran similar commercials to what is being discussed here. One particular commercial, from Hotels.com, depicted two executives in NYC in a cab discussing how one of them got, we'll call it "taken" on price by booking with the hotel direct instead of Hotels.com. Airlines faced similar issues with Travelocity and Expedia. This was before rate parity, best rate guarantees, and supplier revenue management. This loss of pricing and more importantly MESSAGING control, led to the airline and hotel industries response in 2002, the creation of airline-owned OTA Orbitz and hotelier-backed OTA Travelweb.

The goal was simple. Regain control of pricing, automate access to inventory, and reduce margins paid to the OTAs. Both companies were relatively successful in achieving their objectives based on the evaporation of commissions on airline bookings and the Travelweb automated merchant model being adopted as an industry standard method for doing business while shrinking OTA margins. So what will the industry response be this time? And is an industry level response needed?

In my humble opinion, what is critical here is for hoteliers to understand the value that OTAs play in the demand generation and marketing process, especially during bleak economic times. You must also have a clear online distribution strategy, which includes third party distribution and direct online bookings. Do you have the necessary conversion tools on your own website to give a customer incentive to book direct once they've come to your site AFTER finding you on an OTA?

Hoteliers must think differently about travel distribution. You're not at war with the OTAs. You must be smarter about how the LEVERAGE OTAs as a tool to increase the visibility of your hotel in your market. You should have visibility to what your competitors are doing if they are in your true competitive set so that you have an understanding of your expected market share and how you're performing against such expectations. Anyone that tells you not to worry and just to advertise more is likely selling advertising and knows nothing about travel distribution.

I could go on for hours but I'm not sure how much space HI will give me for a response. This is a very worthy debate that I look forward to engaging in on behalf of and with the hotel industry. Let me end this for now with a few steps hoteliers can take to leverage the power of OTAs during this point in the cycle:
1. Hold your OTA market manager accountable - Ask questions of your market manager regarding what you can expect from a revenue perspective based on the contract you've provided. If you're not meeting those revenue expectations, find out why. The answer is generally NOT lower rates, its where you're positioned in the default search results. Find out how to improve your ranking in their algorithm. They have one...trust me.
2. Conversion tools on your website - Do you have any? Do you provide relevant content or incentives for customers to book on your site instead of the OTA. Remember that a substantial number of customers are still using the OTAs as a jumping off point when they find a hotel in which they are interested. And while it is a price sensitive market at the moment, value still sells. Can you give the customer more for their dollar; upgrades, amenities, etc?

3. Actionable Intelligence - Do you know what your competitive set is doing? Are you looking at the right competitive set? Do you audit your third party information to make sure you're accurately being marketed on those sites? Do you have a robust set of analytics tools that enable you to see a true picture of where your customers are dropping off in the booking path of your own site? And with that data are you optimizing your site to improve your conversion?

And finally, you are not at war with the OTAs. I consider this to be more of a battle of wits. Just make sure you're not going into battle unarmed.

Best regards,

Fred Bean
Posted by: Fred Bean

RE: OTCs Declare War on Lodging Business article link
I read your article on the OTCs and cannot agree more on your caution. The OTCs control over our hotel rooms inventory is as close as them owning our hotels. Your article has been shared and e-mailed to all of our AAHOA past chairmen and board for their review. However, it is well and good to read the article and not acting on this very important issue.

I was glad to see Choice Hotels go head to head with Expedia recently but then relented with a so called mutual agreement. I will certainly put my own views and suggestions to the current AAHOA leadership to initiate some response to this warning.

Thank you once again for the eye opening article.

Ramesh Surati

1999 AAHOA Chairman


RE: OTCs Declare War on Lodging Business article link
I think the hotels are forgetting some important factors here. OTCs spend lots of money in CPC marketing your hotels that may have otherwise led to a reservation elsewhere. Except for the major chains, most customers may have never found your hotel had it not been for the major efforts in marketing by the OTCs. Many customers use the OTCs for researching and then go on to book direct with the hotel, no-one accounts for this leakage and the OTCs do not get the benefit due when this happens, i think Shatner is right when he says “$65 is better than no dollars.” This article shows a complete lack of insight and understanding as to how the many different channels and efforts by the OTCs leads to an occupied room at your hotel that may have otherwise never happened. The OTCs spend the marketing money and promote your hotels to customers that may have never known you were there.
Posted by: Mr. Daniel Gallo

RE: OTCs Declare War on Lodging Business article link
Don't forget that it is possible to beat back the Beast. Look at how the airline industry has maintained much better control of their rates and discounts with the OTCs. While a large portion of the OTC's total revenue comes from Airlines the bulk of their profits come from Hotels.

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