Hotel Companies vs. Third Party Online Intermediaries: Direct vs. Indirect Online Channel

2006 Update by Max Starkov and Jason Price

The Distribution Model Has Changed Forever 

The following survey by eMarketer and Accenture clearly shows the irreversible trends in the travel distribution landscape and the shift toward online reservations.

Preferred Methods Used by US Business Travelers to Book Travel Reservations (as % of respondents)

* Phone with Live Travel Agent
(eMarketer/Accenture, March 2005)

Hoteliers-Excellent Offline Direct Sellers

In the offline world hoteliers enjoy more direct sales (75%) than indirect (agency, intermediaries) sales (15%-20%). In the online world hotels are less aggressive than the airlines in bypassing the third party intermediary and agency channel. This year for example only 54%-56% of online hotel bookings will be direct sales, though some major brands already boast direct vs. indirect ratios of 75:25.

Growing Direct Online Distribution in Hospitality

Hoteliers' online market share is steadily growing as hoteliers are becoming savvy Internet marketers. It will take consistent efforts to maintain and improve this share in the future.

Here is how Merrill Lynch estimates the Direct vs. Indirect online market share in hospitality in the US:

Direct vs. Indirect Online Distribution in Hospitality

(Merrill Lynch)

HeBS believes that with the adoption of Direct Online Distribution Strategies by the major hotel brands, including optimized brand websites, rate parity, best rate guarantees, aggressive Internet marketing and search marketing strategies, etc the direct portion of online distribution can grow to more than 65% by 2010. Some major brands (Marriott, Hilton, etc) already achieve 75:25 direct vs. indirect online distribution ratio.

Average Annual Growth 2005-2007:

(PhoCusWright, eMarketer)

Why Online Third Party Intermediaries Can Hurt Hoteliers?

• Expensive distribution channel
• Brand and price erosion
• Real threat to existing corporate business
• Lower ADRs
• Complex contractual obligations
• Indirect distribution shifts "Customer Ownership" to the intermediary
• For the most part manual labor intensive inventory and rate management process -"hidden costs and opportunity costs"
• Does not encourage brand loyalty
• Inhibits the Best Internet Rate Guarantee
• Hotelier reliance on online intermediaries leads to loss of marketing, pricing and overall inventory control
• Addiction to short-term "solution" offered by online merchants and ignoring the crucial Direct Online Distribution Strategy

Online Intermediaries Need Hoteliers

Margins off hotel sales fuel intermediaries:
Average revenue for the online intermediary per booking:

A major 2003 study by STR/PWC found that the hospitality industry lost over $1 billion in profit due to "Leakage" to online intermediaries in the form of abnormally high markups.

Obvious conclusions:

• Hospitality is the only major travel segment that still provides abnormally high profit margins to online intermediaries
• Online intermediaries need hoteliers more than hoteliers need them.

The Internet is the ultimate Direct-to-Consumer Channel

The Internet is the ultimate "Direct Distribution Medium". A direct-to-consumer model should become the foundation, the centerpiece of any hotel’s online distribution strategy. It conforms to the lowest cost and most inexpensive method to distribute inventory. A direct-to-consumer model provides long-term competitive advantages by lessening dependence on intermediaries, online discounters and traditional channels that may soon become obsolete. Any promising, sustainable, and defensible distribution strategy must start with the hotel brand website.

Direct-to-consumer online distribution has the following benefits:

• Puts the hotel in control of its Internet presence and exposure.
• Prevents brand and price erosion.
• Lessens dependence on online discounters and intermediaries.
• Is the shortest path to establishing interactive relationships with customers.
• Provides long-term opportunities to benefit from the lifetime customer value.
• Is the least expensive way to distribute hotel inventory--direct to consumer!

Direct online distribution is not just a theoretical, "ideal scenario" approach. Many surveys show that online customers prefer dealing directly with the travel suppliers, including hotels, when purchasing travel online.

Here is how online US leisure travelers respond to the question, "If you knew that the price of travel would be the same, who would you prefer to buy travel from?"

(2002, Forrester Research)

Consumers may prefer to buy directly from supplier, but many hoteliers are yet to take advantage of these consumer preferences.

Here are some US online travelers’ opinions about online travel suppliers vs. online travel agencies (third party online intermediaries), eMarketer 2005 (as % of all respondents):

How to Make Them Book on Your Hotel Website?

Question:
"Which of the following would influence you to book directly on the hotel brand website rather than on other travel web sites (e.g. Expedia.com, Travelocity.com)? Please select all that apply":

(HeBS 2004 Rush Report)

Hotelier’s Internet Marketing Objectives in 2006-2007

• Turn the Multi-Channel Marketing Model into your primary marketing strategy.
• Develop a De-Commoditization Strategy to provide unique value proposition to customers.
• Continue Building Interactive Relationships with your customers.
• Make Direct Online Marketing and Distribution the centerpiece of my Internet strategy.
• Lessen exposure in the Indirect Online Distribution Channel ("Controlled Exposure").
• Turn into top priority your Website Optimization Strategy.
• Develop a comprehensive Customer Segmentation Marketing Strategy.
• Deploy a robust Internet Marketing Strategy and turn it into a top priority.
• Acquire New Core Competencies and Adopt Best Industry Practices by partnering with leading hospitality Internet marketing experts.

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