How Can Hoteliers Deal with the Online Discounters?

A commonly asked question by hoteliers today is "How can we deal successfully with the online discounters?" Brand and price erosion have become commonplace on the Web. One can even book the landmark Waldorf Astoria on Hotels.com at steep discount. Some independent and franchised hotels derive 20%, 30% and even more of their revenues from online discounters.

Indeed, the online discounters, merchant and opaque services like Hotels.com, Expedia's Travelscape, Priceline, etc., have become the 800-pound gorillas of online distribution. While hoteliers are barely keeping afloat, some of these services have reported record earnings in the quarters since 9/11/01. For example, in Q3 2002 Expedia’s merchant revenue rose 189% compared to Q3 2001. Expedia sold 3.2 million room-nights, 2.6 million of them—merchant (81%). In the same quarter Hotels.com sold 2.3 mm merchant room-nights, up 83.4% from Q3 2001.

What are the reasons for the current situation?

We believe the main reasons for the current situation, which we find extremely dangerous and with long-term negative repercussions for the hotel industry, are as follows:

• Lack of understanding among majority of hoteliers on how the Internet and online distribution channels work. A failure to understand the online distribution market works to the advantage of online discounters.
• The hospitality sector is way behind the other travel sectors in adopting the Internet as a mainstream distribution medium. The weak economy and 9/11 found many hoteliers unprepared (financially, technologically, e-Knowledge-wise) to deal with the explosion in online bargain-hunting and bookings.
• Online discounters exploited extremely well the desperation of hoteliers after 9/11.
• The weak travel market led to misguided "cost savings" from direct-to-consumer Internet initiatives. Strapped for cash, hotels turned in droves to the "free" services of the online discounters. Many hotels opted for short-term fixes without considering the long-term price they have to pay in result of brand erosion and downward rate pressures. Ignoring direct-to-consumer online distribution and embracing merchant services leads to achieving higher occupancy at the expense of much lower ADRs and devastating brand erosion.

We will review the Total Online Distribution Strategy below, but before that we would like to analyze what are the approaches and techniques that allowed the major online discounters to become so successful today. All of the online discounters’ various models, approaches and techniques come down to a very simple objective: position the discounter's website at every possible interaction with a potential online booker. Here are some of these approaches which we find as critical:

Websites:100% consumer-focused, user-friendly websites, simple to use booking functionality, intuitive navigation, 24/7 customer support.

Website optimization: websites well prepared for the search engines with all the proper copy, target keywords, meta tags, description tags and page titles.

Destination Web strategy: online discounters and some of their affiliates developed, specially for the search engines, stand-alone destination portals or destination sections and pages within their own websites, optimized with destination-relevant target keywords and meta tags, and performed destination-focused search engine strategy.

Robust destination-focused search engine strategy. Online discounters found early on that Internet users search for accommodations based on destinations and hotel locations (e.g. "New York Hotel", "Manhattan Hotel", etc).

Extensive utilization of Pay-per-click (PPC) marketing. Hotels.com, Expedia, etc appear on top of the Sponsored Links (PPC listings) when search for hotel in practically any destination on any major search engine.

Affiliate programs: this type of pay-per-lead or pay-per-performance marketing was perfected by the major online discounters. Hotels.com has over 30,000 affiliate websites that feature links to its booking engine and over 65% of its bookings come from its affiliates. Expedia also has over 30,000 affiliates. Non of the major hotel brands, except Accor, has an affiliate program of its own.

Email Marketing: online discounters and intermediaries elevated permission-based and precision-based email marketing into a science. For example Travelocity sends an average of 2-3 million broadcast email messages a day to its own opt-in lists, now totaling 34 million names.

Low price guarantees: Hotels.com "invented" the lowest price guarantee in the online hospitality market and has been using it successfully for over 48 months now. Hotwire and Priceline also offer lowest price guarantees. 67% of Online Bookers respond that “Assurance of lowest price” would entice them to book more online (Forrester 2002).These guarantees have important psychological, promotional and great “word of mouth” effect. Again, hoteliers were late in adopting this effective marketing tool. Among the major brands, only 6C and Starwood have come up with a lowest price guarantee and that was only several months ago.

How to deal with the online discounters?

So how can hoteliers deal with the threat by present online discounters?

• By implementing a comprehensive Total Online Distribution Strategy that ensures priority of the direct-to-consumer online distribution model and balances favorably the direct and indirect online channels, and
• By beating the online discounters at their own game.

The above are not to be considered as two separate approaches to the situation, rather aspects of the same comprehensive strategy. HeBS’ Total Online Distribution Strategy and its Direct Distribution Model use techniques designed to beat the online discounters at their own game.

What is the Total Online Distribution Strategy?

To deal better with today's online travel challenges, hoteliers must adopt a comprehensive online channel strategy, a Total Online Distribution Channel Strategy, which turns the direct-to-consumer distribution model into the centerpiece of the hotel brand's Internet strategy and optimizes the balance between the Direct and Indirect Web Distribution Models.

The Internet is all about positioning your brand website and properties at all "touch points" of interaction with the potential online travel customer. If the online traveler looks for accommodations in your destinations (e.g. Boston, Chicago, etc), he/she should be able to find:

1. First: your website through the search engines, your destination-focused website strategy, Pay-per-click services,online travel and hospitality directories and indexes, your website affiliates, destination portals, CVB websites, and
2. Second: your inventory through third-party online channels beyond your website: major online agency model travel services, opaque rate services like Hotwire, incoming operators and DMOs, as part of online packages offered by tour operators, impulse-purchasing services like Site59, and yes, via selected merchant model operators.

When looking at the table below, it becomes obvious the in at least 54% of the cases, the Online Bookers should end up on the hotel brand website in order for this brand to be in par with the national averages:

Direct vs. Indirect Share in Online Bookings:

                                                 2001    2002    2003

Hotel Branded Websites:   53%     52%       52%

Intermediary Websites:      47%     48%        48%

(2002, PhoCusWright)

What are the features of the Direct Distribution Strategy?

The Direct Distribution Strategy is all about benefiting from the Internet as the greatest direct-to-consumer distribution medium. Direct online distribution should become the centerpiece of any hotelier’s Internet strategy. Here are some of the steps, strategies and direct distribution channels, business models, marketing programs and promotional techniques that share the same commonality: the Internet user ends up on the hotel website and transacts there:

• Website Optimization that achieves two goals: improves user experience and enhances features that affect conversion rates, and prepares the website for the search engines
•         Stand-alone hotel or hotel brand website
•         Property page within the brand website
• Hotel-sponsored destination portals, sections, pages and initiatives
• Search engine Strategy
• Destination-focused search engine strategy and initiatives
• Online loyalty program initiatives
• Affiliate programs
• Lowest price guarantees
• Pay-per-click marketing
• E-mail marketing:
• Customer Email Capture (online and offline)
• Consumer email marketing campaigns
• Travel agent email campaigns
• Travel and hotel directories and portals (e.g. TripAdvisor)
• Last minute and impulse purchase services (e.g. TripValue.com)

Utilized expertly, the Total Online Distribution Strategy and its two components: Direct and Indirect Web Distribution can produce immediate results, while keeping the hotelier in full control of its brand and price integrity.

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