Shifting your budget to direct – not a fad: part 2

Last week we discussed how hotels adjusted to the new reality of OTA growth. In the second instalment of a three-part series, we look at the reasons why a customer might instead book direct.

Why would a customer book direct?

Booking direct seems attractive for the hotels. But it will only work if it is good for the customer.

Before launching programmes promoting book direct campaigns, revenue managers needed to understand what their customer would like.

• Best price—an immediate motivator. A direct price advantage is hard to resist.
• Best value—additional services that enhance the stay experience and diminish the importance of the raw price point. For example, free wifi for customers who book direct.
• Personalised service—using knowledge of specific customer preferences, tailor the stay experience to match each customer.
• Brand booking system—make the booking experience painless. A quick and easy process that should match the experience with OTAs.
• Loyalty programme—accumulate credits for repeat use of the brand book direct to enjoy a future benefit. Using points to track loyalty and offering exchanges of points for free stays is common.

Best price is still key. Offering cheaper rates to entice direct bookings makes sense because there is no commission to pay and the hotel is simply passing on some of the savings in distribution costs to the customer. If a customer is not yet a member, cheaper rates incentivise them to join the programme.

It is important that an OTA or other intermediary doesn’t offer cheaper rates—that would defeat the direct booking advantage.

This is why brands, even before loyalty clubs came into vogue, introduced rate parity into their contracts with OTAs whereby an OTA couldn’t discount room rates to gain advantage. The OTAs, in turn, required the hotels to adhere to rate parity as well. In a perfect world, everyone would offer the same price and there would be no differentiation based on price. However, each player in the hospitality business wants to have a way of gaining the price advantage and hence rate parity contract clauses have come under scrutiny and have faced legal challenges and intense lobbying.

Rate Parity and Law

While the rate parity clauses have withstood the legal challenges in the US so far, it is a different matter in Europe. Rate parity’s legal landscape has taken several turns and the changes are ongoing. To assuage the players, there is now a differentiation between a wide rate parity (parity everywhere) and a narrow rate parity (parity in public information—gated listings exempted). Trivago has reported on the current state of rate parity around the world.

The trend in rate parity legislation offers price advantage as a tool for book direct campaigns.

Graphic courtesy of Trivago: What’s Happening with Rate Parity in the Hotel Industry?

Has book direct worked?

Even as direct bookings and loyalty club programmes were taking off following the launch of Marriott’s programme, Kalibri Labs conducted a study of the effectiveness of direct bookings over a period of May through December 2016. There were four primary takeaways from this study, all boding well for the future of book direct initiatives:

• Consumer behaviour shifted in favour of Brand.com.
• Net ADR of Brand.com loyalty rates surpassed Net ADR of OTA rates.
• Results showed net positive revenue outcomes.
• Loyalty is a powerful driver of demand and growth is strong.

When compared to 2015 performance and an estimation of 2016 performance, Retail Transient Room Nights Demand Share Mix came consistently higher than projections for Brand.com and consistently lower than projections for OTAs.

Graphic courtesy of Kalibri Labs’ special report: retail transient room nights demand share mix

Besides transactional analysis that examined one-time transactions, the study also conducted lifetime value analysis that examined repeat usage of guests. Considering that the study sample of 12,000 hotels and 52 million transactions confirmed a channel shift in favour of Brand.com during the study period, and lifetime value considerations would only accentuate this benefit, the 2016 Kalibri Labs study reaffirmed the advantages of book direct campaigns.

A counterpoint to this view has been presented based on a 2017 Piper Jaffray report comparing the price of booking a room through OTA/Metasearch Site and Hotel Direct. Piper Jaffray analysts reviewed cost of booking through Brand.com and intermediaries for top four hotel chains—InterContinental Hotels Group, Marriott, Hilton, and Wyndham Hotel Group—in the largest 25 cities worldwide.

The findings?

Out of the 86 hotels sampled, just 13% of them had book direct pricing below OTAs and 21% of them experienced the OTAs/metasearch sites undercutting them in pricing. The rest exhibited rate parity.

This seems to suggest that some of these hotels were losing out in the price competition while most of them relied on criteria other than price to compete. However, a deeper dive presents a clearer picture.

The results of this study may be skewed because the pricing used in comparisons did not include discounted loyalty member rates. Both Marriott and Hilton asserted availability of the best price to its loyalty club members.

This suggests that these hotels are willing to incur a higher cost of initial customer acquisition because they are confident of their customer retention and expect to gain handsomely through their lifetime value.

Book direct is a serious advantage to hotels.

This is part 2 of a three-part series. Read Part 1 and Part 3 or download our white paper, which consolidates all three parts.