By Sharon H. McAuliffe, January 2003

I recently attended the HEDNA conference in Boston, and as I listened to the dialogue between attendees representing both the supply and demand side of the industry, there was one thing that became abundantly clear to me.  Hoteliers feel as though they have lost control over their sell rates and yield management practices due to the influences of web wholesalers and online travel agents, and there is no consensus about how to take back that control.   I believe that offering sell rate parity on all transparent channels, including GDS, CRS and IDS channels, can help us to take back control over our rates and our yield management.

I�ll begin with a simplified history to set the stage.  Not long before the web started to become a key sales channel for hotels, a hotel�s rack rates were its �public� rates for all intents and purposes.  Brochures included a rate card which displayed rack rates.  The only other access the general public had to a hotel�s rates for their desired dates of stay came from a travel agency or direct phone calls.  Many consumers knew that they could sometimes get a rate lower than the rack rate, but it took some effort either by a travel agent or the consumer themselves to find and book it. 

Hotels pegged all of their sales efforts to their rack rate, offering discounts from that rate to wholesalers, consortia and corporate clients proportional to how much business each provided.  The public may have been aware of the practice of wholesale discounts and markups, but due to the fragmentation of the industry they had limited access to all possible distribution channels, and therefore, functionally limited knowledge of the rate options available to them.  The original �fence� for wholesale rates was lack of access, which continued into the fledgling years of the internet.

In the early days of the web, the rack rate model was still functional.  Most web distribution came through connections with the GDS or chain CRS systems, and therefore reflected the same rates hoteliers were offering on the small number of distribution channels they had always managed.  Then two things happened which had a profound impact.  During the dotcom bubble, companies decided that freebies were the way to drive everyone to use the web, which was, and still is, considered one of the lowest cost sales channels.  Consumers were thus conditioned from early on to see the web as THE place to get deep discounts, a perception that is still prevalent.  Unfortunately, the internet access infrastructure did not yet exist to support the sales volume needed to make this deep discounting profitable, and we all know how this story ended, though its effects continue.

The second event was when HRN, one of the biggest hotel wholesale distributors, moved their business model onto the web.  At first there were no discernable repercussions.  Hotels felt free to continue to offer HRN sizeable allotments at low rates, and HRN freely sold these deeply discounted rates on their website.  This channel was wildly successful, giving hotels what they saw as reasonable justification to continue to provide HRN with lower and lower rates and larger and larger allocations.  After all, HRN drove more and still more business to them, right?  And while relatively few consumers were using the web to shop for travel, everything looked like it was working just fine.

It didn�t take long before most other travel distribution sites decided to get in on this obviously lucrative business model.  Several websites launched wholesale models of their own, or partnered with sites offering one, and began trading the benefit of top positioning on their sites for discounted net rates.  As the economy went south, more and more hoteliers began to use the wholesale programs offered by the �discount channels� as a means of gaining favorable positioning.  These channels appeared as the most promising option in the desperate search for vanishing revenues. 

The online travel agents and wholesale channels grew their traffic through partnerships with an increasing number of other sites, making their discount rates more and more public.  These efforts to become and stay profitable, combined with the worsening economy and intensifying efforts of hotels to chase revenue at all costs, resulted in the widespread availability of deeply discounted rates.  Every wholesaler vied to offer the lowest rates available�guaranteed!...creating further downward rate pressure.  Hoteliers have recently realized that they cannot offer any single channel their �lowest� rate and expect to continue working effectively with all of their other channels.

As web access infrastructure has grown and the majority of consumers now have access to the entire volume of information offered by the internet, hotel rates, discounted or otherwise, have become completely transparent.  This transparency is the crux of the hoteliers� problem.  Additional challenges have developed as hotels have used the web to dump distressed inventory or to build an occupancy base in advance.  Our corporate clients check the web periodically, sometimes shortly before checking in, and seeing a web rate lower than theirs, demand that we honor the lower rate and include their usual contracted perks.  Guests who made their reservations in advance do the same thing, or more and more often wait until the last minute to make their reservations.  Hotels that are not true competitors because their product is of a lower or higher quality than ours have become competitors due to their high visibility on the web, which is usually a result of overly deep discounting practices.  Travel agents clamor for access to web fares, and in response the GDS channels are introducing wholesale programs of their own.

How to fight this downward pressure and regain control over our rates? 

First, hoteliers must divorce the word �discount� from the word �wholesale� where the online wholesalers are concerned.  Early on, it was still safe to continue using web wholesale channels in the traditional way as discount channels because their consumer base was comparatively small.  Now, however, these wholesalers are one of our primary sources for web reservations and because their rates are so readily available for everyone to see, offering discounted rates on these transparent channels validates these rates as de facto rack rates, which is not healthy for any hotel�s rate integrity.

Web wholesalers have been able to use this rate transparency to play off each other and use the threat of bad positioning to force hoteliers to continue to provide them with competitive rates.  Competitive, however, on their own terms, not on the hotel�s terms.  Hotels end up trying to compete not only against every hotel in their market offering discounts, but also against their own rates on other channels.  This has exacerbated the downward rate spiral initiated by the bubble-burst and the continuing poor economy. 

Second, as I asserted at the beginning, it is my opinion that the only way for hoteliers to break the grip of these online wholesale channels is to ensure that their sell rates are the same on all transparent channels, whether CRS, GDS or IDS.  We must include the GDS and CRS because these channels also feed rates onto the web.  If a hotel offers the same sell rate on every channel, the channels would have no basis on which to compete with each other at the hotel�s expense.  They would be unable to use their contract terms to threaten and manipulate hoteliers because they would all have an equivalent rate at which to sell the rooms.

To put this strategy into effect, hoteliers must require every transparent distribution channel to provide them their minimum mark-up formula.   The wholesale channels have automated their yield systems and hence they must have standardized formulas.  If a channel yields the hotel�s rates upward, it will be at their own risk rather than the hotel�s.  If they yield them down, well, let�s just say I doubt this would happen to any great degree.  They need to maintain high margins in this economy, and moreover, yielding rates market by market (much less property by property) is expensive and the channels are unlikely to erode their margins further in this way.

One risk is that a hotel that adopts this strategy would still be at the mercy of their direct competitors who continue transparent deep-discounting practices.  However, if a hotel has a consistent rate strategy, it can be used as a basis on which to decide whether or not to compete with the deep-discounter.  If it makes sense to compete, then the lower rates are offered on all channels.  If it does not make sense, then one possible alternative is to implement distressed inventory measures.

In my opinion, the only places suitable for dumping distressed inventory are the opaque channels, email promotions and a hotel�s proprietary website (via call-direct specials or a site-specific booking engine).  These channels have limited visibility, and the hotel will not destroy their rate integrity as they would by making the deeply discounted rates public.

In summary, sell rate parity can:
 

• Level the playing field.  It would force the distribution channels to produce based on their own efforts, not based on the hotel�s ever-decreasing margins.

• Simplify management of multiple channels at the property level, and reduce competition of hotels with themselves among these channels.

• Provide once again a �rack� rate on which to build a consistent rate strategy.

• Make it easy for consumers to find the hotel�s best rates and book them with the confidence that there is not a better deal hiding somewhere else.  Forcing consumers to hunt for the best rate can result in losing them to a competitor.

• Reduce confusion at the front desk when a guest calls asking for a web fare; front desk staff will know what that rate is and be able to book it because it�s the same one they offer.  They won�t mistakenly direct the guest back to the internet, which is likely to cost the hotel more, or worse, to lose the guest to a competitor.  Bonus: the desk clerk has a chance to upsell.

• Help reduce consumers� perception of the wholesale channels as discount channels.  They will have to woo the consumer with the ease-of-use of their website, their wide accessibility via partner sites and their marketing efforts.

Sharon McAuliffe is the e.Distribution Manager for PVI Hotel Group, Belmont, California. You can reach Sharon at:[email protected]