Pricing and Distribution Channels: Hilton Amsterdam

“Selling a hotel room used to be simple; business would literally walk in off the street. No more. As the number of channels a customer can use to book a hotel room grows, hoteliers will be forced to take a more holistic view of their technological infrastructure”, as quoted by Bruno des Fontaines (2007), Vice President for Amadeus Hospitality Group Asia Pacific.

Revenue Management is a complex phenomenon with many factors affecting the final outcome. Out of these innumerous factors, playing their role in revenue management, price is indeed one the most powerful tools a hotel can use to increase revenue. The key however is to know how to set the right prices and which distribution channels to use in order to maximize your revenue.

Tools using which, any product or service is provided to end consumer, constitute Distribution Channel of that product or service. Success or failure of a product relies greatly upon distribution channels. “In hospitality business, a successful channel management strategy consists of selling inventory at the highest possible rates, while pushing reservations through the lowest-cost channels”. (Barash 2005)

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It is therefore of prime importance that a hotel chooses most effective distribution channels in order to manage prices and eventually to maximize its revenue. There is, however, a great array of approaches available to manage distribution channels which makes it a very challenging task for hoteliers, requiring for them to understand all distribution options available.

In past hotel distribution channels used to be most simplistic, the traditional main distribution channels were:

Brochures

Advertising

guide books

mail shots

call centers and

Travel agencies.

All of these modes, even though very simple and easy to manage, are extremely expensive and have a very limited range. They could be effective for local clientele only. With the passage of time and advancement in technology, other sophisticated and complex distribution channels originated that were never even thought of, such as

Central reservations

Global Distribution systems

Hotel Booking Agent

Tour Operator

Online wholesalers

However most of these channels only acted as a go-between hotel and the global-distribution-system (GDS)/travel agent. (Barash 2005). This wide array of distribution channels no doubt provide a great deal of benefit to the hotel in the sense that its availability to customers increases infinitely, customers all over the world can get to know about any hotel anywhere in the world through a travel agent or website etc. however at the very same time this phenomenon makes hotel distribution channels most complex and difficult to manage. Reasons for decline of GDS as an effective distribution channel as reported by HeBS (2002) can be due to following reasons:

“Slower than expected travel industry recovery and the weak economy

Channel shifting from traditional Consumer-Travel Agent hotel reservations to online bookings (leisure and unmanaged business travelers) and self-booking corporate systems.

Growing popularity of online business models (e.g. merchant) that do not utilize the GDS.

The emergence of direct interfaces between major online agencies and major travel suppliers thus bypassing the GDS.

Services like WorldRes, which utilize direct interfaces to the major hotel brands’ CRSs also undermine GDS distribution.

Decreased corporate travel: the latest survey by NBTA (September 2002) showed that 68% of corporate travel managers said travel was down in their companies from last year, in some cases by as much as 20%. Also, 72% of them said that current travel is below the 2000 levels-the last time travel was at normal volumes.”

Distribution of hotel rooms through traditional distribution channels such as GDS/travel agent and call center/reservation office, proves to be inefficient and extremely expensive, especially in light of the current weak economic situation. Focusing only on traditional distribution channels will result in lower occupancy rates, and higher distribution and operational costs. In this current scenario internet channels are emerging as more popular distribution channels that are being given increasing preference over traditional channels of distribution.

Internet distribution of hotels is of two types:

Direct Online Distribution

Indirect or Third party online distribution

Direct online distribution is where hotel pushes its property through a website constructed and owned by the hotel itself. Whereas third party web-based travel intermediaries such as online travel agents, have a certain number of rooms allocated to them that they sell through their own sites where mostly air tickets and car rentals are also offered among other things. The indirect distribution channel can be further subdivided into further subcategories such as channel to sell “distressed inventory” such as priceline. (HeBS 2002)

A hotel’s revenue is greatly affected by the method that a customer uses to book his/her room. If a lot of middle parties are involved in booking process then hotel’s share, in the amount that a guest pays for booking a room, can reduce to a great extent. According to Marvel (2004) “a room booked through a travel agent and the GDS (global distribution system) typically costs the hotel 15% of the reservation’s total. Contrary to popular belief, third-party websites are no bargain either for the hotelier, as they keep about 13% of a booking’s value. So-called “merchant” websites (such as Priceline.com or Hotwire) which basically buy inventory from hotels usually average a 33% mark-up on the rooms they sell. Bookings arriving via the central reservation system of voluntary chains (such as Minotel) can cream over 25% of the client’s original payment between travel agent, tour operator and chain fees. Many tour operators working in mass leisure destinations only pay 50%-60% of the normal room price to the hotelier who is lodging their clients”.

Looking at Hilton Amsterdam’s site also reveals similar facts, as can be observed from following table:

ADVANCE PURCHASE FULL PREPAYMENT, NO REFUND OR CHANGES (price in GBP)

Hilton website

243

Laterooms.com

258.76

Orbitz

243.5

Booking.com

254.871

(Rate differences between Hotel’s website and other online sources: The rate for Twin Hilton Deluxe Amsterdam room, on different booking sites available online, for one day 30th April – 1st May 2011. These rates were observed on 4th April 2011)

The fact can be clearly observed that best rates for room bookings are given by hotel’s own website, and obviously so because direct online booking on hotels’ own website has proven to be the best and cheapest source of distribution for a hotel.

eTRAK Full Year 2009 report on “hotel bookings by distribution channel” as quoted by Starkov (2010) shows that the online channel is the only channel that is growing even in today’s difficult economic conditions where demand for rooms is far less than the supply, “Internet bookings for the top 30 hotel brands increased by a remarkable 6.6% in 2009 vs. 2008”. Whereas hotel room bookings through GDS and Voice Channels, decreased considerably.

“HeBS’ findings based on the latest eTRAK benchmark report, surveys and industry data from PhoCusWright and ARC” as quoted by Starkov (2010) are as follows:

1) GDS Channel Is in Steady Decline:

GDS hotel bookings via the CRS of the top 30 hotel brands declined by 3.7% 2009 vs. 2008, and constitute 23.6% of total CRS bookings in 2009 vs. 27.3% in 2008 (eTRAK).

Back in 2006, GDS CRS reservations constituted 31.3% of total CRS bookings for the top 30 brands. GDS share has decreased by 24.6% from 2006 to 2009, when it was reported at the 23.6% level.

Travel Agency Share from Total Travel Market in the U.S. dropped from 41% in 2006 to 33% in 2009 (PhoCusWright).

U.S. Travel Agency Locations decreased by 7% in 2009 vs. 2008. The number of locations has been decreasing at an average rate of 4% every year since 2001, and the number of travel agencies has declined from as high as 35,000 in 1995 to less than 16,450 in September 2009 (ARC, HeBS).

2) The Voice Channel Contribution Is Decreasing:

Voice channel hotel bookings via the CRS of the top 30 hotel brands declined by 2.9% in 2009 vs. 2008, and now constitute 22.2% of total CRS booking in 2009 (eTRAK). Last year’s decrease is in addition to a decline of 2.8% for the full 2008 vs. 2007 (eTRAK). The Voice Channel is in decline for the 6th consecutive year (HeBS).

3) The Shift from Offline to Online Channel is Permanent:

54.2% of overall CRS bookings for the top 30 hotel brands come from the online channel, which is an increase of 6.6% vs. 2008 (eTRAK).

60% of leisure and 40% of business travel will be booked online in the U.S. this year (PhoCusWright).

45% of hotel bookings in 2010 will be via the Internet (direct + indirect online channels) (HeBS).

4) Direct online bookings are on the rise:

In 2009, 70.9% of online bookings came from the direct online channel (i.e. the major hotel brands’ own websites), while 29.1% came from the indirect online channel i.e. the Online Travel Agencies. Whereas in 2008 direct online bookings constituted 75.2% part of online bookings and indirect bookings were 24.8%. This represent a great increase in the number of bookings made directly on the hotel’s website as compared to indirect bookings. (Starkov 2010)

Hotel management perceptibly has greater interest in promoting the online booking, especially direct booking on the hotel’s own site, because it is far cheaper. According to a report on E-commerce estimated “cost of direct reservations by traditional means (i.e. fax, telephone, e-mail, etc.) could be as much as 300% higher than processing the same reservation through the GDS, which costs between $3-$5.Furthermore, most reservations, passing through the GDS, are generated by travel agents who charge an average fee of 10%. Bookings via a chain central reservation system cost the hotel $6 to $10 and reservations by a toll free telephone number $4 to $8”. However for hoteliers the cheapest and most satisfactory mode of booking a room is direct online booking variable cost of which is only about $1.50. (Marvel 2004).

Even though GDS still constitutes the major distribution channel for hotel rooms with a 68% share in 2003, their share is diminishing fast due to higher growth rate of the internet, according to Marvel (2004) overall electronic booking increased by only 1.6%, while online reservations rose by 35.5%. However the best source of distribution for any hotel is direct online booking because in indirect bookings the third party intermediaries take away the major chunk of hotels’ revenue in the form of commission. Therefore the major concern of hoteliers nowadays is to devise ways to attract customers to make room bookings directly to the hotels’ website. Several examples of such efforts are as follows:

Four Seasons do not allow any direct bookings over third-party websites.

Hilton (USA) declines “HHonors points” or “air miles for online bookings” to all the bookings that are made indirectly i.e. not on Hilton’s own website.

As of January 1, 2004, Starwood has also take a step in this regard i.e. all bookings made through indirect internet channels will not be eligible for any in-house benefits. Marvel, M. (2004).

Therefore all in all direct online bookings are on the rise and they appear to be the preferred mode in present conditions of recession. However in order to take advantage of this growth in the online distribution channel especially the direct online channel, hoteliers need to make strong and proactive Direct Online Channel Strategy. This strategy should be backed by funds. “Hoteliers must carefully employ ROI-centric initiatives, including website redesign, website optimization and SEO, paid search, email marketing, online display advertising and proven social media initiatives”. (Starkov 2010)

Even in this economy, the budget for internet marketing, and most importantly of direct online channel, should not be decreased or even diminished, because after observing past trends and results of various researches it can be safely said that online channel is the only growth channel for hoteliers and the “only light at the end of the tunnel in this environment. Even in these difficult times we see “Return on ad spend” (ROAS) as high as 3500% from Internet marketing campaigns we run for our clients”. (Starkov 2010)

Another obvious pattern in Hilton Amsterdam’s direct online pricing is that the rates given on hotel’s website are the most expensive when the booking is completely flexible (customer has complete liberty to alter his/her plans as well as they get their full money returned if cancellation is made before or on the day of arrival) whereas other sites give cheaper rates in this situation.

However on the other end Hotel website gives best rates in case of fixed reservations i.e. reservations in which no room is available for any changes and in case of cancellation hotel keeps all the money.

This could be due to the reason that in case of cancellation hotel has to bear the entire cost whereas booking sites that usually have rooms allocated to them do not have to face any such penalties.

ADVANCE PURCHASE FULL PREPAYMENT, NO REFUND OR CHANGES (price in GBP)

FLEXIBLE RATE, (Price in GBP)

Hilton website

243.524

278.438

Laterooms.com

258.76

277.31

Orbitz

243

262

Booking.com

254.871

273.201

Another observation is that Advance booking rates are different from immediate booking rates. It is an effective tactic to increase confirmed sales. Customers are encouraged to book their rooms well in advance, by offering them lower than usual rates. Booking cycle of a hotel determines how well in advance customers can book rooms, a hotel offers greater discount at the beginning of a cycle whereas higher rates are offered towards the end. (Ismail, 2001). This also helps in managing the bookings in lean seasons i.e. in off seasons lower booking rates are offered to attract greater distribution. Best rate for Hilton deluxe twin room decreases to £202 from £243 if the booking date was moved from 30th April to 31st April.

Hilton also offers package rates, hotel package comprise of a hotels room combined with any other service of the hotel, most commonly it is room and meal package that hotels offer.

There are many kinds of package deals available at Hilton hotel, such as:

Bread and breakfast package, where room is bundled with breakfast for two at a discounted price.

Another package combines air ticket, car rental and room all three in one package price.

Beside package pricing Hilton also offers group rates, i.e. booking a larger number of rooms for a party mostly at a lower rate.

Keeping in view the benefits and complexities of using multiple channels in hotel distribution we can say that the key to adopting best distribution channels and increasing revenues is to choose distribution channels as per hotels needs “without falling prey to an increasingly convoluted snakes’ nest of technology”. Managing these distribution channels also costs money and considerable time of hotel employees. . (Fontaines 2007) Complex hotel distribution systems are strategically dangerous for a hotel as managing a complex distribution may raise the price for customer who may switch to low cost channels.