New Study from Kalibri Labs shows Direct Bookings push is working[i]
The War Is Over, and the OTAs Have Won[ii]
For Hotels, the Airbnb Threat Could Be Receding[iii]
Hotel Investors May Be Ignoring Airbnb Threat[iv]
Believe it or not, these are all headlines from just the last few months. The oldest of them was published four months ago, the most recent in November. Conflicting data is spreading like wildfire. As revenue manager, it’s your job to see where the market is going and stay ahead of the curve, but with so much confusion in the industry, how is this possible?
Making it even harder, independent hotels and vacation rentals are more vulnerable in these scenarios. Why? Because most of the data focuses on chains. A survey of tens of thousands of hotels often includes mostly (sometimes entirely) larger, branded hotels. There is far less research available to independents, and the vacation rental industry is still trying to harness data at all.
Here’s what revenue managers at these types of properties need to know to move into 2018 feeling equipped to make the soundest revenue decisions possible.
Independents & Vacation Rentals More Options Than Big Brands in 2018
In an interview with Jan Freitag, SVP of STR’s Lodging Insights, he said, “Independents have an opportunity to grow occupancy and rate in a way that the big brands do not. Branded hotels have been achieving 70% occupancy; their only solution is to increase RevPAR. Independents, on the other hand, have had an average occupancy of 64.5%, so there is still room to grow.”[v] Of course, this doesn’t mean growing occupancy all at costs (i.e., don’t rely on OTAs). Independents must be cautious about maintaining profitable bookings while simultaneously increasing occupancy.
To do so, focus on revenue management strategies using reliable competitive and historical data. Duetto notes that revenue managers must customize comp sets by segment, analyzing the guests of each particular channel.[vi] Additionally, independents should nurture leads to capitalize on existing demand and bring in the highest revenue direct bookings.
The vacation rental market is projected to see significant increases in revenue in the coming years. By the end of 2018, reports Forbes, the industry is expected to be worth $36.6 billion, “twice the growth rate of the entire travel sector.[vii]
Though growth will slow, vacation rentals still have new market penetration on their side—some travelers still aren’t aware of or have not yet booked a vacation rental— and naturally built-in efficiencies (fewer staff and services). A focus on increased mid-week, shoulder-season, and off-season occupancy, as well as growing RevPAR, are essential.
The Revenue Management Piece of this Pie
Revenue managers aren’t just focusing on RevPAR anymore. A Cornell School of Hospitality Survey published in early 2017 notes that revenue managers want to see new metrics and talk about total profitability instead of top line revenue, as it should be, but it’s falling to revenue managers to chant for change. Revenue managers may be where the industry as a whole has the most opportunity to pivot. According to Sean O’Neill, “Boutique independents and midsize chains like to blame the rise of third-party distributors like Booking.com for their narrowing profit margins. However, this stock excuse is rarely matched by much new in the way of innovation in revenue management… the most critical problem facing hotels is a stunning lack of knowledge about exactly how much falls to the true bottom line for any given reservation.”[viii]
Making organizational change requires more than revenue management technology, it also necessitates training and technology on the reservations level to ensure agents properly sell the rates and use strategies to increase conversions. Additionally, revenue management must work in tandem with sales and marketing to analyze campaigns, carefully track attribution, and ensure marketing emphasized the benefits and value of direct bookings. Teams must if not integrate then synchronize around messaging and goals.
Guest Acquisition Costs Affect the Asset
The cost of guest acquisition has become so substantial that hotels are evaluating it as an asset loss, a big one. Cindy Estis Green, CEO of Kalibri Labs, notes that “a change of -0.3 percent year-over-year was a loss of $500 million for hotels and an asset value decrease of nearly $5 billion.”[ix] The long-term financial health of the property is affected by today’s guest acquisition costs, and it also affects day-to-day operations, for instance, the ability to employ the resources and technology to improve revenue management, marketing, guest service operations, and so forth.
Additionally, STR’s Freitag says that it’s not clear yet if the U.S. lodging industry is at a peak or plateau. “Since 2011, we’ve seen tremendous run-ups in room demand with very limited supply growth. Next year is the first time we will see supply growth hit 2%. Though occupancy in 2016 was the strongest we’ve ever recorded, we’ll start to see a decline. The most important thing hotels can focus on is that RevPAR growth number; it encapsulates everything.”
The first line of defense: reining in guest acquisition costs to increase net revenue. Not only are OTA costs 6.5% higher than direct costs, but direct ADR is also 9% higher than an OTA.
Call centers have the second lowest acquisition costs next to online booking; however, call centers bring in more profitable revenues and have higher conversion rates. According to Michelle Marquis, NAVIS VP of Sales, “All the data still supports that voice produces the highest revenue. This is especially good news right now because mobile search has surpassed desktop, but mobile bookings have only increased marginally. Always be asking where those searches are going? What hotels are finding is that their guests are using click-to-call from mobile devices when it comes to finalizing the reservation, especially for high consideration stays, which includes independents and vacation rentals.”
About the Direct Bookings Campaigns
The direct bookings push by several major chains, also known as “Stop Clicking Around,” has worked… for the major chains. A Kalibri Labs report from November said that from May through December of 2016 room nights were up 7.8% and net revenue growth was 9.3%. What you need to know, however, is that the survey included 25,000 hotels, but the majority were flags, and the focus was on Brand.com bookings, excluding direct bookings via the voice channel.
So does the data still apply? According to Jeff Robertson, NAVIS VP of Marketing, “Absolutely, but there are interesting exceptions for independents and vacation rentals. The first is that the big brands are receiving approximately 7% of their business via voice channel. Independents get around 34% via voice channel, so it’s not an apples-to-apples comparison. But that’s okay because the point Kalibri makes is that the big benefit of the direct bookings campaigns is in the long-term decrease in guest acquisition costs due to loyalty. Independents and vacation rentals have this in the bag in a way that the flagged hotels don’t yet.”
The Kalibri report notes, “The success of the book-direct effort—and all future campaigns to drive direct bookings—will hinge on how well hotels can cater to the guest experience.” For these categories of properties, experience and loyalty are inextricably tied together. Robertson notes, “Experience comes in not just the singularity of the product but also in the human interaction. This is why we see websites with 2-4% conversion rates while reservation agents have a 40% conversion rate. In the end, this bodes very well for independents and vacation rentals. To capitalize on these trends, they will need to shore up their marketing tracking efforts and begin to think more holistically about online and offline booking channels, but after that the experience and loyalty are built-in.”
The Online vs. Offline Reality
Phocuswright’s 15th Edition U.S. Online Travel Overview shows that offline bookings still outpace online with 60% offline and 40% online, but when it comes to those online reservations, OTAs are edging out hotels.
For private accommodations in the U.S., 34% called the homeowner or the vacation rental company, while 32% booked via rental or vacation rental company website.
The bottom line is that both online and offline channels matter to achieving the most profitable mix of bookings. Among the lessons: deep rate discounts are not necessary to attain direct channel bookings. Quite the opposite. They undermine branding and long-term rate strategy. Instead, look to optimize rates across all channels carefully and drive direct bookings through inexpensive value adds as well as the promise of a superior experience.
The Sharing Economy & the Impact on Revenue
For hotels: When it comes to revenue management, does a thriving sharing economy matter? Yes. Two years ago just 14% of travelers had used Airbnb, and now 25% have.[x] The competition has expanded and, in addition to the supply increases among hotels, the sharing economy has further extended the inventory available across nearly all markets. Therefore, hotels must consider vacation rental and home sharing sites when creating rate strategies to stay competitive.
For vacation rentals: All that said, Airbnb and VRBO have been making moves to substantially decrease the contact that owners and management companies have with the guest. Not only is it reducing phone calls, it’s also making the guest experience with their sites more challenging. Questions must be answered one-by-one via email, and some of the listing sites are going so far as to black out details in email correspondence when there is any reference to competitors. Vacation rentals that rely too heavily on sharing sites may find that in addition to their guest acquisition costs, their guest experience also may suffer.
According to Marquis, “For every 5% of call volume a vacation rental gets from VRBO or HomeAway, they will need to increase inbound call resolution (with the same demand) by 2%. Let’s say that 15% of inquiries won’t be coming in via phone anymore. That means you have to increase your call resolution by 6%. It’s a tall order. Vacation rentals will need to shore up their agent performance as well as use tools to manage and consolidate their listing site leads to capitalize on existing call volume.”
The Short Version
Supply is increasing, competition is increasing, demand will start to taper off, OTAs are thriving, and guest acquisition costs are still far too high. But for independents and vacation rentals opportunity is high. Focus on (carefully) growing occupancy and RevPAR going into 2018 and stay centered on driving the direct channel, which means online and offline. Don’t panic, don’t discount unnecessarily. Stay the course and look for efficiencies in sales and marketing and reservations wherever possible.