01Nov

Do You Know What Your Distribution Channels Cost?

Author: Kristi White

Many hotels are not as focused as they should be on their channel costs. In fact, a report by the Hotel Electronic Distribution Network Association (HEDNA) revealed that just 65 percent of chains and 48 percent of independents look closely at cost of distribution. A key factor in your property’s growth and profitability involves developing an effective channel mix strategy. Crucial to that strategy, is accurately determining the costs involved in acquiring and retaining guests.

Transparency Required

Intermediaries: Third-party channels such as online travel agencies (OTAs), global distribution systems (GDSs), metasearch platforms, and wholesalers form a significant part of your distribution toolkit due to their marketing power and ability to generate high traffic from across the globe. When your hotel cuts the check for those costs, such as commissions or transaction fees, the cost is fairly easy to determine. But third-party channels using the merchant model, like Expedia and Priceline, can be a bit trickier. Because the OTA keeps the contracted margin as their commission (as opposed to the hotel writing a check), it may appear as if the money you receive from them is pure revenue. But the gap between what the guest pays and what you collect is the cost and should be accounted for in your processes.

Direct: Generating business through your direct channels comes with costs as well. Research shows garnering one of the first three positions on a Google search engine results page (SERP) achieves significantly higher click-through rates. And obtaining those positions involves expenses revolving around website maintenance, search engine optimization (SEO), and pay-per-click (PPC) campaigns designed to drive more direct traffic and bookings. Additionally, there are the costs to maintain your website and the transaction fees to process the reservations.

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Brands: Even if you’re part of a brand, there are costs to consider. While it’s true you likely receive “free” distribution through your brand’s website and mobile app, there are fees associated with belonging to a brand. Hotels must generally pay franchise fees on total room revenues, plus loyalty program fees (including loyalty discounts that erode rate), and some brands might even charge transaction or pass through fees. A study of 48 brands by Peter O'Connor, chaired professor of digital disruption at Essec Business School, showed the median of brand fees associated with distribution totaled 24 percent, higher than some OTA commissions.

But Wait! There’s More

Sometimes channel costs are hidden within your sales and marketing expenses in the form of email marketing campaigns, social media engagements, retargeting, and reservation abandonment programs. These marketing costs associated with distribution must be included in the same way as OTA commissions and third-party fees. Hoteliers must also consider reinvestment costs necessary for retaining customer business, including loyalty program discounts and comps. In addition, brands will typically charge performance marketing fees for bookings originating from marketing or search channels like Google and TripAdvisor.

Accurately assessing all costs allows you to clearly understand the margins for each channel – a key component of a profitable revenue management strategy. Sometimes obtaining 80 percent occupancy through lower-cost channels is more profitable than 100 percent occupancy through higher-cost channels.

In order to achieve transparency in all of your distribution costs, and optimize your channel performance, you need top-line resources and tightly integrated technology systems in place. This ensures accuracy while streamlining identification and analysis of all costs – no matter where they may be hiding.

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