Pricing and Distribution Channels: Hilton Amsterdam

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) 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 hotels 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 hotels 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 reservations total. Contrary to popular belief, third-party websites are no bargain either for the hotelier, as they keep about 13% of a bookings 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 clients 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 pri ce to the hotelier who is lodging their clients. Looking at Hilton Amsterdams 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 Hotels 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 hotels 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 todays 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 years 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 hotels website as compared to indirect bookings. (Starkov 2010) Hotel management perceptibly has greater interest in promoting the online booking, especially direct booking on the hotels 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 Hiltons 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 Amsterdams direct online pricing is that the rates given on hotels 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. Spend Analysis: Application and Strategies Spend Analysis: Application and Strategies In spend analysis, skills to do with data analysis are extremely important. However, experts in related fields question the use of a software application to automatically generate the required data. In most cases, automated application does not necessarily give the accurate data as some processes require practical skills needed in the respective field. In everyday life, individuals come across a lot of information and data that is less likely important in decision making. This implies that an individual must possess data analysis skills to identify the information that is required and the less vital. In decision making, some major characteristics of vital information are; consistency, having a pattern and without errors. â€Å"Spend analysis is referred to as the systematic review of historical purchase data† (Pandit Marmanis, 2008). One of the major reasons why spend analysis is carried out is to be able to identify savings opportunities. Despite the fact that there are several indicators used to identify such opportunities, an automated software application would be incapable of successfully identifying such opportunities depending on the order of accuracy and precision. Some of the key indicators in spending analysis require analytical skills such as in price and applying best practice in various processes in an organization or household setting. If there is a consistent increment of prices of goods and services with time, it would be prudent for an individual or an organization to pay more attention to the purchases in specific categories and ensure that the factors leading to the rise in prices is well addressed. Such a process would require data analysis skills with specific attention to identifying a pattern of price increase. The application of best practice has over the years not been fully adopted by businesses. This is because, this technique is considered as simplified and less likely to come up with a saving opportunity. However, there is always the likelihood that an organization or an individual is overpaying for goods and services. Best practice requires data analysis skills which are applied to areas that provide the best cost saving strategy. Other indicators in spending analysis, such as the purchase price variance (PPV) can use software application to identify patterns or any irregularities from the data collected. According to Barone Franco. (2012) the six sigma methadolo0gy is used to enhance organizational performance through the use of statistical process meant to reduce process variation that characterizes most organizations. Currently, the six sigma methodology is commonly used by many organizations to identify areas of wastage in addition to improving the overall productivity of the organization through the improvement of business processes. The six sigma indicator shows the variation in parts, processes and products. However, of importance to note is that the six sigma method is not used independently in an organization. Most of the businesses that use six sigma also incorporate other lean methods. The six sigma methodology has over the years evolved to become a dynamic process that is used to improve performance and also maintain the process environment. Whats the strategy does is identify the major causes of performance gaps, then propose appropriate methods of addressing the performance gaps with an overall aim of increasing performance. The six sigma uses a sequential method known as the DMAIC, which stands for define, measure, analyze, improve and control. This is the guide that is used to identify the performance gaps and propose remedies to the gaps. Define: This step is expected to identify the performance gaps and develop alternatives that would lead to a higher sigma. Measure: In the step of measuring, there’s the use of metrics to come up with the baseline data to be used to identify the major cause of the problem. In addition, information must be gathered first before any data is incorporated. Analyze: In this step, statistical tools are used to confirm that the problem identified is admissible and that the factors found to cause the problem are the root causes of the problem. Improve: This step seeks to offer alternative solutions aimed at addressing the problem. Some of the key questions that are frequently in this step include; which way is cheaper, which way is faster? There are many solutions that are commonly identified as the alternatives to performance gaps. The most common solutions under this step include; mistake proofing and cellular manufacturing. Control: The control stage is also known as the institutionalization stage. This stage modifies parts, processes or products in accordance to the proposed solutions and also periodically monitor the changes that arise from such substitution. When carried out effectively, spend analysis can be greatly beneficial to an organization. This is because in addition to maximizing productivity and efficiency of business processes, spend analysis also encourages insightful decision making that is backed by both facts and figures. In addition, spend analysis is responsible for viable, cost-saving techniques that assists businesses identify areas of wastage and address the issue for better performance. These roles on spend analysis are more inclined to the financial aspect of business. Most of the problems that spend analysis aims to solve are issues to do with the expenditure and supply management. While most business processes seem intertwined and thus cannot occur individually, the financial aspect of business is the hub of all the performance gaps that spend analysis seeks to solve. By analyzing the concept of ‘spend’ most businesses are able to compare the spending behaviour with the production output and identify areas that need to be improved so that the organization can achieve higher performance. As stated by Ramsey and Silverman, (2002) research has established that businesses that use spend analysis are more likely to improve on performance with an approximated improvement rate of 24% in terms of general efficiency. With such statistics, there is no doubt that spend analysis has immense benefits to an organization in terms of driving performance and through the establishment of viable cost-saving techniques. Considering that spend analysis is a process that is meant to improve on the efficiency of products, processes and parts, there are numerous challenges that most organizations face during the implementation stage. Most organizations consider the spend analysis to be a dynamic process that is difficult to initiate and manage. More importantly, the processes involved in spend analysis require a high level of accuracy. For a business to develop a well leveraging spend analysis, integration of data from various different sources is required. However, a spend analysis is not only made possible by accurate data. There are various other factors that complement the methodology including finance, supply chain and IT. The prevailing economic times dictate that organization take advantage of any spending opportunity that comes across. The best technique to do this would therefore be through spend analysis. References Barone, S., Franco, E. L. (2012). Six Sigma methodology. Statistical and Managerial Techniques for Six Sigma Methodology: Theory and Application, 1-21. Ramsay, J. O., Silverman, B. W. (2002). Applied functional data analysis: methods and case studies (Vol. 77). New York: Springer. Pandit, K., Marmanis, H. (2008). Spend analysis: the window into strategic sourcing. J. Ross Publishing.