Is your loyalty program encouraging (ahem) loyalty?

Natalie Osborn
Natalie Osborn|February 16, 2012

I recently caught up with Mike McCall, PhD, Visiting Scholar in the School of Hotel Administration, and a Research Fellow of the Cornell Center for Hospitality Research. We chatted about customer loyalty, and how to identify and develop your best customers.

How do you identify your best customers?

First of all, Mike recommends that you work out what “best” means to you. A loyal customer is not simply a customer who is a repeat customer. He believes that repeat patronage is an important aspect of loyalty, but it is not the only measure for loyalty. One of the things that you might look for in your best customer is someone who voluntarily markets your firm to their social network. These customers can be considered highly loyal, because they are the customers who are talking publicly about what a great firm you have.

How should you go about developing your best customers?

Mike feels that you need to look at segmenting and differentiating customers in your loyalty program, using meaningful criteria. One place that you can start is to look at spending behavior. If you measure not only how frequently they visit your firm, but also how much they spend when they are with you, you will start to get a better picture of your best customers than if you just measure frequency.

Mike used an example with two different customers of a certain airline to illustrate his point. A loyalty program member who flies frequently between Raleigh and Chicago on the airline will get a large amount of points and subsequently perks as reward for that frequency with the airline. In comparison to the loyalty program member is the retired customer who flies to Europe once per year in first class. By using frequency alone as a measure of loyalty, the retired customer would escape being promoted by the airline to one of the higher loyalty tiers. It is highly possible that both these customers spend a similar amount of money with the airline, and by missing the retired customer the airline would miss a valuable opportunity to recognize and develop further patronage from that customer.

Are loyalty programs that have large differences between the tiers more or less effective?

Mike thinks that program tiers in loyalty programs are important, but rather than basing them on the precious metals (such as silver, gold and platinum), tiers should be based on the kind of behaviors that your customer’s exhibit. The problem that Mike sees with large difference between program tiers is that you are almost always encouraging defection amongst your program members.

Defection? Wait a minute - I thought we were talking about loyalty programs?

Mike clarified with an example from a hotel loyalty program. Let’s say that I belong to a particular hotel rewards program that offers me status after I stay 10 nights over a 12 month period. Well, knowing that I am unlikely to reach the next tier of the program, which requires me to stay 50 nights over a 12 month period, my incentive as a customer of that brand is reduced. Instead, if I have more nights to stay in a hotel for that year, I will likely begin working towards status on another competitor’s hotel reward program. One of the downsides of tiers that are too far apart is that customers will start to manage their rewards programs instead of necessarily demonstrating the kind of loyalty that the firm would want.

Does incorporating customer lifetime value help improve loyalty programs?

Mike explained that there are a number of ways to incorporate customer lifetime value into a loyalty program. He says that it is important to recognize that the customer interaction does add value over time. The longer you can keep the customer working with you, the better the relationship will be. Now that the analytic capabilities are available for us to take a deep dive into the customer and their spending behavior, we have the ability to understand when they are visiting us, and we have a better grasp of who our customers are and what they are doing.

An important starting point is to look at your existing customer base and try to identify what the differences are between the people who are part of your loyalty program and those who aren’t. Program managers should focus on growing their loyalty program in a manner that makes the customer profitable versus just a repeat customer. By incorporating the lifetime value of the customer we are able to do that.

Loyalty versus Price Sensitivity

Mike highlighted that many firms are challenged when they try to create loyalty without at the same time creating price sensitivity. A price sensitive customer is not necessarily a loyal customer. Mike sees this happening when firms tend to give away as rewards things that customers would pay for anyway. The example he used was the “coffee card” he carries where every 10th coffee is free. Mike highlighted that by having the card, he is not drinking any more coffee, but the firm has given away 10% of their product for free. He stresses that it is important to focus on those rewards that create value with your customers as opposed to what is readily available.

Fantasy Loyalty Program

Lastly, I asked Mike if he was able to design a fantasy loyalty program - what would it look like?  In fantasy land, Mike would base a loyalty program on levels of brand insistence, harnessing those customers who are loyal beyond measure. Getting there, he says, means paying attention to your data and collecting the most relevant data. When you look at the amount of data that we have available to us today, the biggest challenge is our ability to draw the correct interpretations from it. Analytics can make the most difference in mining your customer intelligence for the customer who will tell everybody about your firm, the customer who will show up regularly, and the customer who will pick your firm as opposed to any other.

That’s your best customer.

Additional discussion on how to strike a balance between improving the customer experience and controlling costs can be found in the Loyalty, Rewards and Value: What Do We Want from Our Customers? webcast sponsored by SAS and the Center for Hospitality Research at Cornell University’s School of Hotel Administration.

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Different place, same problems – How do we engage with the guest and keep them loyal?

Kelly McGuire
Kelly McGuire|February 8, 2012

I recently attended the Cornell Hospitality Summit in Mumbai India at the Taj Palace.  This was an event co-sponsored by Taj Hotels Resorts and Palaces and The Cornell Center for Hospitality Research.  I also attended the invitation-only roundtable on Customer Value that the Cornell Center for Hospitality Research organized in advance of the Summit.

This was my first trip to India and I was excited not only to experience India (and the world-class service at the Taj Palace), but also to hear directly from the Indian Hoteliers about the issues they face in that part of the world.  First, let me acknowledge the hosts of the event, Taj Hotels, Resorts and Palaces.  The service and the facilities were top-notch!  I thoroughly enjoyed my stay (in Mumbai and in Delhi) and I am now completely spoiled by the incredibly attentive service I received!

Rohit Verma, Executive Director of the CHR, and his team did a great job pulling together the invite list for the roundtable and the summit.  They attracted top executives from Starwood, Peppermint Hotels, Caesars Entertainment, The Taj Group, Leading Hotels, The Leela Hotels, Palaces and Resorts, Oberoi Hotels, The Lemon Tree Hotel Co., Golden Tulip Hotels & Resorts, Apeejay Surrendra Park Hotels, and Jebel Ali Hotels International.  There were also a number of executives from software vendors, OTAs, consulting companies and GDSs.  The CHR will publish proceedings from the Roundtable and the Summit, and I’ll link to it here when it’s available.  In the meantime, here are my thoughts about what we talked about at the event.

What struck me the most about the conversations during the roundtable session is that hoteliers around the world face the same basic issues when it comes to building valuable guest relationships.  The hoteliers at the roundtable spoke about the need to avoid the commoditization effect resulting from competing simply on price.  The challenge they face in an increasingly transparent world is to identify and foster those components of the brand promise that encourage loyalty. This is a universal challenge in the hotel industry, but there were nuances in the Indian market that I found interesting.  First, the majority of the branded properties in India fall into the luxury or upper-upscale segments.  This means that for them, competing on service is not a differentiator – they all have excellent service.  Therefore, they must find something else about the brand that engages their guests and keeps them coming back.

Vikram Oberoi, from Oberoi (who, I should also thank for hosting a fantastic dinner for us the night of the event at the Oberoi Mumbai!), mentioned that when they ask guests how they heard about Oberoi Hotels in post-stay surveys, the number one response is either through friends or business associates.  This holds for both business and leisure travelers, showing that word of mouth is still king. However, the hoteliers at the roundtable all mentioned that a significant, and growing, portion of their guests are turning to social media for recommendations.  Rahul Pandit from the Lemon Tree Hotel Company said that he has put Trip Advisor reviews on his brand website, and he sees a 20% conversion rate there (which is high compared to other channels).  Vivek Bhalla from Starwood said that the real opportunity is to use all of the available technology to your advantage – as tools to engage with consumers and provide that unique personalized experience that drives loyalty (Any of this sound familiar to US hoteliers reading this blog??).  Understanding how, where and when guests prefer to engage with you is an important factor in maintaining these long term relationships.

Secondly, the luxury market is over-penetrated in India.  The clearly identified opportunity for these chains is to develop brands that can compete in the mid-market.  Not only is there international demand for a mid-scale option, but Indian tourism officials have recognized that they are losing domestic tourists to other locations in South East Asia because it is actually cheaper to go abroad for a leisure break than to domestic locations.  However, translating the western mid-scale concept to the Indian market will be a challenge.  There is a definite gap in expectations from a mid-scale brand between international and domestic travelers, meaning that the traditional service offering at a mid-scale property may need to be altered.  The rising middle class in India is not accustomed to self-service or limited service, even though they may not be willing or able to pay luxury prices.  All of this gets back to understanding consumer preferences and the value they place on key aspects of your service offering – a problem all hoteliers struggle with.

In response to the growing levels of both domestic and international tourism in India, both domestic and international brands have development underway across the major and secondary markets in India.  This will create a challenge for the domestic brands.  Raymond Bickson from the Taj Group mentioned that he is concerned about maintaining market share against the major global players while being forced to compete against their robust loyalty program structures.  In addition to feeling almost forced to open hotels in source markets to build awareness of the Taj brand among global travelers, I noticed that Taj has also started to focus on building their own loyalty program.

The conference in India uncovered the root of the question we are trying to answer in this month’s series of blogs.  How do we know who our best customers are?  Identifying and profiling these customers would help companies identify the differentiating elements of their brand or service and to target new customers with similar profiles.  Uncovering needs and preferences of the “best customers” can inform service design, so companies who are adjusting service offerings for a mid-market brand know which elements are essential and which can be scaled back.   All of these analyses require that hotels collect detailed guest profile data from all interactions with their guests across the enterprise.  Many hotel companies use loyalty programs to encourage guests to share the kind of information that allow hotels to glean valuable insight about their customer base.  However, loyalty programs themselves have become commoditized, and are turning into a “me too”, rather than a competitive advantage.

In the blog series this month we’ll debate the pros and cons of loyalty programs, and provide suggestions about how to leverage these programs to collect the data that will help you to build that 360 degree view of your customer.  I’m sure Mike McCall from Cornell will have some good advice for Taj and the other Indian companies on the best way to structure their loyalty programs if they want to compete with other global brands.  Natalie spoke with him, and will be re-capping their conversation in next week’s blog.  Until then, we look forward to your comments and questions.

Additional discussion on how to strike a balance between improving the customer experience and controlling costs can be found in the Loyalty, Rewards and Value: What Do We Want from Our Customers? webcast sponsored by SAS and the Center for Hospitality Research at Cornell University’s School of Hotel Administration.

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How do I leverage my relationship with online travel agents?

Natalie Osborn
Natalie Osborn|February 2, 2012

This week I chatted with Chris Anderson, associate professor at the Cornell School of Hotel Administration, where he teaches courses in revenue management and service operations management. Chris published The Billboard Effect: Online Travel Agent Impact on Non-OTA Reservation Volume research in 2009, and Search, OTAs, and Online Booking: An Expanded Analysis of the Billboard Effect in 2011. The premise of the billboard effect is: hotels that are listed on third-party distributors’ websites, commonly known as online travel agents (OTAs), gain a reservation benefit in addition to direct sales. That benefit involves a boost in reservations through the hotel’s own distribution channels due to the hotel’s being listed on the OTA website.

OTAs are successful because they focus on the consumer travel search and shopping experience

Chris and I chatted about why there is so much emotion when it comes to discussing the relationship between hotels and OTAs. I’d suggested that as demand and rate recovers for hotels that current OTA contracts are starting to chafe, but Chris thinks it runs deeper than that. Chris recalled us back to 2002, when markets were weak and OTAs first really came to fruition. As the economy picked up through’03,’04 and ’05, hotel companies really started investing in their web presence, and hotel suppliers were able to get a significant amount of consumers booking online to do so at their own brand.com.

Let’s compare those days to the current cycle. During this downturn there has been even more pick-up for the online travel agents and, unlike ’03-’05, consumers are not moving back to supplier websites. Not only is it NOT happening THIS time, Chris states, but it’s unlikely to happen again. Overall, consumers are choosing to search or shop for hotels where they have a more enjoyable online shopping experience. And OTAs are heavily invested in making that shopping experience enjoyable. Unless hotels can focus on creating that kind of experience, they will never be able to attract consumers back to brand.com.

Shop/Search vs. Transact

Chris thinks that it is unlikely that hotel companies will be able to catch up and deliver a similar shopping experience to online travel agents unless they make a significant investment in technology at all levels of their operations. OTAs have developed an unparalleled shopping experience for consumers by merchandizing their offerings. They have been successful in deploying behavioral pricing techniques, such as “strike-through” pricing and highlighting value with programs like “hotel freebies”. OTAs further curate a lot of content including reviews and photos that provide consumers with a richer experience.

Chris feels that largely, hotel supplier websites are reservation transaction vehicles, versus enjoyable shopping experiences.

Search is positioned to become more and more costly

Google has recently ratified its privacy protection policies and with that has increased the information it is able to gain at the consumer level. Chris thinks that the result of this is that Google will be better able to estimate the value that they bring to suppliers, whether online travel agents or hotel suppliers. Once Google knows that value, they will be able to further monetize that value, potentially making Pay Per Click advertising more expensive. Ultimately, this will be at the expense of the supplier and online distribution will continue to be a cost to hotel owners.

Focus on where your customers transact, regardless of where they search

Chris thinks that instead of trying to compete with the OTAs online shopping experience, hotel brands need to focus on driving customers to want to transact directly with them. Brands still offer a lot of value. While consumers associate online travel agents as an efficient means to shop and research, “at the end of the day consumers really want to transact with the guy who owns the stuff.”  That’s why you can observe a much lower OTA market share of transactions for brands than for independent hotels, as Mark Lomanno highlighted in his research. Consumers may choose to transact with a brand directly simply because they will get their loyalty points. For an independent, a consumer may prefer transacting with the OTA because that OTA already has their credit card details, their name and they may even get OTA loyalty points.

Hotels suppliers should look to create incentives for consumers to transact with them directly, to expand and deepen those incentives, and focus on delivering on those. Otherwise they need to be prepared to make the same investments that online travel agents have made to create comparable shopping experiences.

Chris Anderson also presented in the New Pricing Strategies for Hospitality and Gaming webcast sponsored by SAS and the Center for Hospitality Research at Cornell University’s School of Hotel Administration.

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An analytic approach to multi-channel distribution management

Natalie Osborn
Natalie Osborn|January 26, 2012

Most of what I have read over the last few months on hotels and online travel agents (OTAs) has read like a chapter from War and Peace. And sometimes it has been difficult to determine whether it is WAR or PEACE. Hoteliers and online travel agents have a symbiotic relationship that changes with the balance of supply and demand. In times of high supply and low demand for hotel rooms, the OTAs are the aggressor in negotiations. In times of low supply and high demand, hotels hold the upper hand. But, since this blog is all about finding analytic solutions to your operational challenges, let’s take a look at a more analytic approach to multi-channel distribution management.

There will always be new channels to manage

As Eoin Furlong stated in his conversation with Kelly McGuire, hoteliers will always have new channels to evaluate and manage. The last couple of years have seen the introduction of several new distribution channels and even several new “genres” of distribution channel. Not only do we have Google’s Hotel Finder, and most recently Room Key, but we also have flash sales, reverse auction sites, and social couponing or daily deals sites as new types of distribution partners.

Participation in these channels provides a wealth of price data to your customers, making rate fencing and segmentation more challenging, and “price” more of a driver for your customers than ever before. When you add to this the level of exposure your brand and pricing gets through social media, you can understand how transparent your pricing really is. Not only that, but your customers also have more information about your competitors pricing. Savvy customers are able to evaluate your prices against your competitors in a variety of public forums.

The shift from “yieldable” to “priceable” is testing the limits of existing revenue management and price optimization technologies and approaches

If your pricing models are based on stable inventory controls, and apply a post-process approach to demand-price models, you may be left wondering why your channel price recommendations are so out of sync with your negotiated rates. You may also be frustrated from attempting to influence channel prices and not quite ending up with the result that you wanted. These issues are partly a result of the approach to calculating channel pricing, and partly because of the fluctuations in segmentation from “yieldable” segments to “priceable” segments. Here you are left with the double edged sword of not responding enough to market movement, and channel price recommendations not varying adequately with seasonality or day of week.

The movement from “yieldable” to “priceable” (and sometimes back) not only impacts your demand-price relationship but also how your customers book. With a myriad of competitive price information and channels (including mobile) available to them, your customers feel more confident in booking later in the reservations cycle, even as close to same day. This confidence comes from their ability to access a multitude of prices, as well as shared information on the best deals and the instant ability to take advantage of any pricing errors made by you or your competitors.

It’s about time we did a better job of linking price and demand

Since pricing is increasingly the key element in the buy-or-not-buy decision, it is necessary to accurately model the demand-price relationship. Specifically, price elasticity needs to be calculated at different levels of data, including day of the week, time of year and days till arrival. Recognizing these differences allows the models to both create better forecasts and better optimized pricing.  When demand is modeled directly as a function of price rather than post-process, it allows for simultaneous optimization of both pricing and inventory together, producing better recommendations and fewer inconsistencies.

Is that a light at the end of the tunnel, or an oncoming train?

Until improved demand-price models are widely available in Revenue Management and Price Optimization analytics, you will continue to see these inconsistencies between the controls for “priceable” demand and ”yieldable” demand.  In the interim, you need to carefully evaluate the channels in which you chose to participate. As Mark Lomanno explained in a previous post, at least for the US, hotel demand is a zero sum game.  Making channel pricing decisions without considering the follow on impacts to negotiated rates, groups, brand.com and other “yieldable" demand will not produce the results that you are looking for.

The shift from inventory optimization to price optimization and the growing importance of distribution channel management are trends featured in the New Pricing Techniques for Hospitality and Gaming white paper.

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Trends in distribution management - the operator's perspective

Kelly McGuire
Kelly McGuire|January 18, 2012

I had a chance to catch up with Eoin Furlong, Director of Revenue Analysis for Hilton World Wide last week.  Eoin’s team sits within the Revenue Management group at Hilton and is responsible for managing relationships with the third party Online Travel Agents (OTAs).  They act as a consultant and partner to the property revenue managers, and advocate for them with the OTAs.  They handle any connectivity issues, as well as provide reporting and auditing tools for the hotels.  He told me that his goal is to make managing the OTAs and measuring their effectiveness as easy as possible for the property revenue managers so that they can focus on managing streams of business that might be more profitable for the hotel. I was encouraged by the careful and measured approach Eoin takes to the third-party relationships.  It was good to be reminded that there can be benefits, if you understand where to look for them. I’ve categorized the general questions I asked with his responses below.  You can also hear him answer in his own words through audio clips from our conversation.

Do you believe hoteliers have given up control of their inventory?

Eoin was particularly passionate when I asked him if hotels have given up control of their inventory.  He thinks it’s a misnomer to say that.  He pointed out that relationships change with the ebb and flow of the economy.  Obviously during a downturn when you need the demand, you’ll make more concessions to get it, but he reminds hoteliers that now that the economy is swinging back up, we can take some of that power back in the negotiations.

He also pointed out that hotels discount in many areas, including tour, wholesalers, and even groups – and that it would be interesting to analyze levels of discounts offered to these groups and compare that to the level of discounting that takes place through the OTA channel.  In other words – OTAs may be the most visible, but they are certainly not the only culprit.

His final point, which was an excellent one, is that as much as the share of demand that is being booked through the OTAs is growing, brand.com represents a much larger share of bookings for most of the major hotels, and that is a highly profitable channel.  And he doesn’t want to forget about the more traditional channels like travel agents, GDS and voice.  Nurturing the personal relationships you have through these channels can result in a much higher rate, he says, if you have the right message and the right people to deliver it.

What are some best practices for working with the OTAs?

Eoin reinforced many times that the OTAs represent an opportunity for the hotels to fill rooms, but that the use of the channel and the pricing strategy should be evaluated in the context of the goals and strategies of the company, and needs and characteristics of the individual properties.  Ultimately, it is up to you, as a hotel company, to determine which channels are the most productive or profitable. You should understand if there are differences by geography, hotel type or other factors, and bring all this information to the table when you are negotiating terms.

Are there differences in the way that global markets leverage the OTAs?

Eoin’s team has global responsibility so we spent some time talking about the differences between markets globally.  He made the point that markets in Europe and Asia are much more dependent on wholesale or tour group business than the US.  This business is static, negotiated far in advance, and definitely deeply discounted.  In some of these markets, the floating discounts used on the OTAs might actually be more profitable, and could help these hotels to break their dependence on the static wholesale business.  He also pointed out that as the emerging markets, um, emerge (my words, not his), hotel companies have a huge opportunity to learn from what’s happened in the US market – through the two recent economic downturns and the emergence of the OTAs – and start out from the beginning with the right mix of business.

What about discounting?

We talked a lot about the temptation to discount, and the conflicting messages about dropping rates to steal share and maintaining rates.  In today’s climate there are many opportunities for hotels to offer deeply discounted rates through niche channels like mobile apps or flash sales.  Eoin cautions that if a hotel has a sound revenue management strategy in place, these channels shouldn’t be necessary.  When you find the need to push a lower rate into the market, he suggests, why not offer it through as many channels as is feasible, and then test to determine whether it actually helped drive the results you needed.  In fact, he recommends (and I emphatically agree), that hotels remember that you don’t always have to offer a discount to get consumers’ attention.  Offer driven messaging like partner opportunities or a local event can serve to remind guests why they want to stay with you just as effectively as a discount.  I think that a fallout of the recent recession is the industry’s focus on deal seeking and discounting, as opposed to value or benefits driven messaging.  Why proactively seek bad business when you can nurture your most profitable relationships?

What does the future look like?

Eoin is closely following the activity within the search space.  He sees that hotel companies are beginning to more proactively seek ways to compete in search.  There is an opportunity to capture the customer at the beginning of the search process before they find you through a non-proprietary site, and he sees the  industry actively seeking ways to monetize this channel.

Trends in pricing and distribution management are also featured in the New Pricing Strategies for Hospitality and Gaming webcast sponsored by SAS and the Center for Hospitality Research at Cornell University’s School of Hotel Administration.

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Are Hoteliers Losing Control of their Inventory?

Kelly McGuire
Kelly McGuire|January 12, 2012

This was the question that hotel owners came to Cindy Estes Green from The Estes Group, and Mark Lomanno, member of the board of directors of newBrandAnalytics and former President and CEO of Smith Travel Research, amid growing concern about the penetration of the OTAs, and the cost of doing business through these channels.  This question developed into a research paper which you can access here.  I had a chance to speak with Mark about the study and its implications recently.  Before I get into the details of our conversation, I must say that the issues uncovered by the study simply cannot be ignored by the hotel industry, managers, owners, OTAs, vendors alike.  (which is why we’re  kicking off the blog series by exploring this timely topic).  The study quantified what experts have long suspected, that the way we’ve been operating in terms of pricing and distribution, must change if hotels want to continue to operate profitably.

The study utilizes three basic methods: a data analysis of 24,000 participating US hotels who contributed monthly rooms booked by channel and associated revenue to STR from January of 2009 – June of 2011; an econometric modeling of price and demand elasticity done by Tourism Economics; and a broad survey of trends in distribution management conducted by Cindy Estes Green.   In our discussion of the results, several important data points really struck me:

Imbalance between channel mix and pricing efforts

Results indicate that 35% of demand in 2010 came through electronic channels (including brand.com, GDS and third party). Of this demand, only about 10% as from the OTAs – and that only accounted for 7% of revenue (because of the commissions).   Surprisingly, voice channels accounted for 13% of demand and 17% of  revenue, yet the industry seems to have forgotten about this as a sales channel.  Mark made the comment, in fact, that he perceives that most hotel companies tend to think of voice more for customer care than as a sales channel.  What is scary to me is that, given the amount of attention given to OTAs, when it comes to pricing decisions, we’re letting 10% of our demand affect pricing for 90% of our demand!  Whenever the decision is made to drop a price on an OTA (which, because of rate parity, means discounting for brand.com too), there are follow on impacts to any linked prices (from negotiated contracts) and the pricing for groups as well.  I understand that the OTA price is not only controllable, but also highly visible, and therefore warrants the extra attention.  However, if you aren’t considering the impact of the OTA pricing on the other 90% of demand (and let’s not forget, actually 93% of revenue), and vice versa, you are definitely leaving money on the table.  The problem is that legacy revenue management systems tend to deal with these demand streams independently.  That must (and will) change soon, or we’ll continue to lose out on revenue opportunities.

We’re giving money away to the OTAs

This is kind of a controversial statement.  The OTAs would point out that they generated $7.7B in revenue for hotels in 2010 – but they made $10.4B in revenue – so the gap, or much of it anyway – could be thought of as a missed opportunity.  Part of the problem, Mark thinks, is that while the industry is aware of the costs of operating through this channel, it’s not really brought to the forefront in the tools that we use to measure performance – namely the hotel P&L.  Mark made the point that because the OTAs pay the hotels the rate minus the commission, the 25% that the OTAs take doesn’t appear on the P&L – but the GDS commission does.  He suspects (and I agree) that if hotels actually saw that OTA commission figure, they’d pay much more attention to how much volume they drive through the third parties.

There is no doubt that the OTAs invest a good deal of resources on marketing.  Their argument (and that of the research on the Billboard effect) is that they are able to give hotels more exposure than the hotels could generate on their own, and that the commission on one reservation should rightfully be partially considered a marketing expense.  Mark says that there is certainly some validity to the Billboard argument, but his study would suggest not to put all of your eggs in the Billboard basket.  The analysis showed that the OTAs generated a only a negligible amount of incremental demand into a market, which means any
demand a hotel gets is a share shift from another property.  If this is the case, hotels might be better off trying to shift the share through other channels where the net room rate is higher.  Mark also mentioned that if you compare the advertising the OTAs do through major media outlets with the advertising that hotel brands do, you’ll notice two things. First, the OTAs are drastically outspending the hotels; in TV it’s 2 to 1, in online paid search advertising between 3 and 4 to 1.  Second, while the hotels focus on service experience elements, the OTAs are all about the deal “come to us to get a screaming deal on hotel rooms”.  Even though rate parity means the consumer should get the same “deal” through brand.com, the OTAs are training the market that the best deals are to be found on the OTAs.   It appears that even though the OTAs are spending on advertising for hotels, the message is not to the best advantage of the hotels. (and of course the OTAs should be pushing messages out to their advantage, no one can blame them for that – I’m only suggesting that hoteliers should be aware of this)

Trying to win business by lowering rate is NOT GOING TO WORK!

Forgiving the dramatic capitalization, the most important finding in this research is that demand in the US is a zero sum game. There is essentially no  icremental demand in the market, so any movement ends up being a share shift.  This means that demand is generally speaking, inelastic.  You aren't generating incremental demand by lowering prices.  Any demand growth is a function of economics or demographics, not pricing changes.  Mark said that the STR data from 2008-2010 indicates that the only companies that showed any improvement over the comp set long term were the outliers-those that implemented drastic (and crazy) low rates and those that decided to raise rates despite the recession.  Those with high rates showed a bit of drop in occupancy, but not enough to damage performance. Obviously the drastically low rates were made up in volume. Everyone else tended towards the average.  His takeaway “why do we insist on dropping rates when demand is most inelastic.” Hmmm…

So what do we do about it?

Mark says the overwhelming reaction to the study from hoteliers is exactly this question.  Unfortunately, the answer isn’t a simple one.  Their preliminary work indicates that the answer will really depend on the characteristics of the individual properties.  While this may be disappointing to the industry, I think it’s OK.  This reinforces to me the importance of not acting on auto-pilot – or even worse, being led by your competitors decisions (see above about competitive set performance).  My advice: maintain your analytic discipline. Run the numbers on every decision.  Don’t be overly influenced by “prevailing wisdom”.  Keep your eyes open and understand why you’ve made every decision – simply saying “because the hotel across the street did it” isn’t a good enough answer.

In the end, I don’t think that operators should read these results as a condemnation of the OTAs (and neither does Mark), but rather as a call to action.  Cindy has pointed out in interviews, that if the OTAs never existed, something else would have filled the gap they left.  Mark says that, most importantly, the study results tell him that hotels better think very carefully about any deals they enter into next.  Companies like Google and Facebook will (and did) look at the $10.4B in revenue that the OTAs earned in 2010 as an opportunity, and they’ll be knocking on doors soon.  I couldn’t agree more.  We have a history of being lead, rather than leading, and  it’s time we took the reins!

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Are daily coupon deals helping or hurting my restaurant?

Natalie Osborn
Natalie Osborn|January 2, 2012

Love them or hate them, but there’s no denying them. Daily deals such as Groupon and other coupon offers, particularly online deals, are capturing consumers’ imagination and changing their purchase behaviors. Recently, there has been a lot of debate among restaurateurs about daily deals. And not surprisingly, not all of it is favorable.

On the plus side, daily deals can bring a restaurant additional exposure, customers and revenue. But there are plenty of possible downsides. First and most obvious, discounts cut into a restaurant’s revenue. When the total bill is lower, wait staff may be frustrated by getting lower tips for the same work. You might be offering discounts to customers who would have happily paid full price. Worse, you might fill the tables with discount customers who displace your loyal full-price customers.

And while daily deals may bring in new customers, are they good ones? Many restaurateurs believe that customers who use daily deals tend to be cheap and not likely to return unless they get a similar deal. They also worry that deep discounts will diminish the perception of brand value.

These all seem like logical concerns, so Sherri Kimes of Cornell University and Utpal Dholakia of Rice University set out to see if these concerns were valid. In August 2011, they conducted an online survey of 931 respondents who had purchased a daily deal of some sort. Of this survey population, they targeted those who had purchased a restaurant daily deal (617 of them) and particularly those who had done so within the previous three months (30.9 percent of the entire sample, 288 respondents).

The survey provides preliminary and intriguing answers to restaurant operators’ questions about daily deal customers. The key take-away? Daily deal users aren’t all that different from non-daily deal users, and demonstrate the following characteristics:

  • Daily deal users aren’t necessarily cheap, and  they tend to have higher incomes.
  • Some cannibalization occurs; about one-third of daily deal users were frequent customers.
  • Daily deal users are just as likely to return and recommend the restaurant.
  • Daily deal users are highly likely to return even at full price.
  • Daily deal users tend to be “market mavens” who could be good advocates for your brand.

Key findings from the study, “The Effects of Daily Deal Use on Consumer Perceptions and Behavior,” by Sherri Kimes, PhD, of Cornell University and Utpal Dholakia of Rice University,  were featured in the Tackling the Biggest Challenges in Hospitality and Gaming webcast sponsored by SAS and the Center for Hospitality Research at Cornell University’s School of Hotel Administration.

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Welcome to our blog

Kelly McGuire
Kelly McGuire|December 21, 2011

Welcome!  We are very excited to be co-hosting this blog with the Cornell Center for Hospitality research.  Our hope is to continue the efforts we started with our co-sponsored webcast series to bring academia and industry together to address key concerns for hospitality and gaming companies.  Using this format, we can provide even more timely answers to burning issues facing executives; answers based on sound academic research and leading industry experience.   We will still produce webcasts together, but this blog is intented to get content to you faster and more often.  Our plan is to have weekly posts which will be organized around a series of topics that matter to you.  Natalie Osborn and I will interview researchers, industry experts and thought leaders and provide their perspectives to you in written blogs, as well as podcasts and video clips.

Most importantly, we need to hear from you!  We welcome your comments, feedback and suggestions.  We hope you will use this blog platform to engage in conversations with us and with each other.  We want you to share your ideas about future topics as well as your comments and questions on current topics.  We look forward to engaging conversation, and healthy debate.  Thanks for reading!!

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