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Creating a Profitable Hotel Distribution Strategy

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Posted by Cloudbeds
May 17, 2019

For small hotels, hostels, and bed-and-breakfast properties, distribution continues to be one of the most challenging parts of running a profitable hospitality business. With more mobile bookings and new booking channels on the rise, the complexity grows with each passing year.

Today, hoteliers enjoy unprecedented visibility and pathways to reach guests where they shop. Potential guests are now able to do much more research on places to stay, and can quickly compare prices across multiple hotels.

ThinkWithGoogle studied traveler behavior when planning for a trip and identified 700 digital touchpoints (searches, website visits, video views, and clicks), including eight accommodation brands, over the course of a five-month search window. Another analysis from McKinsey was a bit lower, with an average of 45 touchpoints in the average traveler’s accommodation purchase journey. Within this world of options and traveler analysis, hotels must maintain visibility across channels and platforms to stay competitive.

Even though your property can benefit from added online exposure, only you can ensure that you’re converting lookers to bookers and getting the most out of your distribution partners. Whether bookings come from OTAs, metasearch, your website, mobile apps, or over the phone, you can maximize profitability for your hotel by implementing a strategic distribution strategy.

Determining an effective distribution strategy depends on your property’s objectives. Here, we’ll outline the 7 must-haves of a profitable hotel distribution strategy. Pick and choose, or implement them all — either way, you’ll benefit from a more focused and deliberate distribution strategy for your property.

 

#1: Know Your Best Guests…

An efficient hotel distribution strategy starts with knowing your best guests. These target demographics are your North Star, your guiding framework to deciphering your most profitable distribution. If your hostel property attracts budget-savvy guests in their mid-20s and 30s, then you should be offering beds where your guests are searching for them, such as hostelbookers.com. Similarly, if your guests are mainly honeymooners looking for luxury suites, you’ll market your rooms on more luxury-based channels.

Do this: Make sure that the experience you offer to guests is clear. If your property’s brand position isn’t clear, you’ll struggle to attract the right kind of customers.

Once you’ve identified your target market, you can decide which online travel agencies you should list your property on. Many of the large OTAs, such as Booking.com and Expedia, host properties of all types, and are a necessary part of your distribution strategy. But, niche OTAs that cater to specific or unique property types, such as hostelbookers.com, are not right for every property. There are also dozens of niche OTAs that would be a good fit for your property. If you want to explore some of these lesser-known, but top-notch OTA options, download our Big Book of OTAs.

Outside of your own marketing efforts, your distribution strategy should reflect the preferred hotel booking channels used by your guest demographics. For example, younger generations are more likely to use third-party channels, such as metasearch sites and OTAs while older consumers show a preference for calling hotels and using hotel websites. Choose your channels according to the characteristics of your best guests. You can rely on your property’s guest data to build segments and then align channel with messaging so that your hotel is visible where it matters most.

 

#2: …and cater directly to them!

The next step is putting in the extra effort to attract more of your target-market guests to your property. Everything you do, down to which sheets go on the bed, what pictures you share on social media, and how you price your rooms, must reflect this understanding. That’s not to say that you don’t serve adjacent demographics, it’s just that your entire hotel must center around the guests that help your business thrive.

Having defined a clear target market is extremely important, especially when trying to capture the attention of potential guests with your website. You first want to attract the right type of customers to your site, then keep them there because your content is relevant and exciting.

When guests arrive on your website, make sure your booking process is clear and succinct. All the information they need to book a reservation should be readily available on the website. Don’t give them a reason to navigate away from your page.

Furthermore, make an effort to offer your most loyal guests discounts that are unavailable to the public. These special rates, packages, and unique promotions can go out to your social media followers, email subscribers, or past guests. This effort will create even more brand loyalty.

 

#3: Track your Customer Acquisition Cost

Your customer acquisition cost will reveal how much you’re paying to convert a new customer (i.e., book a guest). Your customer acquisition cost has a dramatic impact on the profitability of a given booking.

Each channel you use will incur a cost since most OTAs charge a commission fee per booking and metasearch engines charge you each time a potential guest clicks to check your hotel rates. Even direct bookings come with a cost since your hotel’s website has associated technology costs (hosting, booking engine) and there may be marketing expenses related to acquiring direct bookings via social media, email, and/or search engines.

Customer acquisition costs have been on the rise in recent years. HotelTechReport noted that revenue spent on booking costs has been steadily increasing since 2015. Some commission rates are growing at twice the rate of revenue. These are large numbers that have a direct impact on how much money your hotel keeps after each booking.

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To effectively understand how much each booking costs, you need to know each commission rate. Cloudbeds outlines all the major OTAs in an infographic based on monthly active users, and average commission rate.

Do this: Make a spreadsheet of each channel’s commission rate and other costs. Keep it updated, so you’ll always have a current snapshot of your distribution costs.

On top of these costs, you need to analyze how much you’re spending on other promotional activities. For instance, are you offering promotional rates on certain OTAs or paying for top placement on metasearch? These costs must be factored in alongside your commission payouts. If you don’t take the time to calculate these amounts precisely, you put yourself at a disadvantage because you’ll never know the true cost of your distribution strategy.

If you’re looking for a metric to monitor customer acquisition costs, consider using NetRevPAR. NetRevPAR is revenue per available room after subtracting the cost to acquire a guest. This will tell you how much net revenue you’re receiving per booking, which paints a more accurate picture of the profitability of your distribution strategy.

The formula: rooms revenue – distribution costs (e.g.,cost-per-click + native marketing + third-party commissions) ÷ available rooms

After analyzing how much each revenue each channel brings you (minus any related costs) then you can decide how to move forward. If one channel is proving more costly than others, then you may need to adjust your pricing model, focus on other channels, or do a better job at pulling OTA guests into your property’s post-stay marketing program.

 

#4: Don’t Neglect Direct!

Direct bookings are powerful. They usually cost less and you have more opportunity to build a one on one relationship with your guests. Especially for smaller independent properties, which often have a unique appeal to guests and are unable to negotiate favorable commission terms with major OTAs, direct bookings can transform a hotel’s profitability.

Selling your rooms directly to guests is like Tesla selling their own vehicles directly to their customers. Tesla produces, markets, and sells the cars in-house–and the company makes more money on each transaction while managing the customer experience from start to finish. The same philosophy applies to your direct bookings: you control the price, you control experience. There’s a lot to be said about the power of that direct guest relationship. Plus: Reservations booked on your website offer much greater profit margins than those booked on third-party websites.

Though it can be easy to get addicted to the “set it and forget it” demand from OTAs, it’s costly, and, in the long-term, reduces your hotel’s pricing competitiveness. To dominate your direct bookings, optimize your website to include a commission-free booking engine that makes it easy for guests to book your hotel on both desktop and mobile. Great design can mean the difference between a potential guest successfully booking a stay or abandoning your site due to frustration.

Do this: Invest in high-quality imagery and video to convert more direct bookings on your site. Your website should also be informative and focused, with crisp copy and clear calls-to-action on each page.

 

#5: Take the Leap Into Dynamic Rates

In many cases, there’s a set budget for marketing, and hoteliers optimize for that budget rather than revenue. Budgets should be as dynamic as customer demand. You may not need to spend as much money as you thought you needed to capture bookings, and so a fixed mindset may lead to overspending.

This fixed-budget mindset leads many hoteliers to implement BAR (best available rate) pricing. BAR is a fixed-tier revenue management approach that often becomes a threshold to profit maximization. This pricing model sets a static public rate, and then all pricing rates become a derivative of it. So, if your BAR is $100, some sites will be set at 30% lower than BAR or 10% higher, based on commissions. While this pricing model is easy and straightforward, it is not always the most profitable solution since it leads to selling rooms at less-than-favorable rates or spending too much on distribution per booking. It also causes your rates to become stale, stored in a cache that’s irregularly updated and not responsive to current demand trends.

Instead, use dynamic pricing, and do this on a channel-by-channel basis. Dynamic pricing allows you to change your room rates based on demand and occupancy. You should never shut off reservations from certain OTAs because of high demand in fear of overbooking. Instead, you should yield up (increase prices) during times of high demand. When occupancy is low, you should use the OTA channels to drive occupancy.

Do this: Use revenue management technology to assist make intelligent pricing decisions to set your hotel’s room rates. Today’s technology is equally powerful for smaller properties.

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#6: Maintain Price Integrity

Price elasticity is a measure of how sensitive demand is to changes in pricing. In a price elastic market, demand changes alongside price: when demand goes up, prices go up and vice versa. It’s not a perfect correlation, but the general theory is that changes in price can affect demand. In an inelastic market, demand is not tethered to pricing: changes in pricing have little to no effect on demand.

Hoteliers often believe that the travel market is elastic. If you drop prices, demand increases, and vice versa. Therefore, when occupancy is low, many properties will drop their prices to fill empty rooms and recover revenue. However, consumers react individually to price changes: some find higher prices off-putting, while others are fine paying more.

Reducing average daily rate (ADR) may increase occupancy, but it won’t make up for revenue loss since lowering ADR also lowers Revenue per Available Room (RevPar). Occupancy rates may rise with lower room rates, but RevPar is adversely affected. Maintaining price integrity above your competitive set is a better strategy to raking in more profits. For a more in-depth discussion on revenue management, check out the series, Revenue Management 101, written by pricing intelligence expert, Ira Vouk.

Do this: Track your rate parity with a tool that analyzes real-time data from competitors and across channels. Then you can see how your prices compare to your competitive set.

 

#7: Bracket Your Rates

Make OTAs work for you. Since you can offer a variety of packages and services to potential guests, consider “bracketing” your rates. In this pricing technique, instead of distributing only your lowest-priced rooms to OTAs, you expand your offering to include promotional rates, packages, and upgrades that will support a higher average daily rate (ADR). These promotional options cater to multiple customer segments beyond the low-cost travelers, which expands your hotel’s appeal to new audience segments.

Do this: Diversify your OTA offerings and then run small experiments to see if you can capture higher value bookings.

What packages and upgrades can you offer to increase ADR? As you build a stronger and more diverse relationship with the right OTAs, you’ll enjoy more bookings at a higher value.

While it takes more effort to create varied options, it will positively affect your ADR and profits in the long run. When brainstorming, ask your OTA account rep for more data on which types of rates, packages, and upgrades work well. This strategy will not only improve your distribution decisions but also give you greater insight into the strengths and weaknesses of each channel.

 

Conclusion

Maximizing your hotel’s distribution channels can be a difficult endeavor. To review:

  • Know your best guests…
  • …and cater to them directly!
  • Track your Customer Acquisition Cost
  • Don’t neglect direct!
  • Maintain price integrity
  • Bracket your rates

With these tips to building a profitable distribution strategy, your property will increase both bookings and revenue. The success of your property is in your hands!

Unsure which OTAs are best for your property? Our Big Book of OTAs is your go-to resource for discovering the scale, scope, and specializations of OTAs around the world. Download it here.

About Cloudbeds

Cloudbeds is one easy-to-use hospitality management suite that simplifies the working lives of hoteliers and hosts. Cloudbeds’ award-winning software is trusted by tens of thousands of boutique hotels, hostels, inns, vacation rentals and groups in over 148 countries. With over 300 distribution integrations, Cloudbeds helps properties grow revenue and automate their workflows with confidence and ease. Founded in 2012, Cloudbeds has expanded to over 200 people with local teams in 31 countries, speaking 17 languages. For more information, please visit www.cloudbeds.com or reach us at Facebook.com/cloudbeds and on Twitter at @cloudbeds.

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