The rising cost of acquiring customers is reaching an inflection point where profit margins are unsustainable, panelists said during the Revenue Strategy Summit in New York.
NEW YORK—After the economic recession at the turn of the century, hoteliers looked to innovation by way of Internet distribution to bring demand back.
A little more than a decade later, hoteliers are looking at innovation to regain control of that same distribution and thus save an industry that is on the brink of succumbing to terminal profit loss.
The industry will sooner than later reach an inflection point where margins are cut so far that operating a profitable hotel as it is known today will be impossible, said Patrick Bosworth, CEO and co-founder of Duetto Research. Most of those profit margin cuts come by way of third parties who provide a sales and marketing platform to send travelers to hotels.
“Our guests will suffer,” Bosworth said Tuesday during the inaugural Revenue Strategy Summit at the Affinia Manhattan. “We could be giving up share to everyone in such a way that it permanently destroys the industry.”
Online travel agencies such as Expedia, Priceline Group and now TripAdvisor took the brunt of the blame from panelists. Cindy Estis Green, CEO and co-founder of Kalibri Labs, cited recent Hotel Asset Management Association research that showed third-party commission costs growing at twice the rate of hotel revenue, which she said is “not sustainable.”
“Commissions are growing at an exponential rate versus revenue,” Green said. “We’re getting sales, but at what acquisition cost?”
Green presented her latest research, which provides a look at what hotels are spending as percentage of room revenue to acquire demand. Brand fees and search-engine fees stack up against and on top of OTA fees, she said.
A study of 250 hotels in New York conducted by Green’s Kalibri Labs showed hoteliers paying 10% to 20% on transaction fees and commissions to third parties. In addition, hoteliers were paying another 20% on sales and marketing costs to acquire consumers, such as keyword buys, digital advertising and brand fees. In total, the hoteliers were spending 20% to 40% of their net revenue to acquire business.
“There’s just not enough left to operate a profitable business,” she said. “It’s unacceptable and we need to stop it.”
Lee Pillsbury, co-chairman and CEO of Thayer Lodging Group, echoed Green’s sentiments later during his keynote address. Pillsbury said there are “enormous consequences” if the industry doesn’t address the rising costs of driving demand.
“Mr. Expedia wants 18%, and Mr. Marriott wants 6%,” he said. “At the end of the day it isn’t going to work. You’re not going to buy, build, maintain a hotel with those economics. The consumer does not want to pay 40% in marketing acquisition costs. They want more value than that.”
Pillsbury said the situation needs addressed immediately.
“If all the members of the value chain aren’t making an economic return, then the value chain will collapse,” he said. “It may not happen right away—it took GM a number of years—but if it doesn’t work for all of us it isn’t going to work for any of us.”
Innovation to the rescue
Pillsbury and other panelists throughout the day called upon internal innovation from within the hotel industry to figure out a solution to lowering acquisition costs.
Rachael Rothman, senior gaming, lodging, leisure and restaurant analyst with Susquehanna International Group, said a shift in forecasting models would help. She said hoteliers can forecast their revenue-per-available-room picture but that “the truth is no one really knows.”
“You’re really only looking and getting a read at what’s on the books on the group side,” she said.
Gian M. Fulgoni, executive chairman and co-founder of comScore, said it is imperative for the hotel industry to lead the charge in adopting mobile strategies and mobile marketing.
Fulgoni called mobile a “fundamental shift, maybe even bigger than the Internet desktop shift from some years ago.”
He said the number of people who use the Internet on their phone is still growing by 25% year over year. Tablet use is growing at a 55% clip year over year, which is “the fastest adoption rate for an electronic device in the history of electronics.”
“If you aren’t optimizing for mobile, you’re missing an opportunity and will potentially run into challenges down the road,” Fulgoni said.
Larry Hall, president and CEO of PAR Springer-Miller Systems, said innovation starts with an idea that can come from anywhere. However, the idea is the easy part, and the difficulty comes in selecting the right idea and moving it through the innovation process, he said.
One example of potential innovation in the hotel industry would be re-thinking the 24-hour stay and instead accommodating for people who have flexible schedules and can check-out earlier or need to leave later, Hall said.
“How hard could it be to let people leave when they need to leave?” he said.
Hall suggested hoteliers don’t have to be able to justify the return on investment to get the ball rolling. “A lot of times we get hung up on ROI,” he said.
Julie Cottineau, founder and CEO of BrandTwist and former VP of branding at Virgin Group, suggested hoteliers start small when innovating.
“Take calculated risks,” she said. “Rich Branson launched Virgin Atlantic with just one plane. He said he wasn’t going to bet the farm on it.”
At Virgin, she said, the culture is set up in such a way that all employees are expected to innovate. “There isn’t a department of innovation,” she said.
“It should be a culture, not a project,” added Gareth Gaston, senior VP of global ecommerce for Wyndham Hotel Group.
No matter what the innovative project entails, Pillsbury said it’s critical that it comes from within the industry rather than from technology companies, or “vultures,” that prey on the industry’s profit margins.
“Expedia went to Bill Gates 25 years ago and asked for $25 million for an idea,” Pillsbury said. “I wonder today how many young entrepreneurs could be coming to us with ideas but instead are going to venture capitalists and third parties.”