Frustrations around pay-for-performance online ads are among the reasons that it’s time to consider overhauling the franchise model for the digital age.
The trends of the past are especially valuable for business owners seeking a perspective on their operations. As a hotel owner, it is critical to study the trends where we’ve invested in a particular brand and can assess a return on such investment.
But the hotel franchise model conceived more than six decades ago might need to be overhauled to keep the business of hospitality and hotel investment viable for owners and to keep them interested in developing hotels. Savvy brand leaders also will understand that if the owners— their primary clients—feel pain, they will eventually feel the pain, too.
As many know, in addition to paying royalty fees for a brand affiliation, owners pay reservations and marketing fees as part of our licensing agreements. Brands, in turn, use these resources, the Central Fund or the Marketing Fund, on our behalf to drive business to our hotels. The value of a “brand” is measured by its ability to utilize these centralized funds to grow segment leadership and consumer loyalty in conjunction with delivering the two most important factors that motivate many owners to build more: cash flow and premium exit values.
The franchisor-franchisee relationship is strained, however, when we know that the brand’s revenue doesn’t decline as revenues shift to third-party channels; rather, each channel shift creates a negative impact to an owner’s bottom line.
Let’s review the past to understand how we got to now. Between 1995 and 2004, the internet was emerging, but it was not a primary source of marketing ROI for brands. A brand’s distribution was the primary driver of customer awareness and preference was driven by consistency.
Since 2005, we have seen apps and digital channels emerge and increase in popularity. Online travel agency contribution grew from single-digit percentage points to the mid-teens. OTAs took full advantage of brands’ rate-parity problems and were able to win consumer confidence that OTAs were the “lowest price.” For the most part, brands let OTA growth go unchecked in the early years because they made money on the top line. At the same time, brands began charging hotels for digital marketing in addition to the traditional marketing and reservation fees that were already being paid. Thus, for owners, costs to acquire new and old customers rapidly increased.
Today, brand resources are strained by emerging and evolving market forces such as the OTAs, cost-per-click search engines, shared-economy platforms and continued brand proliferation, and new standardization requirements to remain competitive. Hotels continue to pay disproportionately more to win the (digital) loyalty of our guests.
So, why isn’t “digital marketing” considered “marketing” in the 21st century? Is the traditional franchise model that was designed for the 1900s ready for an overhaul? What does a new model look like so that brands have more skin in the game?
Let’s take pay-for-performance as an example of a commission.
Do owners wonder how brands keep track of pay-for-performance digital advertising? The answer is through cookies. Banner ads on the websites our customers visit create a digital footprint, a cookie, on their computer. These cookies are designed to hold specific data about the user and the websites where they “see” the banner ad. By design, cookies are used to conveniently carry that information from one session on a website to another, for example to brand.com.
If a user browsing a random website is exposed to a banner advertisement for Brand X, then booking a room using that computer will trigger a “pay-for-performance” commission to the destination hotel affiliated with Brand X. Unfortunately, the cookies will continue to trigger commissions as long as they are active—until they are set to expire, and major brands set expiration somewhere between seven and 28 days. That means a banner advertisement from 28 days ago, from a random website, is taking the “credit” for driving that customer to book at your hotel and charges a commission. As owners, we should think about the merits of such policies.
One of the side effects of a long-lasting cookie is “unrelated cross-sell.” For example, a Dallas-based hotel will pay a booking commission if a customer uses a consumer review site to browse a similar brand in Albuquerque, New Mexico, weeks earlier.
Reducing cookie life to “same-session expiration” is the answer—hotels will happily pay a commission if the user directly clicks on the banner and books a room. But that’s unfortunately not realistic today.
If that’s not enough, one of the biggest downsides to cookies is that our loyal members can also be exposed to one of a billion banner ads, and when these loyal customers book at their frequently traveled hotel on Brand.com, that hotel will unfortunately pay a commission just because they happened to have a stale cookie on their computer.
Given the complicated nature of this technology, it’s likely that many of our customers and owners aren’t even aware this is happening. It’s imperative that owners learn about these technology systems and that they ask about their brands’ cookie policies to better understand what triggers commissions. On the bright side, one major brand has made great strides in this direction by reducing the cookie lookback window, and another brand eliminated commissions on upper-tier loyalty members.
Today, it’s not just about revenue per available room; it’s about all the extra fees and commissions it takes to generate that RevPAR. This is called Net RevPAR, and the gap between RevPAR and Net RevPAR noticeably increases each year. When the franchisor-collected fee revenue grows faster than RevPAR, the difference is paid by the hotels’ margins.
Brands have reduced their traditional marketing as technology has advanced, but digital marketing comes at an additional cost and is often considered an “extra” despite being an essential part of any modern marketing strategy.
The bottom line is the brands which best scrutinize and utilize marketing funds to drive owner profitability will come out ahead of the pack as the more desirable brands to own.
Deepesh Kholwadwala is the President and CEO of Dreamcatcher Hotel Group and Sun Capital Hotels, which owns and manages multiple brands, with specialization in in hotel feasibility, planning, financing, construction, and operations. Deepesh serves as the 2018 Chair of the IHG Owners Association and can be contacted at email@example.com.
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