Many hotel owners are resigned to the rise in third-party charges being the new reality, but some companies are taking steps toward reigning in the cost of acquiring guests.
Over the last two decades, the cost of customer acquisition has increased substantially. The industry has seen the introduction of digital platforms, online travel agencies, rewards programs and the shift from corporate in-house meeting planners to third-party meeting planners, to name a few. For the most part, the cost burden is placed on the owner.
The brands have tried to add efficiencies into the process by creating call centers, sales clusters and field marketing platforms. In the most recent and perhaps most impactful response, one of the major brands announced in January it will reduce commissions on group bookings to 7% from the current 10% on March 31 for its hotels in the U.S. and Canada. Contracts signed before March 31 still will receive 10% commission. This is a critical step toward reigning in guest acquisition costs and creating a more sustainable relationship between hotels and intermediaries.
Commissions affect the owner community. Third-party charges have become a standard practice, and many owners are resigned to this being the new reality. However, this also was the case with the airline industry until they went to a transactional model. The cruise industry is following suit, putting downward pressure on travel commissions as well. And now, it is prudent that the hospitality industry takes a closer look at commission structures.
As an industry, we have not been as mindful of unit profitability as we should be. In general, we focus on metrics other than profitability, relying too often on market share and overall revenue metrics. Each economic downturn brings new commission structures, new partners and reduced room rates in the name of revenue or market share. With property managers and franchisors receiving most of their compensation based on revenue, commissions affect the owner’s profitability first and foremost. Therefore, it is refreshing to see one of the big brands making an effort to get these rising costs under control.
According to a Kalibri Labs report, 40% to 60% of group business is intermediated at the point of sourcing and other points prior to execution. In 2017, group room revenue totaled $30 billion in the U.S., and the cost of intermediaries accounted for $1.3 billion. This does not include other costs associated with the payment of the commission, such as credit card fees, rewards cost and management fees.
Group intermediaries are understandably upset about the changes since group hotel bookings are the lion’s share of their revenue streams. Hotels rely on group bookers to interact with the sales and catering staff in a way that enhances the guest experience and elevates professionalism and delivery. Because commissions are structured as a percentage of revenue, growth in the customer program equates to growth in dollars. Third-party travel managers will likely focus on programs to which they bring the most value, i.e., larger and more complex programs.
With sister industries already taking a stand, now is the time for the hotel industry to re-evaluate and evolve its group business model. Several brands have engaged with ownership in looking at how to better the customer acquisition process. My concern is that this effort will be viewed as an opportunity for other brands to acquire share instead of an industry initiative as it is intended. As owners and the asset managers who service them, we need to get behind these types of brand initiatives and urge industrywide standards.
David Hogin is executive vice president and chief operating officer at Strategic Hotels & Resorts. His current and past portfolios have included most major brands: Four Seasons, Ritz-Carlton, Fairmont, Hyatt, InterContinental, Starwood, The Hotel del Coronado and Marriott. Backed by 20-plus years of hotel management experience, he has risen through the ranks in rooms operations with multiple branded and independent flags. Prior to joining Strategic, he served in various property operating roles, including general manager, hotel manager and director of Six Sigma. He served on the board for seven years and is past president of The Hospitality Asset Managers Association (HAMA). He is a Certified Hotel Asset Manager (CHAM). He sits on multiple brand advisory boards. He graduated with a bachelor of science in business administration from the University of Arizona.
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