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Friday, July 08, 2011

Doing the Math: How to get the highest ADR for your hotel room

 
Courtesy of Freedigitalphotos.net
from Salvatore Vuono's portolio.

On social media discussion sites, such as LinkedIn's hospitality groups, I frequently see hoteliers posting about how they can get the highest ADR for their hotel room. 

It is actually a pretty simple equation that involves paying attention to the booking source, otherwise known as the channel and looking at not only the COST of the channel, but also the REVENUE impact.  Then, making a concerted effort to drive as much business through the channel producing the highest PROFITABILITY (net ADR).

It has long been known that business travelers are less price sensitive than the average vacationer. Most business travel is booked either through Travel Management Companies (TMCs), the corporate travelers themselves (generally through self-booking tools powered by the GDS) or through traditional travel agencies.

Over the past decade, the online travel agencies (OTAs) have also made a dent in the unmanaged and lightly managed travel arena with Expedia's egencia, Travelocity for Business and Orbitz for Business.

While some of these platforms bypass the GDS for the bulk of their bookings (either using the merchant model or connecting directly to Pegasus), the GDS is still producing 117 million room nights per year.

If you do not presently participate in the GDS and distribute your product through traditional travel agencies, that is one way to get started on a path to raising your overall net ADR.

Travel agencies sell travel all day every day and believe it or not, in the 1st quarter, the number of hotel bookings sold through this channel increased 12.6%, versus just 4.4% growth via the Internet for hotel rooms.

I am a data hound and as such, I prefer statistical reporting to survey data when making a point.

TravelClick reports quarterly on a worldwide basis on bookings made via the GDS, both in internet sites powered by the GDS and brick and mortar agencies. 

Take a look at the most recent worldwide quarterly stats from TravelClick.  The most important numbers are the ADR differences by channel.
Courtesy of Travelclick.net  
Note:  These numbers do not include Merchant Model hotel rooms sold via the OTAs

REVENUE IMPACT - As you can see from the 1st Quarter TravelClick numbers, bookings made via travel agents (via the GDS) are bringing in on average $157.56 per night.  This is up 4.7% year over year.   Internet bookings yield $115.83 per night, a difference of $41.73.  So even if you have to pay a 10% commission and a GDS booking fee, you should still come out ahead, as you only pay if they sell a room.

The investment community frequently asks me why there is this difference, both in air tickets and hotel rooms.  The answer is easy.  The Internet nearly always orders search results in lowest price to highest price, putting the product on sale all day, every day.  A travel agent begins the dialogue with a broader set of questions than just HOW MUCH.  When you start with WHO are you traveling with, WHEN do you need to be there, WHERE do you need to go, WHAT do you like to do when you travel, HOW are you getting there and WHY are you traveling, it won't always yield the lowest price.  Believe it or not, consumers are NOT all price sensitive, but the Internet assumes that they are.

Now that you understand the revenue side of the equation, as you do your own math here are the cost components for the use of the travel agency channel for distribution:

COMMISSION - Clearly you need to pay the travel agent a commission for selling the room on your behalf.  That is a percentage on a per night basis, generally paid when the customer checks out.  There are a number of programs available to manage the payment of those commissions for you, including Pegasus, who processes $38 million in commissions each month for the travel agency community. 

BOOKING FEE - You pay just one booking fee, irrespective of the number of nights that are booked.  The GDS fees are payable at the time of the booking to the GDS. 

CHANGING YOUR MIX - If you are an independent that can't afford to connect directly to a GDS, one alternative is to join forces with a Hotel Representation firm, such as Utell, Synxis (a division of SABRE) or TravelClick, who in addition to providing central reservations capabilities, call center and marketing services for your property, can also provide the use of a Chain Code and participation in the GDS.  The GDS fees are often bundled into their marketing fees, but this type of a firm can greatly expand your reach, with minimal investment on your side.

At the end of the day, you need to do your own math.  And if you need help with either channel profitability analysis or how to shift your mix to a more profitable outcome, we're always here to help.

http://www.solutionz.com
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