Carsolize think tankHotel services distribution analysis as part of global online travel ecosystem- Part I *Infographics courtesy of eDreams
IntroductionUnderstanding the resources The Hotel industry is overly complex, with many factors being overlooked by various participants of the industry. Following nu- merous inquiries, we’ve decided to issue a three-part overview of hotel’s distribution landscape – as we see it. This white paper aims to provide both comprehensive outlook on hotel product distribution, possible revenue streams and income optimization via multiple channels. The purpose of this research is to provide travel companies and professionals with much needed information to make the right choices when it comes to resources, business models, and opportunities in the hotel segment. Part I 1. Supplier types 2. Rate types 3. Payment methods Part II 4. Market trends 5. Price comparison between various resources 6. Purchase channels – consolidator, agent, affiliate 7. Distribution (channels, profit margins, risks, operation, up selling) Part III 8. Data mining 8. Lost revenues 9. The lowest price race 10. Technology and automation 11. Summary – flexibility and diversification Current state of online hotel distribution landscape 1. Supplier types - Wholesalers Almost 35% of all hotel bookings originate through wholesale contracts. Because of this, wholesaler negotiated special rates with hotels, can be up to 30%+ lower than BAR rates. Usually wholesalers will provide agents with Net rates, though some support Gross models, both discussed below. - GDS Approx. 100,000 properties, out of almost 400,000+ existing, are available through Global Distribution Systems, such as Amadeus, Travelport, Sabre and few others. The hotel resources are usually published in GDS systems directly by hotels (some via 3rd party software or channel managers), and some chains use GDS CRS systems to manage and host their in- ventory. Hotels available in GDS will have BAR rates or published rates for general agent public. These rates are considered gross with payment at the hotel (postpaid) models, while commissions paid out to the agents are in the area of 8%-12%. However, negotiation with the hotels can provide better terms regarding possible commission volumes. Most hotels available through GDS are hotel chains. - Pegasus Pegasus has been considered a central hotel distribution switch providing service on several levels. Many, if not most GDS available hotels are published to GDS by Pegasus, which acts both as CRS for some hotels and channel manager for oth- ers. In addition, Pegasus provides commission collection services as well, between hotels and the agents. Connection with Pegasus allows achieving higher results than going through a GDS, being one level closer to actual service providers in the distribution chain. Similar to GDS, hotel agreements and special rates can be implemented, viewed and booked.
- Channel managers Though common channel managers are not providers in the common sense of the word, they are a popular distribution chan- nel between hotels and various points of sale, such as OTAs, Wholesalers, GDSs and other booking applications.- Direct connect Some hotel chains (e.g. Hilton) provide direct connectivity with their host CRS systems. As a rule of thumb, they will only deal with large volume players and distributors.- OTAs OTA’s like Expedia, Priceline and other online market leaders provide affiliate programs that rely on their vast direct con- tracting infrastructure with hotels across the globe and their sheer buying power. Becoming an affiliate is easy and free yet presents a challenge for travel professionals mainly in form of low commissions, branding issues, lack of returning customers and weak competitive edge against other affiliates, and even the OTAs themselves. Redistribution of this content is usually pointless, with 5-10% commission levels, and anyone’s ability to gain similar access to content and rates.- Inventory – direct offline agreements Contracting with hotels or hotel chains is possible and at time even holds high revenue opportunity, but comes at a cost. Companies like DMCs (destination management companies) usually do exactly that, but they will only specialize in their geo- graphical location, with contracting being one of main concepts of their operation. Direct contracting is costly business, having the need to recruit and manage hotel contractors, account managers that monitor hotel rates and updating of the inventory, usually entering into a competition with other wholesalers or OTAs having much stronger buying power.2. Rate types- Net rates Net rates are when the agent is provided with base price, normally 15-30% below BAR rates, with payment collection and markup both controlled by the agent and supplier collects payments from agent on monthly basis for the Net cost. Agents will usually have to be merchants of record to manage Net rates and at time post financial deposits to secure credit with supplier.Net rates are negotiated by wholesalers/DMCs with hotel properties. Net rates are usually aimed at the travel trade professionals (B2B), and sometimes for B2C markets with some limitations when it comes to Bar rate requirements. Hotels normally don’t provide Net rates to single agents, as well as GDS/Pegasus and Direct Connect options won’t have Net rates through their system.- Gross/commissionable rates Gross rates can be provided via almost all described channels, and usually are the final consumer selling price with agent’s commission built in. Funds are collected by the supplier, with commissions transferred to agents on a monthly basis for checked in bookings (fulfilled), occurring during the previous month. Gross rates usually include the possibility of paying with either agency or customer credit cards, and normally absorb all costs associated with credit card processing and handling. Gross rates are distributed via GDS/Pegs/Direct/Channel management software. Though negotiation is possible with the hotels, it will evolve around the commission level and not the rate itself. In some cases, like corporate agreements, Gross rates will just be provided with a discount level. - Published rates Published rates are publicly accessible rates, occurring both on consumer facing applications and GDS systems. These rates are of the same commission level to all possible agents and POSs. - Negotiated rates Negotiated rates can signify both special commission levels, a discount from BAR rates, or in few cases, lower Net rates distributor would pay to the hotel. Many corporate agencies and their clients have negotiated hotel rates with leading chains.
3. Payment methods – Prepaid vs. postpaid There are several reconciliation methods between hotels, distributors and sale agents (POS – point of sale). Not to be con- fused with rate types, payment methods mean how the existing rate is covered, independent from whether it’s Net or Gross rate.- Prepaid Prepaid method means that the booking is paid in full at the moment of purchase, and payment is usually received by either distributors or POSs. These parties reconcile with the properties independently of customer-hotel relationship.- Postpaid Gross rates originating from GDS, though can be prepaid at times, are most commonly used on Postpaid methods, meaning that customer arriving to the hotel will cover the charges of the booking.- Part-paid Part maid model is a combination of both methods above, resulting in either collection of service fee or markup only by the POS, while the consumer covers the actual rate. In part paid model, in many cases there will be no commercial relation be- tween hotel and the distributor, though it might depend on the commercial agreement between the parties. Part-paid model is very common with car hire brokers.Below section demonstrates the conceptual and financial differences between prepaid and postpaid models:There are many channels from which hotel inventory may be obtained.One of key strategic decisions to be made when choosing to specialize on hotel offering is whether to work on Pre or Post paidmodel, i.e. making the client to pay up-front for his hotel reservation, or at the hotel when checking out.Both models have several benefits and shortcomings as we outline below:Prepaid Benefits - Lower room price Access to allocated negotiated rates based on wholesaler’s volumes - Higher commissions Working on Net wholesale agreements, agents are able to achieve 20% margin even in B2C sales channels. - Get paid faster (agent controls) Agent collects payment to himself, with funds later transferred to wholesaler, who in turn handles financial aspects with hotels directly. - No need to negotiate with hotels Setting up 5-10 agreements with wholesalers can provide instant access to as many as 250,000 hotels worldwide. - Getting paid guaranteed Agent controls payment, and collects it at time of sale, or prior to arrival dates, thus reducing receivables cycle, and improving cash flow position. - Get paid even if no show Independent of hotel’s commission policies, agent is free to set own refund terms. - Able to sell via sub-agents Wide margin breadth allows developing sub-agent network.
Post Paid Benefits - No upfront charges Agent receives commission from hotel instead of setting up credit line with wholesalers, hence security deposits are not required. - Flexible cancellation policy GDS providers and other post-paid model providers often extend last-minute cancellation policies. - Special rates, freebies and better bargaining position When dealing with a hotel directly and not through an intermediary, travellers have greater opportunity to negotiate special rates, enjoy free upgrades, etc’. - Use Hotel membership plans Hotel chains often provide consumers with special member/club rates. - Special CC deals Credit card companies often have special deals with hotel chains, extending great value to consumer. Table 1 demonstrates how an agent can work with providers of Prepaid or Postpaid hotel resources No Security deposits Postpaid Prepaid Flexible, last minute Few days to arrival Upfront charges? Get what you pay for Chance of slight Cancelation policy? differences Room verification? Use hotel membership Yes No Higher Lower plan? Long Fast Rates? Time for agent to get Lower Higher paid May not get paid even if Agent controlled Commissions 100% cancelation fee Chances of agent Not feasible Recommended getting paid? Sell via sub agents?