Achieving the ideal hotel distribution mix

August 23, 2016

Achieving ideal distribution mix has become one of the most critical goals for any hotel, branded or independent. It is also one of the main building blocks for the complex, yet very rewarding puzzle we call revenue management. If planned correctly and all else in the market goes according to that plan, the right distribution mix will surely increase a hotel’s bottom line and possibly earn the hotel some market share from competitors along with well-deserved bragging rights. But how exactly would one go about setting up the right distribution mix?

Ideally, our goal is to sell every room in our hotel everyday because a room is a perishable product, meaning every unsold room is a revenue opportunity irrecoverably wasted. This is also called a perfect sell. To achieve it, a hotel management team benefits from different sources of business and different systems that all add up to create the distribution mix. Before we begin making plans, let’s get ourselves fully acquainted with elements of distribution mix.

The more direct business, the better

First off, we have direct business, which could be divided into three subcategories: 1) online reservations that come through hotel’s website (the most common way of receiving direct business); 2) phone reservations; and 3) walk-in guests, who literally just walk into the hotel looking for a room. To manage this segment of business, a hotel needs two systems in place, a PMS (Property Management System) and a CRS (Central Reservation System).

Think of PMS as the heart of the operation and CRS as its brain. All of the reservations, guest information, room type availability and rates are stored and managed in PMS, while the CRS establishes a real-time data bridge between the hotel and the world. Rates are distributed to a number of different channels there, including the hotel website as well as other third-party channels (which we will get into later).

Considering that hotels don’t pay commission for reservations booked directly with the hotel, the more direct business the better. The primary distribution costs associated with direct business are website development (generally a one-time cost) and service fees for a CRS (generally a small fee or small percentage of the total booking). These are all insignificant costs compared to commissions, so it’s best not to put a definitive cap on how much direct business hotels should strive for.

Hotels that do have a decent marketing budget can also look to boost direct business through direct digital advertising, such as running search engine ads or retargeting ads. With the right marketing and direct distribution strategy, these campaigns can deliver an incredible return on investment (also known in marketing parlance as “return on ad spend” or ROAS).

How much OTA business to strive for

Although OTA segment is heavily crowded, complex, and costly, no distribution mix will be complete without it. This is because over the years, guests booking their travels online have grown accustomed to the convenience OTAs offer. They are user-friendly, quick, efficient and allow for easy comparison of alternatives available to travelers. Hotels, especially independent ones, need OTAs to reach a wide customer base quickly and easily.

However, hotels should be smart about managing their OTA distribution and use it to their advantage. For an independent hotel with a low website and digital marketing budget, OTAs could be considered cost-effective for acquiring a first-time customer. Although commissions are costly—averaging 15-30% per booking—this cost could be worth it if you turned that guest becomes a lifelong customer that books directly.

Ideally, independent hotels could strive for 20-25% OTA business.. The key to success lies at hotel’s ability to turn first-time OTA customers into future direct guests—whether that’s through email marketing, loyalty programs, and other incentives that maintain the direct relationship you have with your customer.

Allotting rooms for corporate and business travelers

Another important segment for hotels is GDS (Global Distribution System), which gives access into hotel’s inventory and rates to travel agents, who book leisure travel for individuals or business travel for company employees. What percentage of GDS reservations will be from leisure or corporate will mostly depend on hotel’s location, size, and facilities such as meeting/event space.

For hotels that have a good amount of both corporate and leisure travel, revenue managers will have to pay close attention to seasonality and peak demand dates. Because corporate rates are negotiated in advance, these rates could end up being lower than what guests are willing to pay during high season—in which case too much business from this segment could hurt the bottom line. Here is a case where it’s important to pay specific attention to the market to see exactly what allotments you should allow in the GDS for any specific period of time.

Another factor to consider when deciding how much GDS business to take is the travel agent commissions, which are lower than typical OTA commissions (about 10-15%) and yet higher than what direct business would cost (no commission, just website maintenance and CRS fees). In other words, GDS business has its own positives and negatives. About 20-30% GDS contribution for hotels located in business districts would be considered a good balance. For hotels with a heavier contribution of corporate GDS business, it is important to balance out peak nights (typically midweek) with specials and rates that can help boost occupancy on shoulder nights as well.

The backbone of hotel segmentation: groups

In addition to all of the transient business segments explained thusfar, there is also group segment, which consists of a group of guests (usually more than 10 rooms/night), who are interested in staying at the hotel together and potentially use the hotel’s meetings & events spaces if there are any.

While rates for such groups will be lower than publicly available ones, they are most likely to book far in advance (3-6 months out) allowing the hotel to plan better for future business and possibly raise its rates. Also, their cancellation policies can be stricter than ones for individual guests, making this revenue source more reliable. We call this base business, which typically is the first layer hotel uses to build its distribution mix.

Loyalty guests

Lastly, a segment unique to branded chain hotels is the rewards guests, who prefer to stay at a certain hotel simply because of the loyalty programs they are affiliated with. Their motivation could be to earn points or alternatively use them. Either way, a branded hotel has to be ready to include reward-stays in their distribution mix.

Putting it all together

With so many different sources of business, revenue streams and costs associated with each one, the formula for perfect distribution mix will greatly vary for each hotel and will constantly be changing. For this reason, trying to come up with a one-size-fits-all formula to perfect distribution mix is next to impossible, especially as GDS and Group business will vary widely depending on your type of hotel, location, and a number of other factors.

What’s most important is achieving a healthy balance between direct and OTA business—an independent hotel could reasonably strive for approximately 20-25% direct business and 20-25% OTA business, but always keeping in mind that every percentage of business shifted from OTA to direct represents even greater incremental revenue for the hotel because of the reduced costs of acquisition. To that effect, the best strategy for any hotel is to maximize the strength of the direct channel while also maintaining a healthy and profitable distribution mix based on its specific market.