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Understanding the true cost of distribution: Are you leaving money on the table by ignoring your direct channel?

Hotels can make the biggest impact to their bottom line with an optimized direct channel. But a recent white paper by HEDNA found most independent properties are underinvesting and undervaluing this crucial part of their business.

In “Hotel Distribution Data Management And Analysis,” HEDNA discovered that just 48% of independents look closely at cost of distribution. Independents were also the least likely to use analytics to make decisions about distribution (67% relied on them), compared to chains (81%) and management companies (72%).

Overall, the paper revealed something crucial: a lot of hotels just aren’t focused on the cost of distribution, or growing their direct channel. In the following post, we’ll explain why that approach can prove costly. We’ll also provide actionable strategies to help you drive more traffic and increase booking revenue through your own channel.

The cost of your hotel’s distribution

Put simply, if you optimize your hotel’s distribution costs, you’ll bring in more profit. But hotels commonly focus only on revenue and number of bookings, and ignore other important metrics. As a result, the direct channel becomes far less effective. Potential profits are left on the table.

Most hoteliers understand that bringing in more direct bookings (compared to relying on high-commission OTA bookings) will ultimately help increase profits. But there appears to be a general disconnect in how to achieve this goal.

Direct marketing expenses: Set it and forget it?

One major problem is that hotels often set their annual direct marketing budgets once a year, with x amount going to a new website, x amount going to advertising per month, and so on and so forth. In a dynamic travel marketplace, this “set it and forget it” mentality can prove highly detrimental, leading hotels to be outflanked by their more agile-minded competitors.

This annual investment in the direct channel is usually marked as an “expense” in the P&L (Profit and Loss) statement, which unfortunately means it’s one of the first budgets to be cut when trying to reduce costs.

Likewise, once this budget has been set for the year, it becomes extremely hard to increase. For example, when hotels use up their designated Google AdWords budget for the month, many will cut the campaign short rather than invest more, despite how successful the campaign might be.

Hotels often don’t treat OTA commission costs with such scrutiny as their own marketing channel, despite the fact these costs can range up to 15-25% of the incoming revenue. Instead, OTA commissions are often treated as a “Cost of Goods Sold” on the P&L statement because the hotel gets the net room revenue after the OTA has deducted the commission fee.

Sample hotel P&L statement

When hotels don’t count these costs as expenses, OTA sales and commission costs can run wild over time. No one thinks to try and bring down these costs, as they are considered part of top-line revenue and “just the cost of doing business.” This mentality can seriously dent profits and hinder good revenue strategy decision-making.

Hotels need to rethink distribution costs

To maximize booking revenue, hotels needs to shift their mindset. Rather than seeing their own website as a fixed expense, it needs to be regarded as an invaluable revenue channel.

In that spirit, we suggest really thinking about the costs of investing in the direct channel compared to the revenue it can generate. This is all about long-term thinking: the amount you spend to optimize this channel now may well lead to significant profits over time.

The key to success requires continually tracking the effectiveness and costs of your direct channel. By relying on a wealth of your own data, you can make smarter decisions about how to maximize its potential.

Driving more direct traffic to your hotel website

Analyzing hotel website performance

As you might expect, one of the best ways to increase your direct booking revenue is to drive more traffic to your website. With that in mind, here are four key areas to focus on:

Improve website performance
Most experts agree that redesigning your website every 2-3 years a good benchmark, but ultimately you should constantly be monitoring your website to see how well it is performing for you. By keeping good track of the analytics, including understanding the behavior flow and conversion rates, you can see when a website isn’t performing as well as it should. Work with a web and digital marketing agency that not only will help freshen up the design and fix any outstanding user experience issues on the site, but also ensure that you’re improving on key metrics.

Work on your SEO
Driving traffic to your site can be achieved by applying a few SEO basics. One of the easiest ways to boost your SEO is by having NAP consistency. In addition, regularly posting engaging blog content and optimizing your images will capture the attention of the search engines. Beyond your own site, acquiring backlinks from high-quality sites can give your organic search ranking a boost.

Invest in a strategic PPC campaign
Investing in a digital advertising campaign might seem an expense you can’t afford. But it’s important to consider the bigger picture. Look at how much you spend every month on OTA commission fees. Comparatively, investing in PPC might be more cost-effective if it drives more direct traffic and bookings your way—our digital marketing team has tips on how to best set a budget for various PPC channels.

To maximize your ROI, work with a specialized agency that best understands the industry and knows how to attract guests to your site throughout the entire traveler booking journey. In addition, we also recommend working with PPC marketers that are upfront and transparent about their data and attribution models.

Bid on your brand terms in SEM
Losing bookings to OTAs on brand term searches? You might need to beef up your SEM strategy to win a larger share of traffic.

While it might seem unnecessary, a lot of independent hotels forget to bid on their own brand search terms (their hotel name and its variations). When that happens, OTAs will bid on your brand terms and leap to the top of the search results page. Being higher in the listings doesn’t just improve your visibility, it boosts your click-through rates (CTR).

Data shows that the first position in the SERPS receives an average 38% CTR, and second position gets 15%. So you really want your listing to be in these top two spots to get a decent amount of traffic from your ads.

Increase your conversion rates

Alongside driving plenty of traffic to your hotel website, you’ll want to work on optimizing your conversion rates. If you’re suffering from a low look-to-book ratio, you may need to invest in a more user-friendly website and booking engine.

When users land on your website, many will be looking for an instant snapshot of your property. This is where high-quality images and attention-grabbing video are invaluable. Great visuals and video will instantly engage potential guests, help set your property apart, and quickly showcase the unique experience you offer.

Personalizing your visual content to different audiences can also increase bookings by making your imagery more relevant to their persona.

As we’ve spoken about in the past, adopting OTA-style urgency prompts (such as including number of recent bookings and current people looking at a room) can be a powerful way to nudge users from browsing to booking.

Once a person is ready to reserve a room, integrating an automated best rate guarantee feature, and including plenty of social proof (such as testimonials and review site widgets) will add confidence at a crucial time. Finally, be sure to keep booking forms simple. By only asking for essential information, you’ll create a hassle-free experience and reduce the odds of high abandonment rates.

The true cost of distribution — a fresh perspective

For stressed out hoteliers, mindlessly relying on OTAs to fill up your rooms might be the easy option, but it’s certainly not the wisest. Investing in your direct channel is one of the most important strategies you can do to reduce costs and increase overall profitability.

Getting the most out of your direct channel isn’t easy. HEDNA’s study reveals that most independent hotels just don’t have the resources to analyze the data properly. For that reason, it’s worth partnering with the right digital marketing agency that can provide transparency on distribution costs and direct channel performance.

With the most relevant data in hand, you can make the best decisions to increase your bottom line, and stay ahead in an increasingly dynamic marketplace.

Gautam Lulla

Gautam Lulla

Gautam is CEO of Pegasus and an outspoken expert in hotel technology and distribution. When he's not busy disrupting the status quo, you can find him ripping powder on the slopes. Contact him at gautam@pegs.com.

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