No One Has the Right Incentive to Drive Direct Bookings
09 April 2024
The call for direct bookings has never been louder in the hotel industry. Industry experts and consultants ubiquitously champion the myriad benefits of direct bookings, from fostering stronger guest relationships to wielding greater control over revenue management. The logic is sound, and the advantages are clear: direct bookings cut out the intermediary, saving on hefty commission fees paid to online travel agencies (OTAs), and empowering hotels to own the customer experience from start to finish.
Although many in the hotel industry agree that direct bookings are valuable, there is still a significant gap between advocacy for this approach and its implementation. In reality, many hotels, especially independent hotels, rely heavily on online travel agencies (OTAs) and seem hesitant to shift towards direct booking strategies. This inconsistency raises an important question: What is causing this lack of change?
The answer, it seems, lies not in a lack of awareness or desire but in the underlying financial incentives that drive behavior within the hotel industry. From hotel management companies to revenue managers, compensation and reward structures are intricately tied to metrics that do not always align with the long-term benefits of direct bookings. To truly understand this dynamic and to chart a course toward more direct bookings, we must look into the financial motivations that shape decisions in hotel management and revenue strategies. It's a journey that requires us to follow the money, examining who benefits from the status quo and how incentives can be realigned to support a more direct booking-friendly ecosystem.
The Landscape of Direct Bookings
Direct bookings occur when guests reserve their stays directly with the hotel, bypassing third-party intermediaries like online travel agencies (OTAs), booking platforms, tour operators, and travel agents. This direct interaction can happen through the hotel's website, phone, or even in person. The appeal of direct bookings for hotels is multifaceted, offering a suite of benefits that promise immediate financial gains and strategic advantages in guest management and brand building.
Benefits of Direct Bookings
- Enhanced Guest Relations: Direct bookings facilitate a closer relationship between hotels and their guests, allowing for personalized communication and services. This direct line of contact is invaluable for understanding guest preferences, tailoring experiences, and fostering loyalty — elements central to a hotel's reputation and potential repeat business.
- Data Control: When guests book directly, hotels gain immediate access to a wealth of data, from contact information to personal preferences. This data is gold for crafting targeted marketing campaigns, personalizing guest experiences, and making strategic decisions. In contrast, bookings through OTAs provide hotels with limited guest information, impeding their ability to connect directly with their customers before arrival.
- Reduced Commission Fees: Perhaps the most tangible benefit is the financial savings. Direct bookings eliminate the commission fees that hotels must pay to OTAs and other third-party intermediaries, which can range significantly and eat into the hotel's net profit. By encouraging direct bookings, hotels can improve their bottom lines, investing the savings into improving guest experiences or marketing efforts to attract even more direct business.
The Reality: A Heavy Reliance on Third-Party Bookings
Despite these clear benefits, transitioning to a direct booking-centric model has been slow and challenging. Many hotels, especially those without the brand recognition of larger chains, continue to rely heavily on OTAs for visibility and bookings. This dependency stems from a variety of factors:
- The Marketing Muscle of OTAs: OTAs have substantial budgets for advertising and search engine optimization, making them more visible to potential guests than individual hotel websites. Last year, Booking, Expedia, Airbnb, and Trip Group spent 16.8 billion USD on marketing.
- Consumer Behavior: Many travelers prefer the convenience of comparison shopping on OTA platforms, where they can see a wide range of options, prices, and reviews all in one place.
- Risk Aversion: Some hotels hesitate to allocate the necessary resources towards building a robust direct booking channel, fearing the investment may not yield an immediate return, especially in competitive markets.
While beneficial in terms of occupancy rates, reliance on third-party bookings has drawbacks. Hotels are at the mercy of OTA policies, competing fiercely with others for visibility on these platforms and losing a significant portion of their revenue to commissions. The challenge, then, is not merely to recognize the benefits of direct bookings but to implement strategies that can realistically shift the balance in their favor despite these prevailing trends.
Following the Money: Understanding Incentives
At the heart of every decision made within the hotel industry lies a fundamental economic principle: incentives drive behavior. This principle suggests that the actions of individuals and entities are heavily influenced by the rewards they expect to receive. Understanding the specific incentives that motivate key players in hotel management and bookings is crucial to unraveling the persistent preference for third-party bookings over direct bookings.
Financial Incentives for Key Players
Hotel Management Companies operate hotels on behalf of owners, making critical decisions about strategy, marketing, and operations. Their financial incentives are closely tied to the hotel's gross revenue, as their management fees are often calculated as a percentage of this figure. This arrangement naturally predisposes management companies to favor strategies that maximize gross revenue, regardless of the source of bookings.
In addition to the management fees calculated on gross revenue, brands (often the same as the management companies) usually charge a fee for all bookings generated through the brands' distribution systems. This means that bands also charge commissions, like OTAs, even if these are lower than the OTA fees. This is not all bad since the cost of a reservation through a branded website is lower, and this fee structure incentivizes the brand to push for more "direct" reservations.
Traditionally, the performance of hotel management companies is frequently evaluated based on metrics like the Revenue Per Available Room (RevPAR) and the Revenue Generation Index (RGI). RevPAR measures the hotel's ability to generate revenue on its capacity, while RGI compares its revenue performance against a defined set of competitors. High scores in these metrics can lead to bonuses, enhanced reputations, and more business opportunities for the management companies. The focus on gross revenue, RevPAR, and RGI creates a scenario where the number of bookings may overshadow the quality or source of those bookings, including whether they are direct or through third parties.
To make management companies more focused on profits, owners have started negotiating management contracts with performance clauses tied to gross operating profit to ensure the management company is aligned with their interests.
Hotel Revenue Managers: These professionals maximize room revenue through dynamic pricing, inventory management, and channel optimization. Similar to management companies, revenue managers are often incentivized based on RevPAR. A high RevPAR can lead to bonuses, promotions, and professional recognition for these individuals. Everyone wants to succeed by making the least possible effort, so distributing the rooms through an OTA is much easier than managing hotel websites and booking engines to drive direct bookings. Smart revenue managers prefer OTAs using the retail model since this gross revenue will increase RevPAR compared to the merchant model, which generates net revenue with less impact on RevPAR. Travel Agent reservations are often gross, while tour operators are often net. A reservation at BAR from Booking is always better for reaching the bonus than a corporate negotiated rate direct booking. In addition, revenue managers want to ensure that the hotel always checks in the no-shows to boost RevPAR instead of collecting no-show fees on a separate account not included in room revenue.
Do not even think that this is bad behavior. The purpose of incentive programs is to drive a specific behavior. We all know this incentive structure emphasizes maximizing revenue per available room rather than focusing on the long-term benefits of cultivating direct bookings and minimizing commissions. Consequently, revenue managers rarely prioritize strategies that enhance direct bookings if they do not immediately and directly increase RevPAR.
There is a debate about whether revenue management should focus more on generating profits. Some revenue managers who have begun to work towards this goal will quickly become demotivated when their boss, such as the hotel CEO or GM, questions why the revenue per available room (RevPAR) has decreased, as their bonus is linked to this metric.
The Conflict of Interests
The current incentive structures within the hotel industry create a complex landscape where short-term financial metrics dominate strategic decision-making. This focus on immediate revenue metrics can inadvertently discourage investment in direct booking strategies, which, while potentially less lucrative in the short term, can offer significant long-term benefits in terms of customer loyalty, data ownership, and reduced reliance on third-party channels.
The Short-Term vs. Long-Term Dilemma
The dilemma between short-term and long-term performance is further complicated by incentive models that drive the actions of hotel management companies and revenue managers.
Short-Term Gains: High RevPAR and RGI are crucial metrics for the hotel industry, serving as barometers for a property's financial health and competitive standing. Incentive structures that reward these metrics encourage strategies that boost immediate revenue, often through any means available, including reliance on third-party bookings. While this approach can enhance a hotel's financial performance in the short run, it may do so at the expense of developing a robust direct booking channel and a long-term relationship with guests and customers.
Long-Term Health: The benefits of direct bookings—customer loyalty, reduced commission costs, and rich customer data—are integral to a hotel's long-term health and competitive advantage. However, these benefits do not immediately impact RevPAR or RGI in the same direct manner as third-party bookings might. As a result, the focus on short-term metrics can deter investment in direct booking strategies, which require time, effort, and resources to develop and mature.
Navigating the Conflict
This conflict of interest creates a challenging environment for hotels attempting to shift their focus toward direct bookings. The structural bias toward short-term performance metrics leads to underinvestment in strategies that could secure a hotel's independence and financial health in the long run. Furthermore, this dynamic can stifle innovation and discourage adopting practices that foster direct guest engagement and loyalty.
Resolving this conflict requires a thoughtful reevaluation of the hotel industry's incentive structures. Aligning incentives with long-term strategic goals, rather than solely short-term financial metrics, could encourage behaviors supporting the development of direct booking channels. This realignment is not just a matter of adjusting financial incentives but also involves cultivating a culture that values long-term customer relationships and recognizes the strategic value of direct bookings.
Strategies for Aligning Incentives with Direct Booking Goals
The pathway to increasing direct bookings lies in the strategic realignment of incentives across the board. By adjusting the reward and compensation structures, modifying management contracts, and educating stakeholders about the long-term benefits of direct bookings, hotels can shift their focus toward sustainable growth. Here are some actionable strategies:
Adjusting Compensation and Reward Structures
Hotels can adjust how they incentivize their key employees within months.
- NetRevPAR Targets for Revenue Managers: Make direct bookings more attractive for revenue managers by focusing on the revenue per available room after the customer acquisition cost, NetRevPAR. Which booking should the revenue manager prioritize? On the margin, if the guest pays USD 100 for the room, the hotel will keep USD 100 if direct, while only USD 90 through a low-cost OTA. A revenue manager incentivized on NetRevPAR will work on maximizing NetRevPAR and, in this example, prioritize direct bookings more.
- Incentive Programs: Create incentive programs for all staff to increase direct bookings. This could include front desk employees and the marketing team, fostering a hotel-wide culture that values and works towards enhancing direct guest interactions and bookings.
Modifying Management Contracts
Modifying management contracts will take decades.
- Incentivizing Net Revenue: Shift the focus of management contracts from gross revenue to net revenue. Brands boast how much revenue they will bring through their distribution channels and loyalty programs. Owners pay for that in the management fee. Suppose the fee is calculated on net revenue instead. In that case, this will incentivize management companies to consider the cost of bookings, not just bringing the volume, naturally encouraging strategies that minimize all customer acquisition costs instead of handling this problem to the owner.
- Performance Metrics Reevaluation: Incorporate NetRevPAR growth and customer loyalty metrics into the performance evaluation of management contracts. This ensures that management companies are aligned with the hotel owner's interest in building a strong, direct relationship with guests and to maximize return on investment.
Implementing Educational Programs
- Demonstrating Long-term Value: Develop and implement comprehensive educational programs for hotel staff and management on the long-term value of direct bookings. These programs should cover the economic benefits, such as improved margins, reduced dependency on OTAs, and strategic advantages, like enhanced customer loyalty and valuable data insights.
- Best Practices and Success Stories: Share case studies and success stories within the industry of hotels that have successfully increased their direct bookings. Learning from peers can be a powerful motivator and provide a blueprint for implementing similar strategies.
Leveraging Technology
- Investing in Direct Booking Platforms: Encourage investment in technology that enhances the direct booking experience for guests. User-friendly websites, seamless booking processes, and personalized marketing efforts can significantly boost direct bookings.
- Data Analytics for Targeted Marketing: Use data analytics tools to better understand guest preferences and behaviors, enabling more targeted and effective marketing strategies to encourage direct bookings.
Conclusion
The hotel industry's pursuit of increasing direct bookings is closely tied to the incentives influencing decision-making. However, the traditional incentive structures tend to prioritize short-term financial metrics like Revenue Per Available Room (RevPAR) and Revenue Generation Index (RGI), which leads to the neglect of the long-term benefits of direct bookings. This approach overlooks the significant advantages of direct customer relationships, such as improved guest loyalty, reduced commission costs, and valuable customer data.
Therefore, hotels need to rethink their approach to direct bookings by reevaluating their reward structures, contract terms, and industry culture of performance evaluation. Unfortunately, this process may take a long time to change if it ever does.