There is still a lot of talk in the hospitality industry regarding the rising costs of distribution. Calculating distribution costs for hotels is very essential to be earn profit.
While encouraging guests to book direct can help hotels bypass some commissions and fees.
There are still many hotels that rely on the distribution and marketing reach of online travel agencies (OTAs).
As hotels start to change their contracts with third-party channels, they gain flexibility in managing rate and availability parity.
It now becomes critical to weigh the value of a channel.
In this article, however, due to the ever-growing complexity and changing landscape of hotel distribution channels.
I want to focus on how a hotel can best manage their distribution costs using the available distribution channels.
Hence give a clear guideline on how to go about it. By this, I would like to add a standard definition of revenue management: “at the right cost“.
In my opinion, even though Hotel Revenue Management professionals are aware of the impact of distribution costs on bottom-line results.
The responsibility is rarely assigned to the revenue manager.
When analyzing the topic of distribution costs, I came up with several key challenges. So that is generally undervalued and needs to be directly addressed on property.
Often several different channels exist with individual commission and cost agreements.
The respective agreements are rarely filed on the property nor does anyone remember signing them.
Then, invoices received from the various channels are rarely assigned to the corresponding booking productions respectively.
Normally, these are just directly passed on to the finance department.
Individual channels would need to be regularly displaced against high demand dates. When the hotel can yield its business and should restrict the least profitable channels.
The complexity of this displacement calculation taking into consideration not only revenues but also costs requires an experienced revenue manager or a Revenue Management System (RMS).
Currently, only a few companies are actively yielding NET RevPAR in their RMS and even fewer are actively calculating NET RevPAR figures, thus accounting for distribution fees.
Many system-related fees are not directly accounted for in the Revenue Management Department, consequently, the calculated fees per booking channel cannot be directly assessed and yielded correctly.
Examples of potential fees charged at any point in time are:
- Setup fees and implementation costs of a channel manager (e.g. a two-way interface to the Property Management System)
- Costs per channel or per booking through the Channel Manager or Booking Engine
- GDS (Global Distribution System) pass-through fees
- Marketing costs (e.g. for Wholesale Agency bookings, SEM or SEO costs)
- Meta Search Costs and Costs-per-click
- Program participation costs and required upgrades/vouchers and discounts
- Employee costs entering bookings manually
- Loyalty and reward member costs charged internally
If a hotel’s distribution channels are not automatically interfaced to the Property Management System (PMS)
The hotel’s operations team will need to provide support and will lose important time that should be spent with guests in the process.
In addition to the overall challenge of measuring distribution costs in any given hotel.
Adding different segments with changing cost structures and demand patterns increase the complexity of the overall topic.
Under the assumption that any hotel is running on a high occupancy at least during some months per year.
An attempt to yield different segments and distribution channels can lead to new sales.
Therefore more restrictive distribution strategies for hotels that are actively attempting to improve their cost structures.
To gain control of your distribution costs, there are several steps a hotel can do to assess the commission costs per distribution channel.
One of the crucial steps is to assess your business mix and put a segmentation in place. Even though the analysis of distribution costs should be made down to every single channel, grouping bookings into buckets will make yielding later a lot easier.
Make sure to assign this challenging and enduring task to an employee or group of employees that can start digging deep into old GDS, special corporate, online travel agent, wholesale and distribution costs contracts. Trust is essential as these individuals will have to:
- Check past, current and future financial statements or monthly invoices.
- Connect the team to the accounting department and receive a regular update
- Work independently on the analysis of the tasks.
- Assess all found information in spreadsheets and assist with drawing the right conclusions
As soon as you have accumulated all the data and the team can present their findings, you will want to adjust your strategy where possible. Speak to the individual stakeholders prior to acting:
- The Sales and Revenue leaders will be able to tell you about contracting periods for the individual customers or channels and challenges they might face.
- The Revenue Manager should start yielding the cost intensive channels immediately and drive profit at peaks where possible. New tools and more detailed decision making will be necessary and relevant in this step.
Make sure to work sustainably with your findings; regularly reactivate your team.
Revenue and Reservations leaders to constantly share any signed contracts to update the implemented spreadsheets.
It is essential to support a cost-saving culture, where individual departments are not only judged by their revenue growth but also by the amount of commission and distribution costs they have saved, i.e. bottom-line results.
There is a misconception that modern Revenue Management is only about top-line revenues,
Revenue Managers are now confronted with different commission costs, an increasing number of channels, different set-up, kick-back.
And net rate agreements, which require them to be ahead of the distribution landscape to make strategy adjustments with a potentially enormous bottom-line impact.
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