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For most of her long and accomplished career, Flo Lugli, founder and principal of Navesink Advisory Group, has worked at the intersection of hospitality, travel, and technology. During that time, she has seen distribution become perhaps the defining issue of hospitality industry disruption, with everyone from hotel companies and technology platforms to OTAs and tour operators struggling to understand and master this shifting landscape.
On a recent call for HSMAI’s Faculty Roundtable, Lugli presented an overview of distribution, from its history, to its evolution across platforms, to its convergence with revenue optimization and marketing. Here are excerpts from her presentation:
1. THE DAWN OF DISTRIBUTION
In the beginning, it was all about the GDS [global distribution system], and there was a focus on connectivity: How do we manage and connect and provide our rates, availability, and inventory out to the GDS? This is around the mid-’80s, once Sabre and Galileo came out with a new hotel platform. In most cases, it was managed by database teams that lived within a central reservation call center. This was also around the time that you had the launch of companies like THISCO, WizCom, and Lanyon to help hoteliers distribute their rates, inventory, and content. There were a few direct-connects at the time, but as the new hotel platforms came out, it was more and more difficult for the hotel companies to support those direct-connects, and so it was really THISCO and WizCom that were driving most of that connectivity.
At the time, content was — and quite frankly it still is — a challenge for the industry. When I was running WizCom, we were trying to address the issue of content management. With the five GDSs at the time, you would literally have to load properties and all of their rules and policies and room information and local information five different times. I developed something called Easy Access Plus, which basically created a switch for content, but it was very limited. It was very focused on the GDS. There were a limited number of fields that the GDS actually supported. And of course, with the advent of the internet and widespread distribution, it certainly wasn’t designed for consumer-friendly type of content.
As the internet evolved — I’m talking around mid-’90s to mid-2000s — brand.com efforts were managed separately from other third-party efforts, such as OTAs. So, you had a group of folks that were focused on brand.com, and then you the distribution folks, still primarily driven by database and connectivity people, managing the third-party relationships. After 9/11, as business dropped and the OTAs started to play a much more visible role in hotel distribution, the hotel industry began to think about how to better manage their distribution needs.
From around 2005 on, metasearch players — TripAdvisor, Kayak, Google — started to play increasingly important roles. Hotel companies began to assess what their organizational structure should be between distribution and commercial. There were a lot of conflicts between the brand.com department and the distribution department. Brand.com wanted to drive more business to the brand websites, and distribution wanted to drive more business to the OTAs. There was this internal conflict that needed to be resolved.
2. GETTING SERIOUS ABOUT DISTRIBUTION
As we moved into the first half of this decade, obviously OTAs continued to get stronger, as did other third parties, such as Google and TripAdvisor. As the hotel industry started to get more serious around distribution, it began to become a topic in the executive suite. Hotel companies ramped up their investments in brand.com and mobile sites. For example, when I joined Wyndham [as executive vice president of marketing in 2009], we undertook a $100-million capital investment in technology — digital, mobile, and so forth.
The conversation at the time centered around “The OTAs are the enemy.” Rate parity started to get a lot of attention, and Roomkey was formed in an effort by the major hotel companies to try and gain a little bit more control over their distribution, and perhaps to provide a little bit more leverage in their negotiations with the OTAs, although that was never an admitted goal. And then, of course, channel managers became more and more important. As more third parties came into the mix, it was becoming increasingly difficult, especially for independent hotels and small chains, to manage their distribution.
This was during the time when hotel companies aligned distribution under commercial. The execution of managing the connectivity and perhaps the database components of distribution still resided under the call centers, because that’s where most of these people were located, but the actual strategic development and plans were moved under commercial. There was a lot of education going on within the hotel companies about distribution and its implications and complexity, but I don’t think most people in the C suite really understood how complex it was — the need for multiple connections, how to distribute content, and so on.
As we fast-forward to the past four or five years, distribution has become front and center in most discussions. It has become much more commercially focused, but there remains a technical and operational component that must be understood and actually managed. You obviously have more and more investment in brand.com mobile and book-direct campaigns, as an example. And then, beyond book-direct, hotel companies are now saying it’s less about discounts and more about customer engagement, and OTAs have moved for the most part from being the enemy to being the partner. Hence, as an example, the recent Marriott deal with Expedia.
3. THE DISCIPLINES AND DISTRIBUTION
Organizational realignments continue, and revenue management has moved to focus on revenue optimization. Heads of marketing have evolved to roles that are more chief commercial officers or chief revenue officers, depending upon the hotel company, and there’s been a real focus on how to optimize revenues. There’s also been a renewed effort to understand channel costs and optimal channel mix, because distribution is really about understanding what does it actually cost me to get that sale.
For me, distribution today is about how hotel product can be sold to consumers. And when I say “hotel product,” I don’t necessarily mean a room, I mean any service or amenity within the hotel. That could be the swimming pool, or the cabanas, or the meeting rooms and the restaurants, and so forth. It includes all channels — not just GDS and third party, but brand.com and voice, and even to some extent direct to the local property. It also includes all disciplines. Distribution isn’t just focused on how do I make that connection and how do I get that content out there, but it needs to be thought of throughout all disciplines: marketing, loyalty, sales, revenue management, and technology. Everybody needs to be aware of how ARI and content is distributed and the costs thereof, so that they can create a much broader channel-mix strategy.
To summarize, distribution is the overarching strategy of how a hotel or a hotel brand actually markets and sells, with a true understanding of channel costs and ROI. One of the biggest challenges in understanding channel costs and ROI, quite frankly, is the chart of accounts that the industry uses, where you have different departments tracking different costs of distribution. In the reservations department, you have the res fees, and in SG&A, you have the credit-card fees, and in marketing, you have some of the distribution fees. But it’s really difficult for an individual hotel to pull all of those together and understand true cost of distribution.
4. THE CHALLENGES OF DISTRIBUTION
There are other unique challenges within the hotel industry. The fragmented structure masks the real cost of distribution, and the fact that you have local-level decision making on what rates you’re going to offer and what inventory you’re going to offer complicates things. Can you imagine if there were an airline that was franchised, where every single plane was owned by somebody different, and they decided where they wanted to fly and what they wanted to charge? There’s also a lack of consistent technology investment across the industry. The brands are making some investments, but the hotel owners generally don’t have the money, and certainly the management companies are not usually incentivized to make those investments.
This industry is overly dependent upon content. Consumers want to see videos. They want to see photos. They want to really understand what the experience is at the hotel versus the kind of content that you need for an airline seat or even a rental car. The leisure skew plays into the strengths of the OTAs, who have billions of dollars to spend and who have very strong consumer brands. And then, of course, we’re highly dependent on Google and metasearch for customer acquisition. Another of the biggest challenges in the industry today is that the cost of customer acquisition continues to rise.
5. REVENUE OPTIMIZATION, MARKETING, AND DISTRIBUTION
From a revenue management, revenue optimization perspective, what we’ve started to see is a real focus on driving a revenue management culture and approach throughout the entire business — getting people to understand exactly what do we mean by revenue management, why is it important, why digital marketers need to talk to revenue management before launching any promotion. Again, understanding the real costs of each channel and the ROI is important, because brand.com is not free and, in many cases, can be the most expensive channel for owners when you factor in discounts, PFP fees, and the amenities they need to deliver for loyalty. In some cases, it could be more expensive than an OTA booking. So, I think it’s important for revenue management to take the lead in driving better organizational alignment and collaboration across the enterprise and make sure that incentives are aligned, because what gets measured gets done.
Last year I completed a nine-month engagement as interim chief commercial officer for the Americas for Radisson, and one of the things that we did while I was there is build a strong collaborative environment between marketing and revenue management. There were weekly meetings to talk about things like need periods, what kind of offers should we give, what were the results of those offers, how long should they run, what should we test. And there was a lot of effort around understanding, when we did do a promotion, what was the actual ROI on that? We looked at not just how much it costs to place the ad and what was the revenue that was generated, but also what were some of the other costs that went into that promotion?
It’s tough to undarstand ROI for branding exercises. The old marketing saying goes, “I know that only half of my marketing works. I just don’t know which half.” There are ways to look at branding exercises and branding spend versus revenue-driving efforts by doing some cross-channel analysis — when you’re doing some branding efforts, whether that’s radio or TV or whatever, tie that to did we see a spike in call volume and did we see a spike in visits to the website.
So, in summary, over the last 30 years, distribution has moved from an operational and technology focus to a commercial focus, but understanding the operational, technical issues and the cost is important to help define what that optimal channel mix should be for an organization. Organizational alignment and collaboration has never been more important or more critical to optimizing revenue.