We have all been obsessing about the direct v’s major OTA scenario. But what are we doing about other channel buckets like GDS or Wholesalers or even regional OTAs? And most importantly how do we approach channel shifts beyond wanting to manage it better and talking about it?
The biggest challenge in terms of understanding cost of sale whether in an independent hotel or a chain environment is that
- it is all too fragmented and there is no easy way to bring these numbers together especially on the cost side
- the definitions are all over the place and
- it is not easy to compare costs of channels side by side – for example three GDS bookings may have three different costs.
So what do we do? Analysis paralysis!
A Simple Sane Metric for Channel ROI?
I have been increasingly thinking of the principles around Marketing Efficiency Ratio (MER) when it comes to a saner metric (read easier!) that most hotels could work with/live with – and one that could provide a directional sense of which channels are genuinely profitable and which ones are not “good”. And go beyond the Booking.com did this and Expedia did that conversation to look at the bigger picture! It may not be granular enough for many but what would you say is better – analysis paralysis or a simpler way of understanding what is working and what isn’t?
So MER is one of those very high-level metrics (referred to in marketing speak as a North Star Metric) that helps you understand the direct overall relationship between marketing costs and revenue generation. For example, if you spend $10,000 across social media channels and generated $30,000 in total sales, the MER would be 3. MER = Revenue / Cost
Introducing the Distribution Efficiency Ratio
And I believe that we can use it in the hotel distribution context as well if we apply all costs and discounts as distribution costs, got a number for it and then consistently tracked it to bring it up. I am going to call it the Distribution Efficiency Ratio or DER.
Now, if you have a fabulous sophisticated cost of sale analysis system in place that gives you granular insights this approach may not be necessary. I don’t know many hotel companies that have this in place up and running well, including the global majors, but I know that the lovely people at Juyo Analytics are working hard to change that.
The Working Principles – Rough & Ready
Here’s how I would go about it if you currently don’t have a system in place. This could be entirely manual (not recommended) and still work, blended which is how I’d see most hotels use it or by having a tech stack in place that allows for information from both revenue channels and financials to meet.
- Define channel buckets (as specific or grouped together as you want to be for example Expedia, Booking.com separately or by OTA). You probably don’t want more than 6 to 10 buckets. Sadly the traditional somewhat rigid market segmentation approach where all segments behaved “as they should” within segment parameters no longer hold valid…
- Track revenues by each bucket
- And add up all commissions, discounts, marketing and advertising expenses, costs like website maintenance or customer support by channel buckets.
- Calculate a DER for each channel bucket ie Total Revenue/ Total Cost.
- A higher DER value indicates a more efficient distribution channel.
- Put the channel buckets side by side with their DER scores and see how they compare
For example if you had one channel bucket with an OTA (eg: Expedia) producing a revenue of $100,000 per month and it had only commission fees (no ad spend or booster commissions) which came up to $20,000 then this would give you a DER of 5. And by comparison if a Wholesaler (eg: Webbeds) produced $100,000 and discounts (net rates) totalled $25,000, then the DER here is 4.
So in this example, you may want to consider moving some of that Wholesaler volume to Direct where possible (assuming that Direct does indeed have the highest DER) or even to Expedia. And we’d definitely hope that the DER for a direct booking is 6 or more in this example. (although I don’t want to take anything for granted.)
Whether this is what you’d like to do longer term and whether it is sustainable is another question which requires deeper analysis and more understanding of the demand ecosystem for your hotel.
