When hotels started selling their rooms and services via the Internet, the number of channels where end-customers could buy, compare rates and availability rose to the point that electronic hotel distribution became an industry unto itself. And with that, the cost of distribution for hotels skyrocketed.
In the past, the cost of distribution for hotels was based on call centres and travel agencies expenses. However, nowadays this cost comes from multiple actors – OTAs, GDS, CRS, TMC, among others – and each one of them applies a percentage rate over the total cost. This means that the total percentage can be between 15% to 25% fee that hotels have to assume.
Furthermore, most hotels, especially small independent hotels, are not aware of the real cost of distribution and how it affects its annual income. “The reality is that you have to add payment costs and cancellation costs to the distribution cost. And for many hotels these are not costs registered on a book or Excel”, assured Founder and CEO at Fastpayhotels Àlex Gisbert, during the baVel Travel Summit event, held in Barcelona last May.
The distribution cost is divided among the OTAs, which they usually applied the highest percentage; payment costs, where the cost of virtual credit cards is raising, cancellation costs, which can represent a 2% fee of the total distribution cost; and breakage, which is the total amount of money hotels are under-invoicing.
Unfortunately, breakage is a cost that hotels don’t even see, but it can represent a great amount of loss every year. Invoicing wrong amounts, forgetting to charge a card or undercharging are some of the most common flaws. “Breakage is a big source of money for some bed banks and, unfortunately, it is a cost that hotels don’t have in mind”, regretted Gisbert. Furthermore, it is complicated to have breakage under control as in most cases it doesn’t depend on hotels.
To Gisbert, the main problem is that for many hotels the cost of distribution has doubled but the rates have not. Due to the rise in the number of hotels, rates have not increased or, in some cases, have decreased, which can become a sustainable or financial problem for some small and medium hotels.
In order to change this situation and in front of a growing demand for personalised products, hotels are enhancing direct sells on their websites. This way they can offer better services, increasing their profit margin and cutting distribution costs.
“Many hotels are adapting themselves to new technologies, offer better connectivity and exchange their static rates for dynamic rates which allowed them to cut costs”, explained Gisbert. He added: “Although direct sales have their own costs – ads, payment gateways, e-Commerce platforms – the profit margin – for hotels – is higher”.
The distribution cost is changing the way hotels offer their services and products to the end-customer. Direct selling offers the opportunity to provide personalised products and services where they can apply discounts. However, most hotels can not only have a unique distribution channel. At this inflexion point, the players of the extended and complex travel distribution network should think of collaborating to create a new sustainable model for the future.