2022 is a genuinely weird year.
There has rarely been greater uncertainty or conflicting stories in the news about the economy. Inflation is relatively high and pandemic risks remain, yet guests continue to spend on travel and other services.
Rates are at historic highs, but occupancy continues to lag 2019, especially among business and conference travel. And online travel agencies, which have mostly remained on the sidelines throughout the pandemic, have ramped up marketing spending to levels unseen for several years.
It’s a mixed bag. And it’s entirely appropriate to wonder how your hotel should respond to these many divergent trends.
First, it’s critical to remember one thing: There is no such thing as free. No matter where you source your revenue, it comes at a cost.
Many hotel owners and operators like OTA business — or tolerate it anyway — because it comes at a fixed cost, one you only need to pay when they send business your way. However, there’s a serious flaw in that line of thinking, especially in the current environment.
OTA business typically costs hotels somewhere between 15% and 25%. That’s relatively high in any case. But in an environment where average daily rates and length of stays are increasing, it presents a greater problem. Assuming a $179 ADR and a 1.4 night length of stay with an 18% OTA margin, each third-party reservation costs your property roughly $45. If your ADR and length of stay increase by just 10%, your cost of each reservation goes up over 21%, to $54.60.
The problem with OTA bookings is that while the percentage of revenue stays constant, their cost increases as ADR, length of stay or both rise. And that’s a huge issue in an environment where we see guests willing to pay more and stay longer.
Why Direct Business Is Best
By contrast, most direct business is managed on a cost per booking basis, not cost of revenue. In other words, as ADR and length of stay increase, the cost of direct reservations goes down as a share of revenue. Direct bookings come at a cost, too — there is no such thing as free, after all. But that cost goes down as your revenues grow. And that means more profits for your property to invest in capital improvements, staff and training — or save for a rainy day if the economy remains uncertain.
The key question then becomes, if there’s no such thing as free, where can you best invest your dollars to drive direct revenues? Fortunately, on that score, there’s nowhere near so much uncertainty. While the exact breakdown varies based on your chain scale and your specific market conditions, some broad guidelines hold constant.
Attracting Direct Revenues
To start with, remember that it’s Google’s world, we just live in it. As I’ve noted previously, Google remains the 800-pound gorilla the other big apes have nightmares about. Whether it's paid search, organic search or metasearch, Google sets the tone.
If you don’t think Google’s that important, consider this: Google earned 58% more revenue in the first quarter than Elon Musk is spending to buy Twitter … all of it. In one quarter. That’s remarkable. Also note that Google attributed a healthy chunk of its quarterly gain in search in part to the resurgence in travel marketing.
How do you get Google’s attention? Well, participating in paid search and metasearch is a must. Again, there’s no such thing as free. What matters here is working to drive down your cost for these channels to less than your cost of OTA business. That’s typically not all that challenging. Work with your agency partners to deliver an average return of 7:1 or greater. You don’t need every campaign to produce those results — unbranded search may struggle to reach those numbers. But if you can produce average returns in that range, you’re moving in the right direction.
Next, focus on your hotel website’s content. Guests continue to ask questions about health, safety, flexible booking policies and things to do in your local area. Guests can’t book direct if they can’t find you; organic search, while not as powerful as it once was, remains a key component of driving direct traffic and bookings. And don’t just focus on facts; tell a compelling story about why your property is the right choice for your guest’s next trip.
Great content can help you rank better in search and give guests something to share on social media with their friends, family, fans and followers. Help them tell a positive story about your property.
You also don’t need to be the only source of all your content. Research shows that travel brands that partner with social media creators typically see positive results. These folks are professional storytellers. Why not work with them to tell an amazing story about your brand?
Finally, help your team to improve their digital skills overall. Google is offering $100,000 worth of scholarships to help employees across an array of industries learn new skills. Yes, of course Google expects that folks with digital skills will turn around and apply some of their newfound knowledge by spending more on Google products — how do you think they got to be the biggest 800-pound gorilla? That doesn’t mean they’re wrong. In an era where talent is tough to find, spending on improving your existing talent — especially if you can do so on someone else’s dime — is a winning strategy.
'No Such Thing as Free' Can Be Done Well
Yes, each of these items — paid search, metasearch, content and talent — cost money. But so do reservations booked through third parties. Unlike those expenses, their relative costs decrease as the value of each reservation increases. And, because you’re building direct reservations with guests, the long-term value from that direct relationship allows you to drive repeat business even more cost effectively. There may be “no such thing as free.” That doesn’t mean there isn’t a way to spend wisely.
Tim Peter is the founder and president of Tim Peter & Associates. He has over 20 years of experience in hospitality digital marketing, distribution, and strategy and has helped hotel companies improve their marketing and revenue generation strategies.
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