By David Lund
I had a wonderful discussion with a hotel sales manager last week about a new hotel reservation platform that does not include any stops at an on-line travel agent, OTA. The sales manager explained to me that her mid-sized hotel did a couple of million dollars in corporate IT sales and that represented just over 12,000 room nights. She went on to explain that the room nights were generated by close to 100 corporate contracted companies. These companies ranged in volume from a dozen room nights per year to the top of the list where a handful of companies were in the 1000 room nights per year category.
The 80/20 rule is also known as the Pareto principle. Pareto wrote a paper in university in the late 1800’s Switzerland. In his paper, he stated that for many events and happenings that 80% of the effects came from 20% of the causes. He had studies the ownership of land in Italy and found that 20% of the people owned 80% of the property. He also studied the peapods in his garden and determined that 80% of his peas came from 20% of the pods. So, what does this have to do with OTA’s and hotels you might ask?
On further reflection in the hotel where she worked 80% of the 2 million dollars in sales actually, comes from 9 companies. The other 90 companies combine to produce less than 500k in sales almost exactly 20%. When we look closer at these 9 companies we can see the revenue they produce is somewhere just north of 1.5 million dollars and almost 10,000 room nights. The other aspect that we can readily see is the cost of obtaining this business, what we would traditionally call the distribution cost or better still on-line travel agency commissions. In the corporate IT world, the individual travelers typically book their accommodations and better still its usually the corporate executives staff that book the room. They book it through some form of an OTA and the loaded commission costs are in the 20% range. Using the 1.5million in the top 9 accounts this translates into 300k in commissions that the hotel is paying to get this business.
Her idea was to approach each top corporate customer, all 9 of them, and offer a better deal on their room price in exchange for using a new reservation platform that connects the hotel and the corporate travel planner directly. No middle man and no commissions. This allows the hotel to offer the customer a special rate that’s not published and not under the rate parity agreement that applies to hotels and OTA’s. The customer saves on every single room they purchase and the hotel saves commission on every single room night. Win Win. Both the hotel and the corporate clients have just increased their profitability.
Back to the 80/20 scenario. In order to save the 100k the hotel only needs to talk to 9 clients. The clients, in turn, need to re-educate their travelers and typically this is very easy to do as they are used to following the corporate travel manager’s directives. Using the basic commission of $30 per reservation her plan is to pass along $10 per room to the hotel and in turn, the hotel’s profitability increased by $20 and this means the goal is to pass 5000 corporate room nights through the peer to peer app. This translates directly to improve the hotel's profit by 100k. Translate that into owner asset value and were talking about more than a million dollars. That’s how a corporate sales manager could save your hotel a cool 100k this year! www.rfpmaker.com
