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The Pitfalls of Last-Minute Sales in Hospitality
 
By Max Starkov
October 12, 2011

 
The following article is Max Starkov’s latest contribution to the “Successful eMarketing” blog on HOTELS magazine’s website.

Last-minute sales in travel are not a new phenomenon. There have been many attempts to find a way to dispose of these empty airline seats, idle rental cars, and empty hotel rooms at any cost. 

Theoretically it makes economic sense: it is 4PM, I have 20 empty rooms, and if I sell them at 50% off rack, I will still be making some money from my otherwise perishable inventory, right? Wrong!
 
Last-minute sales in hospitality at lower discounted rates are not sustainable in hospitality as this approach jeopardizes all other distribution channels (hotel mobile site, hotel traditional website, GDS, phone reservations, even OTA distribution). This is especially valid today in the viral and mobile environment we live in and with the smart hyper-interactive travel consumers we are dealing with today.
 
What Is the Situation in Hospitality?
 
Last-minute sales have been tried and failed repeatedly in the hospitality industry. Remember LastMinuteTravel.com? Where is this site today? At the height of the dot-com bubble this site even had a splashy multi-million Super Bowl commercial.  
 
Currently Hotels.com has a last-minute hotel deals section on their site (http://www.hotels.com/last-minute-hotel-deals/).  Our analysis shows that these last-minute deals are more of a marketing gimmick and, due to contracted rate parity provisions with the hotels, these “last-minute” rates are no different from the “regular” hotel rates you can find on the main section of the site, on any other OTA, or on the hotel own website.
 
Priceline announced recently opaque Last-Minute Hotel Deals as part of a broader last-minute travel section on the site. Travel consumers can now book hotel rooms up to 11pm the same day they travel and still save up to 40 percent over other leading online sites when they use the “Name Your Own Price” model, which is Priceline’s traditional opaque program.

There is a new kid on the block, a mobile-only last-minute discount OTA called HotelTonight.com, which operates in the following manner:
  • Hotels upload room allotment and rates for the same day via an extranet
  • Average discounts range 30%-35%
For these last-minute discount sites to exist there must be a Market Equilibrium (Price-Quantity) between: The Demand Side (quantity of engaged last-minute deal buyers) and The Supply Side (quantity of fresh, intriguing last-minute deals).
 
As travel demand improves, hoteliers will become increasingly reluctant to participate and provide the supply side of the equation with fresh, intriguing last-minute discounts. Online travel consumers, disappointed by the lack of fresh/intriguing last-minute discounts, will revert back to the traditional booking channels: hotel direct, voice, GDS and OTAs. As a result both sides of the equation will suffer and shrink.
 
In this sense HotelTonight.com and some OTAs are trying to re-create in the mobile space what other players in the field have tried repeatedly and failed. My prediction is that HotelTonight.com and similar last-minute discounters will not last long as these sites employ a business model that is against the hospitality industry’s best practices for channel management and rate parity, and will suffer as a result of supply and demand economics.
 
Why Hoteliers Should Avoid Last Minute Sales?
 
Here are only some of the reasons why it is not a good idea for hoteliers to utilize the last-minute deal business model and why this business model will not survive the test of time in hospitality, similar to the example from the airline industry:
  • Last-minute sales sites are a recessionary phenomenon, not a new and exciting distribution channel. There is nothing revolutionary about their technology, which has been around for years.
  • The mobile channel is not the reason for the emergence of  HotelTonight.com and similar last-minute discounters, it is a mere enabler. The recession is the only reason for these last-minute sites’ resurgence of late.
  • Last-minute sales of empty hotel rooms may sound logical and makes sense in theory, but in reality they work against rate parity and destroy all other distribution channels and price integrity.
  • The economics does not work for the hospitality industry:
    • Flawed business model: the discounted rate is out in the open, which goes against rate parity principles, contractual obligations with OTAs, preferred corporate accounts, group rate contracts, best rate guarantees, etc.
    • Lack of opaqueness establishes a low market price: hotel can hardly charge rack rate again since customer has accepted the discount rate as the market rate.
    • Leads to cannibalization of existing customer base: as discussed below, most mobile bookings happen in the last minute anyway.
In this hyper-connected social and mobile world, the booking window has shrunk tremendously over the past few years and travel consumers have embraced the mobile Web as a legitimate booking channel:
  • Typically, mobile bookings are for the next 48 hours (Google).
  • Many major hotel brands report that 80% or more of their mobile bookings are for the same or the following day.
  • Sixty-one percent of online consumers are willing to book travel via a mobile device (Google, September 2011).
In other words, people are booking closer and closer to the day of the actual arrival, meaning that it is easier for them to wait until the last minute and see what the last-minute rates on HotelTonight.com or a similar service are as opposed to booking in advance via the hotel desktop or mobile sites.
 
In the age of social and mobile “word of mouth,” it will not take long for all regular and frequent guests at your hotel to hear about the lower last-minute rates offered via an OTA or a service like HotelTonight.com. What will be the result? The hotel will soon witness that:
  • Booked guests are canceling existing reservations made via hotel website, phone, GDS, OTAs and re-booking via HotelTonight.com using the lower rates.
  • Potential guests are waiting until the last minute to see what the last-minute rates are for the property and other hotels in the city/location they are traveling to and booking in the last minute.
  • OTAs are after the hotel for these last-minute “deviations” from the contracted rate parity clauses.
A Case Study from the Hospitality Industry:
 
There is a very good case study from New York City where a luxury boutique hotel was (mis) using Twitter to offer last-minute discounts for unsold rooms for the night:
  • Every day at 5PM the hotel would send out a Twitter-only Last-Minute Special that was 25%-30% below BAR (discount varied based on number of empty rooms available for the night).
  • All 8,000-10,000 Twitter followers received this last minute special.
  • Potential guests, new and old, frequent and occasional, were waiting for these last-minute specials to book via their mobile phones or call from the airport or from the taxi cab while en route to the hotel (5PM traffic to Manhattan – you get the picture).
  • There have been numerous cases when people were waiting in the lobby of the hotel to receive the 5PM last-minute deal and then walked up to the reception desk and booked their stay right then!
  • There have been many cases where guests arriving with advance reservations booked at much higher rates via the hotel website, voice, GDS or an OTA, demanded at the front desk to be accommodated at the lower “last-minute rate of the day.” The front desk had to oblige reluctantly.
  • Major ruckus and noisy scandals at the front desk were a common occurrence on a daily basis.
In 6 months or so the hotel discontinued the practice and spent at least a year after that repairing the damage to its price integrity.
 
What Should Hoteliers Do to Avoid Last Minute Sales?
 
Now that we have discussed that last-minute room sales are against industry best practices and do not work in hospitality, what should hoteliers do?
 
To begin with, if hoteliers are doing everything right in the direct online channel, the hotel would not need to use last-minute discounters. Instead of relying on last-minute discounters, hoteliers should invest in the direct online channel, both traditional and mobile Web.
 
Second, make the mobile web your priority in Q4 2011 and 2012. The mobile channel has already become an important travel planning and transaction channel in the U.S. and worldwide. Hotel guests and travel consumers are already mobile-ready, and hoteliers and travel suppliers have to respond adequately to this growing demand for mobile travel services.
 
Third, hoteliers should focus not on “naked” rate discounts like last-minute deals, but on hotel special offers, packages and promotions that provide real value, such as: limited time offers, advance purchase promotions, complimentary amenities and upgrades, loyalty point promotions, family, weekend, spa and romantic packages, etc.

In this economic environment, it is essential for hoteliers to embrace all three of the above steps in order to increase market share by taking advantage of this new mobile travel planning and booking consumer behavior, as well as the shortened booking window and last minute nature of mobile bookings.
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Contact: 
 
Max Starkov
HeBS Digital
6 West 48th Street, 8th Floor. New York, NY 10036
Phone 702-221-2037
Email:
max@hebsdigital.com
Web:
http://www.hebsdigital.com

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Also See: Smart Hotelier’s Guide to 2012 Digital Marketing Budget Planning / Max Starkov and Mariana Mechoso Safer / September 2011

Smart Hotelier’s Guide to 2011 Internet Marketing Budget Planning / Max Starkov and Mariana Mechoso Safer / October 2010

Mastering Internet Marketing in 2010: Results of the 4th Benchmark Survey on Hotel Internet Marketing / Max Starkov, Mariana Mechoso Safer and Evan Rosenblum / March 2010

A Hotelier's Guide to Budget Planning in '08; Best Practices in Developing the 2008 Hotel Internet Marketing Budget / October 2007
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