Why hotels shouldn’t sell a $200 hotel room for $50

This is a reprint of an article written by Tom Walker with Teradata.

Tnooz’s June 22 article “Expedia: What Groupon Getaways with Expedia means for hotels,” (why a hotel should sell a $200 hotel room for $50) posits an interesting case. But does it withstand a closer look?

To make the argument, Jennifer Mellet, Expedia’s senior director of new channel sales, presents the following hypotheticals.

$100: What the customer pays
$ 50: What the hotel receives
$ 40: Cost per occupied room (CPOR)
$ 10: Net to the hotel

Assuming 1,000 people buy the offer, the hotel nets $10,000.

Ms. Mellet further claims that “those are 1,000 largely incremental room nights that would have otherwise gone unsold.” No doubt some of the business would be incremental, but how much is really an unknown. It is also true that some cannibalization would occur, which again is an unknown.

At a gross level of analysis, $200 is four times the $50 that might otherwise be sold. On the margin, however (using the article’s $40 CPOR), the Expedia/Groupon deal is sixteen times less than what the $200 sale is worth:

$200 – $40 = $160. 160/10 = 16.

Is it realistic to believe that the Expedia/Groupon offer will deliver sixteen times more sales than the hotel would realize without running the special? Anything is possible, but as a hotelier I would be more than a little skeptical.

To further strengthen her case, Ms. Mellet points out that:

– In fact, Groupon customers have been shown to spend as much as 60 to 80 percent on top of the value of the Groupon.

Illustration continued:

– Cross-sell revenue per room (70% on top of $100 voucher at 70% margin to hotel): $49

– Total margin generated if 1,000 vouchers are sold: $59,000.

But is there any reason to believe that Groupon customers are more likely than other customers to spend additionally once staying in the hotel? Perhaps, but the proposition is far from self evident. If the hotel sells one sixteenth of the rooms at $200 that Expedia/Groupon would sell, it would achieve equivalent profitability. And the customer would be the hotel’s, not Expedia’s.

There is a pitched battle today between OTAs and hotels over which of them “owns” the customer. Expedia is aggressively positioning itself to be the owner of what might otherwise be hotels’ customers. Unquestionably, Expedia and other OTAs provide hotels a valuable service, but that value is delivered at a comparatively high price.

Rather than abet Expedia in its drive to become a traveler’s supplier of choice, it might be wiser to gamble that hotels’ own channels can achieve more than one sixteenth of what Expedia/Groupon could produce. In the bargain, hotels retain their loyalty position with the customer, which represent a value far greater than the $10 Expedia/Groupon might deliver.

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