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In This Issue:
Visual
Data About UsVisual Data Systems is a leader in Internet marketing, technology consulting and World Wide Web design. As a pioneer in Internet business, we've logged more than a decade of achieving customer satisfaction and Internet innovation. Visual Data Systems offers a wide variety of products and services that can be customized to fit your unique business needs. Let our experienced professionals polish your ideas and dreams to create your distinctive Internet presence. At Visual Data Systems, there are no barriers. Just Innovations. News & EventsCatch Visual Data Systems at the upcoming Conferences: RMS Users Conference Wilmington, NC, September 22-24 Vacation Rental Managers Association (VRMA) National
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May
2003 • Volume 1, Issue 2 Website Discounting Threatens IndustryAt the very time that a slowing economy is forcing property managers to fill empty properties through discounting, there is mounting evidence that discounting is hurting the airline and hotel industries. We should take note. Our industry may be even more vulnerable to the dangers of discounting than are hotels and airlines. Vacation Rental Managers Association (VRMA) Director, Michael Sarka, recently forwarded a report of a study conducted at Cornell University's School of Hotel Administration by Professor Cathy Enz, Hotel School Associate Professor Linda Canina and Mark Lomanno, President of Smith Travel Research (STR). It says that discounts don't increase the hotel industry's revenues. "The prevailing wisdom is that reducing room rates entices new consumers to enter the market and buy more rooms," reports Enz. "This has never worked for the hotel industry, and it won't work in this era of proliferating hotel room discounts and Web-based travel deals, because new consumers do not enter the market in response to hotel discounting. Instead, existing consumers simply get more for less, and hotel revenues fall." The discounting dilemma is also captured in a March 14 Wall Street Journal article titled "Big Hotel Chains Are Striking Back Against Web Sites. " The WSJ reports that the general manager of the Clarion Hotel, near Walt Disney World in Orlando, Fla., lowered his rates and authorized the travel Web sites Hotels.Com and Expedia.com to double the number of rooms they sold for him. Reservations started pouring in, and he filled a third of his rooms for March. But the owner of the Clarion brand name, Choice Hotels International, sees such discounting as a threat to the industry. Choice is trying to educate its hotel managers why the short-term benefits of the discount Web sites are not worth the long-term impact on profits. Choice Hotels is now requiring hotels to give their best rates to customers who book on the hotel chain's own Web sites. The WSJ reports that four major lodging companies have decided to undercut Expedia.Com and Hotels.Com prices on their own Web sites, and five of the largest hotel chains banded together to form their own Web site, Travelweb.com. Hotels also formed WorldRes Europe to prevent Hotels.Com and Expedia.Com from dominating the market in Europe. The hotel groups are reacting to the effect that discount Web sites have had on airlines, where Web-based discounting forced profits down and sent the airlines scrambling to form their own Web site, Orbitz. Hotel execs are trying to take back their room product, to sell it the way they want to sell it and to maximize revenues. Why does Web site discounting threaten an industry? Consumers love discounts. They believe that the two major Web Sites, Hotels.Com and Expedia can save them money. The sites are so popular with consumers that Expedia's revenues increased 44 times in four years, going from $14 million in 1998 to $590 million in 2002. Once consumers start patronizing a discount site, it gains power over the hotels and airlines. Hotels and airlines can't stop using the discount site. If they do, customers will continue to use the web site to buy from their competitors. Hotel and airline industry profits decline from the discounting, but the Web site who list the discounted accommodations are cash machines, with profit margins as high as 30%, according to Paul Keung, an analyst at CIBC World Markets quoted by the WSJ. For a travel industry, the trap is sprung like this. The discounting Web site rep comes in as your friend. He says, "You have empty properties. Let me advertise them at a discount." You reply, "I don't want to discount those units that I can rent myself at full price." He says, "No problem. Just give me the properties you can't rent. I'll even make the renter pay my commission directly so it doesn't come out of your rent." This makes sense to you, and you agree. The Web site advertises the units, which rent, and you get income you wouldn't otherwise have. A good deal for everyone, right? Yes. This is a good deal for everyone, so long as it continues to work like this. But it doesn't. Consumers get so excited, that they come to the discount site in droves. Then the problem begins. One by one, your competitors start putting inventory on the Web site for the more popular seasons-at a discount. You start losing renters to them, so you follow suit. Now the Web site is doing even more business. Consumers are elated now. Everyone is coming to this Web site to rent homes-at a discount. By this time the Web site is being written up in the WSJ and major consumer publications. It sells everything it can get its hands on. It wants more inventory, and comes back to you. "You need to put your prime season inventory on the site or you will be left behind. Other property managers are." You do, and your business has changed forever. Whereas your resort area once generated reasonable profits, its profits are now low. You cut costs by reducing services. You ask your people to do more with less. The pressure on your staff causes more turnover, and service quality falls even more. Customers get upset. Both homeowners and renters leave your program and find one that is the best at providing low cost service. What has happened here? You helped send your renters to a discount web site. It became so big, it forced you and your competitors to book too much inventory at discount prices. You started out just trying to fill your empty off-season nights. But in the end, you helped create a monster that transformed this industry. Will every rental manager survive the resulting industry transformation? Not likely! As discounting becomes the norm rather than the exception, only the most efficient competitors will survive. If you help discounters become popular with renters, you better make sure that you have the modern systems and are better prepared for lean times than your competitors. You better be super efficient. Efficiency is hard to achieve in good financial times. It is even harder to achieve when your budgets have been slashed. You have to achieve efficiency before you have to cut costs. So, in putting inventory on discount Web sites, beware of what you spawn. The dangers of discount Web sites were the subject of a recent report by hotel consultant, Hospitality Tech Advisor. Delivering the good news first, the author pointed out that the travel industry is faring better than the hospitality industry. People are traveling in substantial numbers, though they are not spending as much on hospitality. Delivering the bad news next, he concludes that technology is failing the hospitality industry. Referring to the growing popularity of discount Web sites, he says that technology preys on a fragmented marketplace. Where discounting Web sites have become powerful, they have sucked profits out of the industry, capitalized on the fragile condition of the lodging industry, and "worked insidiously to pit hoteliers against one another." The impact of discounting is not a new one, as clear from the following finance text:
The evidence is everywhere around us. When you book empty properties on a discounter's Web site, you are playing with fate. You may gain a few bookings short term. But you may be cutting your profits over the long term. If there is one universal lesson from the experience of airlines and hotels, it is this. Discount Web sites are the friend of the consumer. They exist for one purpose: to help the renter get lower prices. May no mistake about it. The discount Web sites help switch the balance of bargaining power from the property manager to the guest.
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Data Systems, Inc. To unsubscribe to The Visual Exchange, please send a blank e-mail to: remove@x.vdsys.com. Copyright © 2003 by Visual Data Systems, Inc. All Rights Reserved. |
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About
the Author: George Volsky has contributed this article. George Volsky
is one of the Vacation Rental industry's leading analysts and consultants;
George regularly provides seminars at Vacation Rental Manager Association
(VRMA) and software user conferences. He closely follows consolidation,
and regularly works with this industry's vendors, helping Vacation Property
Managers develop and evaluate competitive strategies. George may be contacted
via email at 