Thursday, 9 June 2011

Confronting the Social Buying Dilemma!


By - Marco Saio - Industry Analyst!


The Expedia-Groupon partnership has finally stirred me to acknowledge and poke an inquisitive stick at the new 900 lb gorilla in online travel: the social buying phenomenon.

During this period of strained supplier-OTA relations and Google search domination, the concept of group/social/daily/ buying (insert buzzword bingo here) further adds another interesting and disruptive dimension to the online distribution power struggle.

The group buying trend is flourishing very rapidly, this is unquestionable, the question though is how will this affect new business models for travel suppliers and now OTAs?. 

Let’s dig deeper and consider the potential benefits and risks facing suppliers using basic scenarios. The four biggest group buying companies for travel deals are; Groupon, LivingSocial, Coupons Inc and Gilt Group.


Utopian Scenario 1
A small independent hotel wishes to harness the raw marketing power of Groupon (10 million active subscribers worldwide) or LivingSocial (email list of 26 million worldwide) to reach a huge new audience and sell distressed inventory during low season or after launching. This form of marketing is both targeted (local to the city they are based in) and performance based (the advert is free). You only pay when the customer comes through the door for the discount, and in addition, Groupon offers a minimum number of buyers guarantee to make it worth your while. The message is simple and compelling: Here's a cool, great value deal for you and some friends to take advantage of, if used before a certain date (deals are usually 50% off for hotels but both Groupon and LivingSocial claim up to 90% discounts for other deals).

At a recent EyeforTravel conference LivingSocial revealed that they had sold over 180,000 room nights in the 18 weeks since launch – That’s over 1000 room nights per property. So if that hotel were to invest its limited marketing budget in such an initiative instead of throwing money at Google ad words and local print advertising, it’s not unreasonable to imagine a gain of 1/10 of the above number or 100 room nights – This would more than compensate for the 50% compromise on best rate for rooms that in all probability would have remained vacant. What are the results? A dramatic spike in hotel RevPAR, unprecedented brand exposure and a reasonable return of repeat business with first-time customers who presumably enjoyed the experience and taking their loved one/family/friends somewhere new for a very wallet-friendly price. I have used Groupon several times and have to admit there is a certain smug satisfaction gained by finding a fantastic deal by doing next to nothing – one email a day delivered to your email (private, of course), the majority of which are not usually things that you would do, but that’s the whole point.

Sceptical Scenario 2
A hotel wants to capitalize on a big local event (think the royal wedding) or merely sell the 15% distressed inventory that they have historically never managed to shift in that month. They strike a similar deal with a high-traffic social buying website, but the hotel is better-known, more upscale and has a far greater number of rooms (and inquisitive shareholders). Another European website that shall remain anonymous recently boasted selling more than 600 room nights at a 4* property in Berlin – In 48 hours.

From a PR perspective, the concept is brilliant: Why not give local Berliners or weekend escape artists a chance to experience staying at a luxurious and historic hotel for an absolute bargain price? Better yet, why not twin the offer with a marketing campaign or competition on your Facebook page and then fan the flames further on Twitter and make the whole thing go viral- as well as gain 50% extra top-line revenue from new bookings?

Ignoring the potentially damaging effects of this initiative on direct traffic and brand image, let’s firstly focus on the issue from a Revenue Managers perspective. For any hotel not lucky enough to have a 85% occupancy, the 50% slash on best rate is far less palatable. Let’s imagine that room rates ordinarily hover at the €200 mark and that the average occupancy is a roughly 60% in a 1000 room hotel (forgive the oversimplification; maths class was never my favourite).

This would mean forsaking €100 per booking or a potential €40,000 in lost revenue during the deal window. At this point the endeavour seems more like a costly and short-sighted PR stunt than a sustainable distribution and marketing channel. The picture is equally bleak when you consider whether loyal customers who paid full fat notice and rightly take offense – if so this represents an exercise in cannibalizing your core customer base. And what of the 15% of new customers lured in? How many will be financially willing and available to return and pay full rates?

The true impact of social buying is impossible to determine without considering the following:  The cold, hard ROI and cost-effectiveness of a deal once the intermediary has taken their cut. Commission rates remain shrouded in mystery and vary greatly by brand, location, volume released and product but the consensus is between 20-50% of the true product value, How much the deals will undercut your direct traffic and relationships with intermediaries – I.e. would Expedia/Orbitz/Sabre take issue with best price and price imparity?

The less tangible long-term impact on brand image and customer loyalty How deal aggregators such as Yipit and DealRadar will redefine the rules of the game; will we see price wars between leading group buying websites?

Keep an eye out for Facebook Deals , Google Offers and more OTA tie-ups like that of Expedia and Groupon Getaways The fact that all 3 have been launched in the past 2 weeks is a clear indication of the enormous, growing influence that group buying has on the traditional online distribution model.

I would be very interested in hearing from anyone who can share their experiences and unbiased learnings with group buying deals to contextualize this debate – Over to you!

EyeforTravel


3 comments:

  1. Great article further explaining the impact of Expedia-Groupon Getaways: http://www.tnooz.com/2011/06/22/news/expedia-what-groupon-getaways-with-expedia-means-for-hotels/

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