Friday, 25 November 2011

The Groupon Effect and Caribbean Hotels - The Rise of Flash Sale Sites

No doubt about it. When is comes to hotel rates we are in a buyers market. Clients can "name their own price" on Priceline and online travel agents (OTAs) like Expedia, Orbitz and Travelocity are constantly coming up with new 48 hour sales, Black Friday sales etc and they all specify a minimum of 30, 40 and 50% off on top of 20-30% commissions! The things we do to get heads in beds!

In every recessionary environment, new fads come and go and some stick around long enough to become viable business models. One of these new trends has been the rise of flash sale sites such as Jetsetter, Living Social Escapes, Tripalertz among others. These sites take discounting to a whole new level offering discounts of at least 40% off the "lowest searchable rate". So take another 40% off that 30% off special you are running on Expedia and that is the rate that you would sell your rooms at on one of these flash sale sites (before commissions that can run as high as 50% of whatever is left after all that discounting!)

Admittedly some of the deals offered on these sites are clearly at levels that are barely above the incremental cost of filling that room. Why would anyone do this? Is it worth it? Are hoteliers really that desperate to move inventory? What about the long term effects of publicly displaying such a low rate on a site like Living Social with tens of millions of subscribers. Won't that cheapen your brand in the long run?

These are all the questions we asked ourselves at Bay Gardens Resorts when we were first approached by Sniqueaway earlier this year. Sniqueaway, owned by Smarter Travel Media (Tripadvisor's parent company), is a newish entrant to the flash sale market. At the time we were looking at a very soft summer and fall (sound familiar?) and we were willing to try something new. Our flagship property Bay Gardens Beach Resort and Spa was one of the first St. Lucian properties to run a sale on Sniqueaway and we have no regrets.

The number of room nights generated from the sale were not enough to turn our summer around but it did provide a boost in occupancy at rates that were substantially above our marginal cost of filling the room, even after commissions. What was even more important to me was the dramatic increase in traffic to our website as a result of this sale. We experienced about ten times our normal volume of traffic to our site and we were able to determine that virtually all of this traffic came from Sniqueaway using Google Analytics, a tool that all hotel marketing managers should get familiar with.

The marketing value of such exposure is immense! One has to look beyond the low rates and the high commissions and think of the marketing exposure that being in front of millions of high income, well travelled potential customers can provide. Since our first experiment with Sniqueaway we have partnered with several other flash sale sites such as Jetsetter, Bloomspot, Living Social Escapes and the 800 pound gorilla and Flash Sale King, Groupon Getaways.

My own experience with this is that is has been worthwhile for us but before you jump into this you have to be clear about your goals. If your goal is to increase occupancy 20% and to sell hundreds of Groupons or Living Social Escapes then forget it. Travel to the Caribbean from our traditional source markets (US, Cananda and Europe) has become extremely expensive of late and no matter what price you sell a package at, people are going to think long and hard about booking a trip when the airfare is $700 and up. But if your goal is to get exposure and generate traffic to your website that you can turn into potential leads down the road then Flash Sale sites are a great low cost option as they take nothing upfront and only take a commission on whatever is sold.

I also think it is important to debunk some of the misconceptions about working with these flash sale sites as we have now lots of direct experience with this medium:

1. Flash sale sites charge 50% commission - Huh?!? I heard that too after working with several of these sites on 70/30 and 80/20 revenue shares. This is the same commission that is taken by OTAs. Remember travel is a new product offering for several of these sites so they are willing to negotiate.

2. The calibre of clientele that these sale sites attract is low - there was some evidence of this but it does not apply to everyone. Quite a few of these guests were high income earning professionals who can afford to pay regular prices but take pride in paying 1/2 price. For some of them its about bragging rights. Bay Gardens Beach Resort offers a Vacation Ownership program and I was pleasantly surprised when a client who booked an escape with Living Social actually bought a vacation ownership (timeshare) week valued at $15,000! Clearly they had disposable income and they will be back every year for the next 25 years!

3. Publicly displaying such deals is detrimental to your brand and your ADR long term - an interesting argument but I have not seen any evidence that persons expect these flash sale prices to continue indefinitely. I  think the market understands that this is for a limited period of time and we certainly have not seen any drop in the pace of our bookings for our peak or shoulder periods going into next year despite the fact that our rates have increased. Good properties in desirable locations will be able to attract strong ADRs in the long term and a few flash sales here and there will not permanently change that dynamic.

4. The rates that you get after commission are not worth it - I don't disagree in some cases. But at the end of the day if you feel you are better off letting a room remain empty rather than selling it at or below cost then no flash sale site can compel you to make a bad business decision. I have walked away from just as many flash sale opportunities as I have jumped on. If it it does not make good business sense even factoring in the additional exposure then don't do it!

Flash sales have become a permanent part of our marketing strategy, especially for soft periods in the summer and fall. We have received incredible exposure from these sales and in addition to the room nights generated at critical times we have received perhaps 30,000 visits to our website in a short space of time directly linked to our participation in flash sales. A conservative estimate (again derived from Google Analytics) puts our conversion rate at about 1%. So long term about 300 of these visitors may eventually make a booking with us. Maybe more. At an average booking value of $1000, that's a potential $300,000 in bookings in the long run in exchange for no more than $15,000 in commissions paid to flash sale sites to date. That's an incredibly high ROI for any marketing effort!

If you are considering signing up with one of these sites here are a few quick tips on how to make sure you get the most out of it:

1. Pick the right time to launch the sale - we are in the midst of one of the busiest travel booking periods right now (Thanksgiving) and are currently running our second Groupon sale which is performing quite well in terms of exposure and bookings.
2. Offer more expensive room types that are tough to move - we often offer our more expensive suites that are tough to sell in low season when persons are more budget conscious. This way we don't end up tying up inventory that would otherwise be sold. It also increases the chances of coming up with a package that still generates some profit even after the 50% discount and the commissions!
3. Make use of value add-ons - we offer lots of high margin added products and services that don't cost much to throw in but offer great value to the customer. This makes it easier to discount the entire package 40-50% and still generate some profit.
4. Negotiate! - whatever their standard revenue share is, it is always negotiable. Watch for hidden costs as well such as credit card processing fees that are often added to the regular commission.

I am hoping that more and more Saint Lucian resorts participate in these sales as getting the word out about St. Lucia is an expensive endevour for our local tourist board and with each new flash sale the island will get more and more exposure and gain better top of mind awareness which will benefit all of us.


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  2. Thank you very much for this interesting article. Currently I am studying hospitality Management in Switzerland and I am writing my thesis about group buying and its potential as a viable distribution channel for hotels. I have some problems explaining if it is really a reliable marketing tool and furthermore will the concept of group buying influence the way travel is bought and sold? Do you think there will be a repeat business of guest by using such sites?
    I would be really glad hearing some more opinions! kind regards!

  3. Hi Gaiserle

    Very interesting choice of thesis! I think it is too early to predict the long term impact of group buying sites like Groupon on the travel market. I can see it being an important way for smaller, independent hotels to gain exposure and of course in a recessionary environment Daily Deals sites will get lots of interest from consumers but I can't see it becoming the most prominent booking medium. The booking pattern is more last minute but it is still a few months out especially for locations such as St. Lucia. Flights to get here are still on the high end so I can't see persons basing their entire vacation plan on what they see on Groupon. Their main vacation will still be booked using the "conventional" means i.e. using OTAs, Tripadvisor etc to determine where they want to stay and then searching for the best price on the hotel's website, OTAs etc. Booking a last minute vacation on Groupon or Jetsetter would be a 2nd or 3rd annual trip, not the main vacation. At least not for mainstream consumers.

    I understand why you might have difficulty explaining the marketing power of these sites. It is tough to wrap your head around as so many people compare it to other distribution channels which is not a good comparison at all.

    I have already seen repeat business and from my interaction with the clients and from discussions with my management team who interacted directly with these clients they were very satisfied with their stay here and fell in love with St. Lucia. So quite a few of them will be back at some time, but honestly the ability to generate repeat business has a lot to do with the hotel itself.

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