12.4 Distribution channel management
5 min read•july 30, 2024
Distribution channel management is crucial for hospitality businesses. It involves choosing the right mix of direct and indirect channels to reach target customers effectively. From hotel websites to online travel agencies, each channel has its pros and cons in terms of control, reach, and cost.
Optimizing channel mix requires understanding market segments and measuring performance. Businesses must balance factors like commission rates, integration costs, and brand image. Effective management includes negotiating partnerships, handling conflicts, and implementing yield strategies to maximize revenue across all channels.
Hospitality Distribution Channels
Direct Channels
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- Selling directly to customers through a company's own website, call center, or physical location
- Allows for greater control over the customer experience and higher profit margins
- Examples:
- Branded hotel websites (Hilton.com, Marriott.com)
- On-site restaurant reservations
- In-house spa booking systems
Indirect Channels
- Selling through intermediaries such as online travel agencies (OTAs), global distribution systems (GDSs), wholesalers, and travel agents
- Can expand market reach but may involve higher costs and less control over pricing and branding
- Examples:
- OTAs (Expedia, Booking.com)
- GDSs (Amadeus, Sabre)
- Wholesalers (Hotelbeds, Tourico Holidays)
- Traditional travel agencies (American Express Travel, Carlson Wagonlit Travel)
Online Distribution Channels
- Include a company's own website, OTAs, metasearch engines, and social media platforms
- Increasingly important due to the growth of online booking and mobile usage
- Examples:
- Metasearch engines (Google Hotels, Kayak)
- Social media booking features (Facebook Travel, Instagram Reservations)
- Mobile booking apps (HotelTonight, Airbnb)
Offline Distribution Channels
- Include traditional travel agencies, tour operators, and destination marketing organizations (DMOs)
- Can be effective in reaching certain customer segments, such as older travelers or those seeking packaged experiences
- Examples:
- Tour operators (Globus, Trafalgar)
- DMOs (Visit California, NYC & Company)
- Brick-and-mortar travel agencies (Liberty Travel, AAA Travel)
Channel Effectiveness for Target Markets
Market Segmentation and Channel Selection
- Identifying distinct customer groups based on factors such as demographics, psychographics, behavior, and geography
- Different distribution channels may be more effective in reaching certain segments
- Examples:
- Luxury travelers may prefer direct channels or high-end travel agencies
- Budget-conscious travelers may favor OTAs or metasearch engines
- Group travelers may book through tour operators or DMOs
Optimizing Channel Mix
- The combination of distribution channels used by a hospitality business
- Optimal channel mix depends on factors such as target markets, product type, pricing strategy, and competitive landscape
- Examples:
- A boutique hotel may focus on direct channels and niche OTAs
- A resort may use a mix of direct, OTA, and wholesale channels to maximize occupancy
- An airline may prioritize direct channels and GDSs for business travelers
Measuring Channel Performance
- Key performance indicators (KPIs) for evaluating distribution channel effectiveness include booking volume, revenue, average daily rate (ADR), occupancy rate, and customer acquisition cost (CAC)
- These metrics should be tracked and analyzed regularly to optimize channel strategy
- Examples:
- Comparing ADR and occupancy across channels to identify top performers
- Calculating CAC for each channel to assess marketing efficiency
- Monitoring booking volume trends to adjust inventory allocation
A/B Testing and Optimization
- Comparing the performance of different distribution channels or strategies to determine which is most effective
- Can be done through controlled experiments or by analyzing historical data
- Examples:
- Testing different pricing or promotion strategies across channels
- Comparing conversion rates of direct vs. indirect channels
- Analyzing the impact of commission rate changes on booking volume and revenue
Managing Distribution Partnerships
Contract Negotiation
- Agreeing on terms such as commission rates, inventory allocation, rate parity, and marketing support with distribution partners
- Effective negotiation requires understanding each partner's value proposition and bargaining power
- Examples:
- Negotiating lower commission rates in exchange for higher inventory allocation
- Securing marketing support or featured placement on OTA websites
- Agreeing on rate parity terms to ensure consistent pricing across channels
Channel Conflict Management
- Conflict can arise when distribution partners compete with each other or with the hospitality business's direct channels
- Strategies for managing include setting clear policies, differentiating products and prices, and providing incentives for cooperation
- Examples:
- Offering exclusive rates or packages through direct channels
- Implementing a minimum advertised price (MAP) policy to prevent undercutting
- Providing commission incentives for partners that meet performance targets
Yield Management Strategies
- Dynamically adjusting prices and inventory allocation across distribution channels to maximize revenue
- Requires real-time data analysis and decision-making based on factors such as demand forecasting, competitor pricing, and channel performance
- Examples:
- Using revenue management software to optimize pricing and availability
- Implementing strategies based on demand and supply
- Allocating inventory to channels based on their historical performance and cost
Co-op Marketing Programs
- Partnering with distribution channels to jointly promote the hospitality business's products and services
- Can include targeted advertising, email campaigns, social media promotions, and special offers
- Examples:
- Participating in OTA-sponsored email campaigns or social media ads
- Offering exclusive discounts or packages through partner channels
- Collaborating on content creation or influencer marketing initiatives
Distribution Channel Costs vs Benefits
Commission Rates and Fees
- Commission rates vary across distribution channels, typically ranging from 10-30% of the booking value
- Higher commission rates can be justified if a channel delivers incremental revenue or reaches high-value customers
- Transaction fees may be charged by distribution partners for each booking, in addition to commissions
- Examples:
- OTAs charging 15-25% commission per booking
- GDSs charging $3-5 per transaction
- Wholesalers offering net rates at a 20-30% discount
Integration and Opportunity Costs
- Integration costs are associated with connecting a hospitality business's inventory and pricing systems with distribution partners' platforms
- These costs can include software development, data mapping, and ongoing maintenance
- Opportunity costs arise when a distribution channel's requirements or restrictions prevent a hospitality business from fully optimizing its revenue or inventory
- Examples:
- Investing in a channel manager to streamline inventory updates across multiple channels
- Foregoing direct booking discounts to comply with rate parity agreements
- Missing out on last-minute bookings due to long lead times required by some channels
Brand Image Considerations
- The choice of distribution channels can impact a hospitality business's brand image
- Partnering with reputable, high-quality channels can enhance a hospitality business's brand
- Overreliance on discount channels may dilute the brand's perceived value
- Examples:
- Luxury hotels limiting distribution to select high-end channels
- Budget hotels leveraging opaque channels to sell distressed inventory without damaging brand
- Restaurants using premium reservation platforms to attract affluent diners
Key Terms to Review (18)
Channel conflict: Channel conflict occurs when there is a disagreement or clash among different members of a distribution channel, which can lead to tension and inefficiencies. This situation often arises due to competing goals, differences in pricing strategies, or conflicts over market segmentation. Understanding channel conflict is crucial for managing relationships within distribution channels and ensuring smooth operations.
Channel optimization: Channel optimization is the process of maximizing the efficiency and effectiveness of distribution channels to ensure products and services reach customers in the best possible way. This involves analyzing various channels, such as direct sales, online platforms, or third-party distributors, and making adjustments to improve performance, reduce costs, and enhance customer satisfaction.
CRM (Customer Relationship Management): CRM, or Customer Relationship Management, refers to the strategies, technologies, and practices that businesses use to manage and analyze customer interactions throughout the customer lifecycle. The main goal of CRM is to improve customer service relationships and assist in customer retention and satisfaction, ultimately driving sales growth. By leveraging data collected from various customer touchpoints, businesses can personalize their offerings and enhance communication, leading to a better understanding of customer needs and preferences.
Customer journey: The customer journey refers to the complete experience a customer has when interacting with a brand or business, encompassing all stages from awareness to purchase and beyond. It highlights the various touchpoints a customer encounters, emphasizing how these experiences shape their perceptions and decisions regarding the brand. Understanding the customer journey is crucial for optimizing distribution strategies and enhancing customer satisfaction.
Direct distribution: Direct distribution is a method where products or services are delivered directly from the producer to the consumer, bypassing intermediaries like wholesalers or retailers. This approach allows companies to maintain greater control over their products, pricing, and customer relationships, leading to more personalized service and potentially higher profit margins.
Distribution Strategy: A distribution strategy is a plan that outlines how a business will deliver its products or services to its customers. It focuses on the channels through which products will reach consumers, ensuring that they are accessible and available where and when needed. In hospitality, this strategy is critical as it directly affects customer satisfaction and revenue generation by aligning with the overall marketing mix and optimizing distribution channel management.
Dynamic pricing: Dynamic pricing is a flexible pricing strategy where prices are adjusted in real-time based on demand, supply, competition, and other market factors. This approach allows businesses to maximize revenue by changing prices according to the varying willingness of consumers to pay at different times.
GDS (Global Distribution System): A Global Distribution System (GDS) is a computerized network that enables travel professionals, such as travel agents and online booking platforms, to access and book travel services, including flights, hotels, car rentals, and other travel-related products. GDS plays a vital role in connecting suppliers and distributors, allowing for real-time inventory management and facilitating transactions across different channels.
Indirect distribution: Indirect distribution refers to a marketing strategy where products or services are sold to consumers through intermediaries, such as wholesalers, retailers, or agents, rather than directly from the manufacturer. This approach allows businesses to reach a wider audience and leverage the expertise and resources of intermediaries to facilitate sales and distribution. By using indirect channels, companies can benefit from established relationships that intermediaries have with customers, making it easier to penetrate various markets.
Intermediary: An intermediary is an entity or individual that acts as a bridge between producers and consumers, facilitating the exchange of goods and services. They play a vital role in distribution channels by connecting suppliers with customers, ensuring that products reach the end-user efficiently. Intermediaries can take various forms, including wholesalers, retailers, travel agents, and online booking platforms, each serving to enhance the accessibility of products and services in the marketplace.
Inventory management: Inventory management is the process of overseeing and controlling the ordering, storage, and use of products and materials in a business. Effective inventory management is crucial for ensuring that the right amount of stock is available to meet demand without overstocking or running out of essential items. This involves understanding how to organize kitchen supplies, maintain housekeeping supplies, manage product distribution channels, analyze costs for profitability, integrate point of sale systems, and adapt to various types of food service operations.
Market Segmentation: Market segmentation is the process of dividing a broad target market into smaller, more defined groups of consumers who share similar characteristics or needs. This approach allows businesses to tailor their marketing strategies and offerings to meet the specific preferences of each segment, enhancing customer satisfaction and increasing efficiency in marketing efforts. Understanding market segmentation is crucial for adapting to current trends, optimizing the marketing mix, implementing effective revenue management strategies, and efficiently managing distribution channels.
OTAs (Online Travel Agents): Online Travel Agents (OTAs) are digital platforms that facilitate the booking of travel services such as flights, hotels, and rental cars through the internet. They serve as intermediaries between consumers and service providers, offering users a convenient way to compare prices and make reservations from multiple vendors in one place. By streamlining the booking process and providing extensive options, OTAs have transformed the travel industry and distribution channels.
PMS (Property Management System): A Property Management System (PMS) is a software application used by hospitality businesses to manage daily operations, including reservations, check-ins and check-outs, room assignments, billing, and other functions related to guest services. A PMS integrates various components of a hotel or property, streamlining processes and enhancing the guest experience by providing real-time data and operational efficiency.
Target audience: A target audience is a specific group of consumers identified as the intended recipient of a marketing message or product. Understanding the target audience helps businesses tailor their offerings and marketing strategies to meet the needs, preferences, and behaviors of that particular group, ensuring effective communication and maximizing engagement.
Touchpoints: Touchpoints are the various interactions and experiences that customers have with a brand throughout their journey, from initial awareness to post-purchase evaluation. These interactions can occur across multiple channels, such as in-person, online, or through marketing communications, and play a crucial role in shaping customer perceptions and loyalty.
Wholesaler: A wholesaler is an intermediary business that purchases goods in large quantities from manufacturers and sells them in smaller quantities to retailers or other businesses. They play a crucial role in the distribution process by bridging the gap between producers and the final sellers, often providing services such as storage, transportation, and product assortment.
Yield Management: Yield management is a pricing strategy that aims to maximize revenue by dynamically adjusting prices based on consumer demand and other market factors. This approach helps businesses in the hospitality sector, such as hotels and resorts, optimize their occupancy and revenue by analyzing booking patterns and consumer behavior to set the right price at the right time. By leveraging data on demand forecasts, competitors' prices, and customer segments, yield management ensures that accommodations can remain competitive while maximizing profits.