Commoditization: A wake-up call for luxury hotel management

A commodity is a good that is universal — typically an unprocessed grain, fruit or precious metal. For example, copper is bought and sold on a worldwide exchange with limited relevance to its mine or country of origin. By commodity, we refer to the fact that the product itself is universal; the buyer does not have to qualify the product, only quantify it.

Traditionally, services cannot be commoditized, as there are numerous variables that account for differences between the type and level of service offered by each provider. That is changing.

The commoditization of hotels started many years ago with the first rating systems. Companies like the American Automobile Association (AAA) and Mobil (now Forbes) ranked hotels into groups rated 1-5 diamonds and 1-5 stars, respectively. Each of these categories defined a standard of quality and set of amenities. With these ratings in hand, the consumer could make a selection based upon the criteria that interested them. So, without knowing anything about the brand or hotel name, a consumer seeking 4-star (or diamond) quality could shop this group on the basis of price for any given location, knowing that the service offerings would be at least in keeping with the standard.

The upheaval of OTAs

The arrival of online travel agencies such as Expedia, Travelocity and Orbitz was at first heralded as a new dawn for hotels via rapidly expanding consumer distribution. All a hotel had to do was allocate inventory to the OTAs, then sit back and watch occupancy soar. True, RevPAR was affected, as the OTA room rate was aggressive, but it was all for the good of the hotel chain, wasn’t it?

Think about it. All that hotel investment to build a broad-reaching location base, only to allocate a significant portion of your distribution channel to a third party, and moreover, pay this third party 25% to 30% commission for the privilege. The logic in doing this, frankly, escapes me. As a good general manager friend of mine reflected upon this practice: “It’s a disease. I need a cure. Help!”

OTAs, like any industry, recognized the critical importance of advertising to create awareness among the general traveling public. They have spent millions of dollars in TV and print advertising to build their brands. And build they did! For example, how many readers can now quickly place the Travelocity Gnome? Travelers are responding, shifting their purchasing behavior. Now, in many cases, they are much more likely to visit an OTA than book through any hotel chain website directly. 

The situation is getting even more commoditized. Here is an example: A recent OTA television ad promised “4-star properties for a 2-star price.” If you are a hotel chain executive and you saw that advertisement, I wonder what thoughts crossed your mind. Not only does this sort of rhetoric lessen your property to a mere category, but it also works to undermine all the strategic product segmentation (by price category) that you spent years developing. In effect, OTAs have positioned themselves as a service, with hotels as their commodity. It’s an eye-opening realization and a battle cry for change.

What’s a hotel chain to do?

Change at the strategic level does not happen quickly. Hotels need to differentiate themselves, and this comes primarily from delivering unique benefits to the consumer. These can be in the form of amenities, guest service, room décor, technology application, value-added extras as well as tried-and-true advertising or market positioning. Developers and chains are starting to clue in; witness the Conrad Hotels by Hilton, Ian Schrager’s Public Chicago or the Autograph Collection. I am sure you can name a few more.

Next, hotel chains, starting at the 4-star-plus level, have to wean themselves off distribution channels outside their own purview. In French, the term is called maitre chez nous, roughly meaning, “masters of our own house.” You can ill-afford to have anyone sell your property except your reservations staff, your own websites (both chain-wide and property-specific), traditional travel agents and perhaps controlled or very time-limited “flash” sales such as Jetsetters.

The simple adage to follow is that you should manage your inventory through your own revenue team. There are risks, particularly during periods of low seasonality. The focus here, however, is a distribution strategy that promises brand success for the long term, regardless of a few short-term hiccups.

Then hotel chains need to beef up their awareness programs. This means mainstream advertising — and not just a 4x or 6x per year media program in Travel & Leisure or Condé Nast Traveler (both excellent and useful), but a true multimedia program that includes television, print and radio. Set realistic budgets based on market research and specific quantifiable awareness goals. Be bold and inspiring. It will pay off.

Lastly, once you have the premium product promoted, consider extending your inventory-control tactics chain-wide through your 3-star and budget brands. You have the power to prevent commoditization, but you have to start soon before it’s too late!