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An Empirical Analysis of Hotel Chain Online Pricing Strategies
An Empirical Analysis of Hotel Chain Online Pricing Strategies
An Empirical Analysis of Hotel Chain Online Pricing Strategies
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PETER O’CONNOR
The hotel product is increasingly being sold electronically, and price has been identified as one of the
key motivators for encouraging customers to purchase online. This study represents the first signifi-
cant investigation of the electronic pricing strategies of the major international hotel companies, and
analyzes the rates offered by hotels across five of the major online distribution channels. Key findings
include that hotel brands currently use multiple simultaneous routes to the marketplace, and that the
rates offered over these routes have to a large extent become equal. However, significant differences
can be observed depending on the market segment being serviced by the brand, with direct online
channels being consistently cheaper for economy and mid-priced properties and online GDS-based
intermediaries offering the best value at the luxury end of the market.
Address correspondence to Peter O’Connor, Associate Professor, Hospitality Information Technology, IMHI (Cornell-ESSEC), Av-
enue Bernard Hirsch, BP 105, 95021 Cergy Pontoise Cedex, France. Tel: +33 1 3443 3177; Fax: +33 1 3443 1701; E-mail:
oconnor@imhi.com
65
66 O’CONNOR
Table 1
Composition of Worldwide Hotel Advanced Reservations
Global Distribution Systems (GDS), end user con- have become more value conscious. For example, a
sumer adoption of the Internet as a mainstream com- recent study by BIGResearch (2002) found that
merce medium has prompted a change in the way in nearly three quarters of travel consumers were un-
which the hotel product is being distributed. willing to buy online unless they felt they were get-
The Web has dramatically changed the way people ting a good deal. Furthermore, studies by Gomez
communicate, research information, make decisions, (2000), Hospitality Sales and Marketing Associa-
and particularly the way in which they buy goods tion International (2000), the Travel Industry Asso-
and services. Travel products in particular have ciation of America (2001), Jeong and Lambert
proven to be some of the most suitable for sale online. (2001), and PhoCusWright (2001) have all identi-
The typical profile of an Internet user—affluent, fre- fied price as being one of the key motivating factors
quent traveler who spends above average on leisure that encourages consumers to purchase travel online.
and entertainment—is an attractive market for travel For example, the PhoCusWright study found that
suppliers (NFO Plog Research, 2000). Furthermore, competitive pricing is the best way to attract cus-
from a consumer perspective, in an increasingly tomers (Pastore, 2001). When travelers who haven’t
wired world, purchasing travel online has become bought online were asked what would encourage
faster, easier, and more convenient than contacting them to do so, 64% said that saving money would
a travel agent or telephoning a supplier directly. As make them more interested. No other benefit—sav-
a result, online travel revenues are forecast to grow ing time, getting bonus loyalty club points, more
sharply. For example, according to a recent report control, or obtaining better information—came close
by Jupiter Media Metrix (2002), online travel sales to this level of response.
will more than triple in the next 5 years from US$24
billion in 2001 to US$64 billion in 2007. Booking Hotel Pricing on the Web
volumes are also forecast to climb, with the Travel
Industry Association of America (1998) estimating Recent studies have shown that online travel pur-
that by 2002 between 6% and 10% of all travel res- chasers tend to be price driven. For example, ac-
ervations will originate on the Web. This will make cording to Yesawich, Pepperdine & Brown (2000),
travel the highest grossing online product, nearly almost 6 out of 10 leisure travelers now actively seek
doubling that of PC hardware—the traditional top the “lowest possible price” for travel services. Simi-
selling product. E-Commerce analysts Jupiter Me- larly, a recent Forrester Research study (2001) found
dia Metrix (2002) are even more enthusiastic, pre- that 66% of all buyers used an online discount in the
dicting that over 22% of all travel bookings will be past 12 months to buy travel online, and a study by
made online by 2007—an 11% increase over the next the Joint Hospitality Industry Congress (2000) found
5 years. that there is a real expectation among consumers that
Key to successful selling online is the issue of Internet prices will be lower than those in the “bricks
price. Recent research has shown that consumers and mortar” world. Such a perception has developed
ANALYSIS OF HOTEL CHAIN ONLINE PRICING STRATEGIES 67
for several reasons. First, many of the most well- ping for travel online almost always check more than
known Internet retailers (such as, for example, one site before purchasing. According to Jupiter
Amazon.com) compete with traditional outlets Media Metrix, for the hotel product 10% of bookers
based, to a large extent, on price. As a result, there is visit one site, another 43% visit two or three sites,
an assumption among Web users that the same is and 22% visit four or more sites. Online purchasers
true for travel products. Secondly, many consumers have become increasingly intolerant of inconsistent
are aware of the lower distribution costs associated information, and may react to disparate rates on dif-
with Web channels (Nua, 1998). As Jack Geddes, ferent channels by purchasing from the company’s
Managing Director Sales and Marketing Asia, competitor. Furthermore, if rates are not consistent
Radisson Hotels Worldwide, has pointed out “Con- across channels, is any particular route consistently
sumers now understand that suppliers are cutting cheaper? And lastly, if rates are different over alter-
costs through this channel and expect savings to be native channels, is the pricing strategy logical from
passed onto them, as well as being rewarded for both the consumer’s and the hotel’s perspective?
making the booking themselves” (Muqbil, 1998).
Such expectations are being reinforced by the bud- Methodology and Limitation of the Study
get airline sector, which offers significant discounts
for online bookings. Companies such as EasyJet, Previous studies of hotel Internet use have been
RyanAir, and Buzz estimate that by avoiding limited. Murphy et al. (1996) focused on rating the
telesales and travel agents, they can make savings content of hotel Web sites, while Van Hoof and
of up to 30%—which they pass on to customers in Combrink (1998) attempted to measure managers’
the form of lower fares (Cooke, 2000). Lastly, many perceptions of, and attitudes towards, the Internet.
hotels use the Web to sell last minute deals—pack- Web reservations facilities were investigated in de-
ages at relatively low prices but with short lead times. tail in a prior paper by the author (see O’Connor &
While such promotions can help dispose of distressed Horan, 1999). However, the issue of pricing over
inventory, they have also resulted in the public asso- multiple simultaneous travel distribution channels
ciating rooms sold over the Internet with cheaper does not appear to have been the subject of exten-
prices. sive systematic research to date. The objectives,
These factors have combined to make consumers therefore, of this study were to analyze the rates
associate online booking with good value. However, being offered to consumers over hotel electronic
in the case of hotel own branded Web sites, industry distribution channels and to subsequently identify
practice seems to be the opposite of theory. In their the pricing strategies being used by the hotel com-
1999 survey, O’Connor and Horan (1999) found that, panies.
in the majority of cases, rates obtained over hotel Obviously, an exhaustive analysis of the rates be-
Web sites were significantly higher than those ob- ing offered by all hotels would be impossible. How-
tained by contacting the hotel company’s Central ever, as the use of both technology and electronic dis-
Reservations Office. Often the rate quoted by the tribution has in the past been lead by the major
company’s Web site was substantially higher, de- international hotel chains, an analysis of their efforts
spite the associated lower cost of distribution. How- was thought to be indicative of developments in the
ever, this study was limited in that it only focused field. As a result, it was decided to focus the study on
on direct sales over hotel chains’ own branded Web the behavior of the top 50 international hotel brands.
sites. Hotel electronic distribution is rapidly evolv- While this strategy means that the findings are not
ing and a large number of other online consumer- representative of the industry as a whole and thus the
focused channels are now available, with most chains results not generally applicable, it does allow an ac-
using multiple routes to get their product to the con- curate benchmark of trends as they currently stand to
sumer (Castleberry et al., 1998). The availability of be established. The companies were chosen based on
so many alternative points-of-sale poses some in- the ranking of the top 50 hotel brands published in
teresting questions. Is there consistency between the Hotels magazine in July 2000. Two companies
rates and availability being offered over alternative (Disney and Club Med) were removed from the list-
channels? Research has shown that consumers shop- ing as they are in effect resorts, only distribute their
68 O’CONNOR
Website. However, the low usage of WorldRes is In terms of which channel is consistently cheap-
surprising. With the exception of through a est, such a broad generalization is difficult to make.
company’s own Web site, using WorldRes has the However, based on an analysis of the rates found in
lowest potential transaction cost and thus would the study and making allowances for rounding and
appear to be an attractive channel for use by hotel currency conversions, it can be seen that prices across
companies. However, in practice, it does not list each of the channels were comparable, with the av-
the properties of many of the major hotel brands. erage price for the requested room being in the range
Examination of its property database reveals a large of US$163. There were two noticeable exceptions
percentage of independent hotels, bed & breakfasts, to this trend. Microsoft Expedia was consistently
and smaller hotel chains, yet the question has to be marginally cheaper than any of the other channels,
asked as to why the major brands do not exploit as can be seen from Table 4, and the rates found on
this distribution channel? WorldRes were in general more expensive. Such
findings are surprising in that, as was explained ear-
Rates Available lier, the transaction costs associated with each chan-
nel vary greatly. Expedia, as an online travel agency,
With the exception of the toll-free number (where has a higher cost of distribution from the hotel’s
the first rate offered was accepted), each of the perspective, and thus it would be logical to assume
channels analyzed offered multiple rates to the cus- that rates offered over this channel would reflect
tomer. As can be seen from Table 3, each channel these higher associated costs. Similarly, because
presented an average of five rates in response to WorldRes’s transaction costs are relatively low in
the request, with more being offered to the cus- comparison with the other channels surveyed, it
tomer in the case of Travelocity than through the should in theory be offering the cheapest rates if hotel
other channels surveyed. companies were matching their rates to the associ-
Presenting a variety of rates to the customer has ated cost of using the channel. However, in practice,
both positive and negative implications. From a posi- in general the rates quoted on WorldRes were the
tive perspective, it offers the potential customer a highest found on any the channels surveyed. Clearly,
choice and allows them to match their needs with when selling the hotel product online, there does not
the products being sold. On the other hand, present- appear to be a relationship between the cost of us-
ing multiple rates without adequate product differ- ing the distribution channel and the rate offered.
entiation can create confusion in the mind of the However, simply examining broad averages of-
customer as to what they are getting for their money. ten hides valuable information. If the brands stud-
This is best demonstrated by an example encoun- ied are subdivided into classifications based on their
tered in the study, where a property had 17 different targeted market segment, a different picture emerges.
rates available for a particular date on TravelWeb, As can be seen from Table 5, hotels at the lower end
with few (if any) discernable differences identifi- of the market are far more likely to offer consistent
able in the rate descriptions. Clearly such a scenario rates across all channels used. While it could be
would be confusing and frustrating for any customer speculated that the reason for this might be because
wishing to book that property. economy properties are more likely to have a single
Table 3 Table 4
Number of Rates Offered to the Customer Average Rates Offered to the Customer
Hotel company Web site 4.27 3.6 19 1 Hotel company Web site 159 112
Microsoft Expedia 3.66 1.4 5 1 Microsoft Expedia 152 116
Travelocity.com 6.07 3.3 16 2 Travelocity.com 166 134
TravelWeb 5.62 3.6 17 1 TravelWeb 162 115
WorldRes 4.58 3.8 12 1 WorldRes 181 168
Voice (CRO) 1.00 — — — Voice (CRO) 163 117
70 O’CONNOR
Table 5
Market Sector Analysis
Cheapest Channel
fixed price for their product irrespective of demand, fer the highest probability of finding the cheapest
it could also be due to a more consistent pricing strat- rate available for such upper-end properties. It is also
egy on the part of the hotel companies involved when clear from the data that a hotel company’s Central
addressing a relatively price-sensitive market. Fur- Reservation Office, accessed through a toll-free num-
thermore, it can be seen that consumers at the lower ber, is not the place to obtain cheaper rates. Irre-
ends of the market are far more likely to obtain lower spective of the market segment, there is a higher
rates through direct channels. For economy brands, probability of obtaining the most expensive rate
direct sales over the company’s own Web site was through this channel, and bookings through this route
cheapest nearly one quarter of the time, with a fur- were almost never the cheapest available. However,
ther 46% offering the same rate irrespective of the this finding is to a large extent a factor of the survey
channel used. Thus, a consumer making a reserva- methodology used. With voice, the first rate quoted
tion for an economy room on a hotel company’s Web was the one recorded for analysis. In many cases,
site would find the cheapest rate on this channel three other (lower) rates were quoted when the researcher
times out four. With mid-priced products, the chain indicated that he did not want to make a booking,
Web site is even more likely to give the best rate, suggesting that some degree of haggling would have
offering the cheapest rate nearly half of the time. resulted in significant lower prices on this channel.
However, at the upper end of the market the situa-
tion was very different. Hotel company Web sites Conclusions
gave the cheapest rate in less than 10% of cases, but
quoted the highest rate in over one third of cases. From the above discussion, it can be seen that both
The evidence is clear. If you want to stay in upmar- the range of channels through which hotels can be
ket hotels, avoid booking on their Web site if you booked and the complexity of these channels have
are searching for good value! Instead, the online grown. This study represents the first major attempt
intermediaries (in particular Microsoft Expedia) of- to understand hotel company’s pricing strategies over
ANALYSIS OF HOTEL CHAIN ONLINE PRICING STRATEGIES 71
electronic routes. Bookings made on five major con- And what are the implications of these findings
sumer-focused online travel sites were analyzed to for the consumer? First, it is clear that for those with
determine if a logical pricing strategy could be es- a taste for more upscale products, the hotel brand’s
tablished. own Web site is not the place to shop, as better value
The study revealed that the majority of hotel brands can be obtained in most cases through other chan-
now use multiple simultaneous electronic channels nels. More interesting, however is the fact that, in
of distribution, making their product available to a general, prices have become more or less equal
relatively wide audience. While the use of voice across many of the channels investigated, and thus
through a Central Reservation Office has fallen by implication, across many other electronic distri-
slightly, there has been a growth in the availability of bution channels as well. It is well established that
hotel company’s own Web site, with 19 out of 20 of time is a valuable commodity in today’s society.
companies now making their product available for Because the number and variety of ways that a con-
sale in this manner. The differences between this and sumer can book a hotel room have become undeni-
earlier published research indicate a major expansion ably complex, the cost associated with searching
in the use of the Web as a direct selling medium on through even a small number of the many alterna-
the part of the hotel industry, perhaps accompanied tive consumer-focused channels currently available
by a realization of its benefits in comparison with in the marketplace in an attempt to find a cheap price
other, more traditional, electronic channels of distri- has also grown dramatically. Given that this study
bution. Most companies offer multiple rates to cus- has found that many of the rates being offered over
tomers over each channel utilized. It is interesting to alternative channels are more or less the same for
note the large number of companies that now have the majority of hotels, the question must be asked as
consistent pricing across all channels. Previous re- to whether spending time and energy searching for
search found less than 10% of companies had consis- the cheapest rate is worthwhile.
tent pricing and cited the lack of integration between
the various inventory databases used to manage in-
ventory as a possible cause. Yet over one third of Peter O’Connor is an Associate Professor at Institut de Man-
agement Hotelier International (IMHI), France, an MBA pro-
brands now offer consistent pricing across multiple gram specializing in international hospitality management.
channels, indicating progression in the industry’s He received his Doctorate in hospitality e-commerce from
management of electronic distribution in the interim. Queen Margaret University College, Edinburgh, and holds a
Although no single distribution channel is consistently Master’s degree in Management Information Systems from
cheapest, in-depth analysis does reveal a link between Trinity College, Dublin, and a Bachelor of Science degree in
Hotel and Catering Management from the Dublin Institute
the market being targeted and price. Firstly, cheaper of Technology. Mr. O’Connor’s primary research, teaching,
prices can rarely be obtained over voice channels, ir- and consulting interests focus on the use of technology in
respective of market segment. From the data it can be the hospitality and tourism sectors. Based on his work, he
seen that consumers are more likely to find cheaper has authored two leading textbooks on technology in the
prices on hotel chains’ own Web sites in the economy hospitality business, Using Computers in Hospitality (Cassell,
UK, 2000, now in its second edition) and Electronic Infor-
and mid-price segments. More upmarket hotel brands mation Distribution in Hospitality and Tourism Industries
are, on the other hand, more likely to quote more ex- (CABI, UK, 1999), as well as numerous articles in both the
pensive prices on their own Web site than on other trade and academic press.
channels. Perhaps this is a reaction by the brands at
the lower end of the market to the price sensitivity of References
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