In the last year, the major online travel sites have all dramatically changed the way they work. Unfortunately this change is having a very negative effect on the local economy, deeply cutting into our already already-shaky hotels and perhaps affecting their long-term viability. This is not good for Maui, and you should know about it.
Before I can explain, you need to know how these online travel sites—Priceline, Expedia, Orbitz, Hotels.com, Tavelocity—really work. How is it they’re able to offer the lowest prices?
Over the years, a number of urban myths have surfaced. One of the most common is that the companies buy blocks of airline seats or hotel rooms at a discount and resell them, which isn’t true. Another is that they sell last-minute inventory at a discount, which isn’t really true either.
The method they use is a good, old-fashioned contract. If you want to be listed on their site, you have to contractually agree to offer them the lowest price available. Simple, really. The major sites have commanding control of the travel market; a hotel that doesn’t play along can have its listing dropped, which, when you need to fill rooms daily, leaves you with little negotiating leverage.
This was a system that worked for years. If you were a hotel, the fee you agreed to pay was a 5-10 percent commission. Very reasonable, actually. For that cost you received a steady stream of reservations, all with little marketing effort (and expense) of your own.
Unfortunately, over the last two years, these sites have established a second tier of service, requiring a 30 percent commission. Oh, you can still play in the 10 percent club, but you’ll be listed below those paying the 30 percent commission, effectively pushing your hotel many pages downward. Only the most tenacious, thorough consumers will ever see your listing, and they probably won’t think much of it due to its poor placement.
The value of that higher listing is everything in this business. Should a local hotel manager not agree, they’ll immediately lose much of their sales through these sites.
The problem is, hotels are thin-margin enterprises to begin with—they’re not very profitable even when run well. To give up 10 percent of their gross revenue is workable, but 30 percent? That level eats up the profit and basically starts selling rooms at a loss.
So what’s a hotel manager to do? Simple, raise prices. If they need to net $90 for a room, they can’t sell it for $100 anymore with a 10 percent commission. They need to sell it for $128.57. When they sell the room at that rate, they immediately give 30 percent (or $38.57) to Priceline, Travelocity, etc., and keep $90 to cover their operating costs. For those paying attention, this also increases the room tax on that stay, now 12.4166% in Hawaii.
Remember, under that same contract they’re not allowed to offer lower prices online, so even if you go directly to a hotel Web site, you get the same price. (They can, however, offer a lower price if you call, which some will do, but most won’t simply due to the complexity of offering different rates.)
The timing of this change couldn’t have been worse. Just as we’re in the middle of a protracted economic downturn, these marketing monopolies start pushing their vendor base hard. What’s a good consumer to do? Boycott them, maybe? Don’t know.
Something’s got to give, or the sites promising cheap travel will have made it much more expensive in the long run.
Doug Levin is a Maui-based CPA