2016 was the year of ‘the loyalty wars’, the battle of the century between online travel agencies and hotel brands.

NB: This is a viewpoint from Peter O’Connor, professor of information systems at Essec Business School in Paris, and European online analyst for Phocuswright.

Hilton, Marriott, Accor Hotels and Choice Hotels International heavily promoted loyalty club membership-driven book direct campaigns, granting transient consumers substantial discounts in return for instantly signing up to their ‘loyalty’ programs. Supposedly designed to combat the ever-growing power of the OTAs, many independent analysts however questioned its purpose, effectiveness and long term effect on hotel profitability.

Unfortunately, this was a battle that in the long run no one could win. Many players have already begun to moderate their positions, and we’re already seeing the emergence of some common ground. The change in behavior is driven by a new, more harmonized outlook.

Half empty, half full

A scarcity mentality tells us the earth’s resources are finite and that we are doomed to fight each other until the last drop of water, air, or other precious resource is used up. On the other hand, an abundance mentality looks at the world through the lens of opportunity.

Scarcity tells us that there are winners and losers – a ‘zero sum game’. Abundance tells us that we can innovate towards solutions to unlock prosperity, and that a dynamic marketplace focused on multiple winners can in fact be achieved.

As different industry players move their lines in the sand, we may quietly be witnessing the resurgence of such an abundance mentality within the hyper-competitive hotel distribution sector.

Last August, I wrote about true cost of loyalty-driven discounts in order to start a dialogue about how market dynamics have changed. As hotels, we can adopt a scarcity mentality, villainizing the OTAs all we want over supposedly high distribution costs, regardless of the fact that hotels’ OTA costs have decreased substantially over the past five years while the cost of supposedly cheaper direct bookings has increased.

In the hotel industry, we love having a common enemy; someone else to blame for our woes (does Airbnb ring any bells?) and the OTAs have in recent years served as the perfect punchbag. The scarcity mentality was alive and well.

Course of action

Right now, after years of sitting back whining while the OTAs outpace their growth, the global hotel brands have finally decided to get off their butts and do something about it.

In an effort to encourage customers to book direct, they decided to provide incentives in the form of not only lower prices but also enhanced services such as free Wi-Fi or ‘free’ breakfasts.

But as they’ve rolled out these initiatives, the brands quickly learned that challenging the OTAs is going to require a ton of new investment and many are currently questioning whether this explicit and hidden discounting approach is sustainable in the long term.  Despite claims that all is rosy in the garden, many are coming under pressure from owners and investors alike to clearly demonstrate the effectiveness of their book-direct-in-return-for-incentives approach.  Evidence to date suggests that most are struggling to do so.

Can you buy loyalty?

In my earlier article I investigated the rising costs of distribution by looking at a specific case study using the franchise disclosure document of one of the world’s most recognizable hotel brands.

In that example, multiple factors were driving weakened direct booking net revenue contribution. These include, but are not limited to: rate dilution from discounting, a hefty paid search marketing fee for customers coming from pay-for-performance channels, and the substantial cost of participating in the brand’s loyalty program itself.

As a follow-up study, to try to better understand the impact of loyalty fees across the industry, I did an analysis using the HVS 2015-2016 and 2011 US hotel franchise fee guides.

I looked specifically at brand comparisons between the two years (ignoring any companies not present in both editions), which gave me a sample of 55 major hotel brands across upscale, midscale, and economy segments.

To my amazement I found a 77% increase  in loyalty fees between the two year’s averages (normalized on a percentage of gross rooms revenue basis). This means that the cost for hotel properties to participate in such programs had almost doubled over this five year period.

But according to a Kalibri Labs report , this same period saw a significant drop in direct bookings, a fact that calls into question the effectiveness of these ever more expensive loyalty programs.

Perhaps the global hotel brands should follow the OTAs’ lead and reduce –  or even eliminate –  fees on bookings that are not truly being delivered by the brand.

Currently, most hotel brands typically charge fees on a gross rooms revenue basis, meaning that they get their cut irrespective of how much business they actually drive to the property in question. Surely a fairer scenario would be to only charge owners for bookings delivered by channels ‘controlled’ by the brand in question – a move that would bring hotel brands’ pay-for-performance business model closer to that being used by the OTAs.

Partnerships shape up

If 2016 was about carving up a finite consumer pie, I believe this year will be about abundant mindsets driving new partnerships, and the two largest OTAs are doing just that. For example, Booking.com acquired various technology providers to create a service offering called Booking Suite which drives direct bookings to independent hotels. Expedia just introduced a free basic revenue management tool called Rev+ and is making some bold moves with chain partnerships.

For example, Expedia is now even sending customers directly to chains through link-offs to their direct booking sites as well as signing up customers for the chains’ loyalty programs, as in the case of Red Lion whose ‘Hello Rewards’ loyalty rates are listed directly on Expedia’s sites.

Red Lion’s CMO, Bill Linehan, was quoted as saying that in the month after launch it saw a 400% increase month over month in Hello Rewards sign-ups with about 25% resulting from the Expedia partnership, clearly showing that by working together, rather than bickering, both parties can grow the size of the pie and create greater value for everyone.

Non-exclusive virtual alliances are the name of the game, as testified by the recent deal between Marriott and Expedia in the vacation packaging arena, and Marriott’s initiative with Booking.com which uses the latter’s content and technology to power some of its low volume country sites such as Marriott.it rather than developing it for themselves.

Instead of wasting time and energy on pointless and often heated battles, finding innovative and imaginative ways to work together is clearly the way forward, with both owners and customers ultimately the main beneficiaries.

As the old saying goes, for everyone to win, we need to make love, not war!

NB: This is a viewpoint from Peter O’Connor, professor of information systems at Essec Business School in Paris, and European online analyst for Phocuswright.

NB2: Image by uwphotographer/BigStock