It’s been just a week since IHG joined Hilton and Marriott in cutting third-party commissions from ten percent down to seven — and it comes at a time when the industry is still buzzing from the Hilton cuts. At the end of the day though, there are plenty of reasons we should have seen these moves coming. (I offered it up as a prediction last year in October during a speaking engagement at MPI Oregon.) Now, there’s more reason than ever to believe that additional cuts are on their way. In fact, Hyatt’s re-evaluating their own commissions as we speak.
Given the cost structure of today’s hotels, Marriott, Hilton, and IHG made a predictable shift. Hotel top-lines have been under attack thanks, in large part, to franchising fees and intermediary commissions. They’ve also taken a big hit from rising hotel operating costs. The fact that hotel owners are more financially sophisticated than ever before means they’ve been paying close attention… and what’s a worse margin-killer than commission on group business?
These top line costs especially hurt property owners at hotel chains, because a majority are operating on a franchise model. Franchises are responsible for operating costs, and franchise fees are paid as a percentage of total revenue. So when operating costs go up, it doesn’t factor into fees. Instead, it just eats away at the portion of profits left over for owners.
Plus, since larger chains generally have ample meeting space on site, these same hotels are banking on group business to grow revenue. The problem there becomes that 40-60% of that business involves intermediaries at the point of sourcing. Last year, commissions to third-parties were $1.3 billion on $30 billion in group revenue in the U.S. alone.
Add to this the fact that hotels are paying for products, services, and technologies on a per-room basis, and you can see how the fees start to rack up for hotels and chains that are large enough to attract and accommodate the lion’s share of group business. Since these types of costs are fixed — and much higher for larger hotels — gross margins get squeezed more and more when commissions are high. But it’s not just services and intermediaries that are costing properties. On average, larger hotels also pay more in total acquisition costs as a percentage of their group business.
For these large chains, commission cuts may make sense. More freed up money means more opportunity to focus on group acquisition and invest in their product offering for meetings and events (e.g. meeting space renovation, new equipment, etc.). Properties are wondering why they would spend money on third-parties when they could apply it to direct group marketing channels instead.
Let’s see how this will impact Marriott’s 2018 revenue.
Marriott’s projected 2018 revenue: $21.5B
Assuming 40% comes from group: $8.6B
Assuming 1/2 would come from third parties: $4.3B
10% commission: $430M
7% commission: $301M
This change should increase $MAR‘s top line by $129M
— Dan Berger (@danberger) January 27, 2018
Whether or not chains cut commissions, investing in these direct group marketing channels opens up an alternative strategy to reduce reliance on third-parties, using technology to bring the meeting product directly to planners. That’s why you can expect other chains to follow the same route as IHG, who uses Social Tables technology to power their own direct group sourcing and booking platform.
This type of move is great for large chains, because it allows them to capitalize on their direct planner traffic and build up their own network of planners. They can create more value by streamlining the process for the growing majority of planners who are researching venues online (>50%), all the while bringing in more profit for owners. It’s a win-win.
Still, while we’ll probably see the ripple effect of chains mimicking Marriott continue, not all will follow. Other properties may decide that their money is well spent, fearing that they won’t get the same return across their other channels as they do with third parties. Many of those properties will instead make a play to woo intermediaries, and we’ve already seen some — Preferred Hotels and Denihan Hospitality in particular — raise their commissions in the interim. Time will tell whether they’re able to find any success, but this type of cost-benefit analysis is what a thought-out channel strategy is all about.
Nevertheless, for planning firms who rely on sourcing to generate revenue, it’s time to rethink how they can add value to their service offerings. One idea could be additional meeting services, such as planning. They can take collaborative technology like our free planning software and leverage it as a value add to increase the efficiency of the planning process. As opposed to being perceived as a middle man, a move like this could reinvent firms as partners who help facilitate successful meetings — from sourcing to execution.
If third parties are unable to diversify their offerings, they either risk losing income or having to pass commission losses onto their planner clients. However, the latter won’t work, because, as we’ve seen with the rising cost of group acquisition, nobody wants to pay more for business they’re accustomed to. We shouldn’t expect planners to be any different.
No matter how intermediaries and properties react following these shake-ups, one thing’s for sure: Group business is rapidly evolving. If history teaches us anything, it’s that evolution requires adaptation for survival — and adaptation almost always means leveraging not only new technologies, but also new business models. For organizations that are able to think in this way, there will always be tremendous opportunity to thrive.
Updated May 15, 2018
Interested in building your own direct channel? Learn more about how direct booking software can help chains cut acquisition costs and build direct relationships with planners.
Dan Berger is the Founder and CEO of Social Tables. He has received nearly 20 leadership awards, including the Pacesetter Award from the Events Industry Council and Top 25 Most Influential People in the Meetings Industry by Successful Meetings. He has been named Tech Titan by Washingtonian and was named a finalist for E&Y’s Entrepreneur of the Year. Born in Israel and raised in New York City, Dan now calls Washington, DC home. He has a BA from Hunter College and an MBA from Georgetown.