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The disappointing life of hotel industry booking site Room Key

07/12/2016| 10:33:19 AM| 中文

Room Key, launched in January 2012, is the brainchild of six major hotel chains. However, it turns out to be a disappointment due to unreasonable profit model, limited marketing budget and pop-under ads.

If you ever scroll all the way down to the bottom of the home pages for Choice Hotels, Hilton, Hyatt, InterContinental Hotels Group (IHG), Marriott, or Wyndham, there’s a slight chance you may notice a link to something called Room Key.

Or, if you happen to be looking for a room on any of those sites, but decide you’re not ready to hit the “book” button and leave the site, there’s a chance a new screen will pop under, directing you to RoomKey.com.

Still not sure what Room Key is? You’re probably not alone in that regard, and that’s one of the biggest problems with its business: a major lack of brand awareness.

Room Key, launched in January 2012, is the brainchild of six major hotel chains — Choice, Hilton, Hyatt, IHG, Marriott, and Wyndham. When it debuted, its inaugural press release described Room Key as “an innovative new online hotel search engine that will provide the simplicity, transparency and breadth of choice consumers expect from a search engine, while delivering the flexibility, accuracy and assurance consumers expect from the hospitality industry.”

In other words, it was the hotel industry’s answer to the rise of the online travel agency (OTA), similar to how the airlines launched Orbitz in 2001. But unlike an OTA like Expedia or Booking.com, hotel-chain-owned Room Key would charge lower commissions. It also wouldn’t be biased in its search results, and it would give each of the founding hotel owners direct business in the form of leads from Room Key to their websites.

“The notion that the industry would create its own travel portal so we can be less dependent on OTAs was an immensely appealing idea at that time, and it still is,” David Kong, Best Western CEO told Skift.

Best Western, while not a founding hotel partner in Room Key, signed on as its first commercial partner a few days after the site’s launch. Since then, however, Kong hasn’t been very impressed with the site’s performance.

“It’s a very small fraction of our business, nowhere close to what the initial estimates were,” Kong said. “In that regard, it’s a bit disappointing. It was created by all the major brands in the industry. You’d think we would know how to do it and do it well, but it hasn’t panned out that way.”

Room Key Today

“We behave like an OTA in terms of the search process and we sell like a meta,” is how Room Key CEO Steve Sickel, who took over from founding CEO John F. Davis II in 2014, described the site.

Davis declined to be interviewed for this article.

But if you look at where Room Key is today, four years after its founding, Room Key hasn’t come close to meeting its original goals, as Best Western’s Kong noted.

Speaking to Skift at the NYU International Hospitality Investment Industry Conference in Manhattan, Sickel said, “I would call Room Key a solid medium-size player in the distribution space. Not bad, after only a couple of years of formation in a very crowded landscape. There’s a ton of travel sites out there. We’re solidly middle to middle-upper-middle in the mix.”

If you look at the site traffic for RoomKey.com on Similar Web, however, you wonder if Sickel’s “medium-size” estimate is a bit inflated. For the month of June its total number of visits was about 1.6 million. For the same period, Booking.com had 323 million visits and Expedia.com had 60.8 million, while Marriott.com had 28.2 million, Hilton.com had 22.9 million, and IHG.com had 17.5 million. Nearly 78 percent of Room Key’s traffic comes from referrals (exit traffic generated by the founding hotels’ sites through pop-under ads); only about 19 percent of it is direct, and a little more than 2 percent comes from search.

Choice Hotels COO and president Pat Pacious still views Room Key “as a viable channel.” “It launched at a time when the industry and OTA environment was changing significantly,” he said. “I think it’s a great idea. The brand awareness and how you attract customers to the site has been a challenge, but I do see a home for it. I don’t know if it will turn into what we hoped it would be back in 2012. I think no one really knew what it could be. The strategy was to drive down the commission cost. This was a lower-cost channel to do that.”

Room Key’s challenges also caught the attention of two noted hospitality and business professors, Chekitan Dev, a marketing professor with Cornell University’s School of Hotel Administration, and Peter O’Connor, a professor at the ESSEC Business School in Paris. In September, they published a thought-provoking piece about Room Key in the Harvard Business Review. Called “Case Study: Should a Hotelier Invest in a New Kind of Online Travel Agency?,” it presents readers with a fictional dilemma: whether to invest in HotelShield, a not-so-subtle substitute for Room Key.

“As discussions were heating up between hotel brands and OTAs about what hotels were getting and what they were giving up in exchange, it seemed like an opportune time to research this quasi-OTA Room Key,” Dev said. “I also wanted to follow up on what had happened to Travelweb. We specifically wanted to analyze the pros and cons of this ‘third way’ strategy (brand.com and OTA being the first two) and whether it was worth it for hotel brands to pursue this strategy.”

Room Key’s Predecessor

To understand how we got to where we are with Room Key today, it’s crucial to look back to Travelweb, which was founded in 2002 by Hilton, Hyatt, Marriott, Six Continents Hotels, Starwood, Priceline, and Pegasus Solutions. It was a way for the chains to develop their merchant model hotel business and to better compete against OTAs such as Expedia, Hotels.com, and Travelocity.

Joe Humphry, former Travelweb CEO from 2002 to 2004, said “Travelweb started more as a tech company, then continued onto the OTA business. The objective was really to force automation onto the OTAs. Our objective was accomplished.”

But, Humphry adds, he still wonders what would have happened had Travelweb’s founding owners raised the money to go ahead and build Travelweb.com into a full-fledged OTA.

“A lot of groups wanted to put money into it and make it a big OTA and there was a lot of PR on the company,” he said. “If they wanted to do an OTA, that would have been a good time. The OTAs weren’t as big as they are now. Some of the [hotel] brands wanted to go forward with it, and put marketing up and raise money, but that didn’t happen. That was a board decision.”

He added, “It didn’t need the sort of money that you need today. Hindsight is 20/20. Even after I had left, I was kind of disappointed they decided not to go forward. I think they could have been [a dominant OTA player.]”

Instead, shortly after Humphry left to return to his consulting business, Travelweb was sold to one of its primary stakeholders, Priceline, for nearly $30 million, including Priceline’s initial $8 million investment.

“Both of these businesses [Travelweb and Room Key] have the same issues: visibility and awareness of the effort,” said Brian Harniman, managing director at Brand New Matter, a strategic advisory firm. In 2004, Harniman was working for Priceline as a vice president of business development, and he worked on the team that evaluated and performed the due diligence on Priceline’s acquisition of Travelweb.

Harniman added, both Travelweb and Room Key fell short because of a lack of marketing resources.

So why did Priceline decide to buy Travelweb?

“Priceline bought it to acquire merchant contracts so we could break away from the Name Your Own Price hotel product,” Harniman said. “It was better for us to sell a merchant room because the margins were better. Another reason was to buy goodwill from our hotel partners so they would continue to work with Priceline.”

Harniman said that, eventually, the Travelweb acquisition led to Priceline’s most valuable acquisition in 2005: Booking.com.

“[Travelweb] became our stepping stone into becoming a real ‘regular’ travel provider, instead of this weird Name Your Own Price seller where you don’t know what you’re getting and you don’t see what it is until you get it,” Harniman said. “Now you can buy disclosed inventory. You can buy the same retail travel you would expect to as a consumer. It helped Priceline get the confidence to buy Booking.com.”

So not only did the hotel founders of Travelweb miss out on their chance to form their own OTA, but their decision to sell to Priceline ultimately contributed to Priceline’s incredible success with Booking.com, currently the No. 1 site for travel and accommodations, in terms of site traffic and profits.

“Back in those days, when Pegasus and the brands created Travelweb, they had the potential to dominate,” said Kong. “Again, for one good reason or another, they failed to gain any traction and never established consumer relevance and it became nothing. It was a lesson we did not learn.”

That pivotal board decision to forego turning Travelweb into a powerful OTA for the hotel industry would be revisited in 2011, when the big chains again began talking about forming a new third-party distribution channel.

Humphry recalled having a conversation with marketing executives from Marriott, IHG, and other hotel brands about starting an online travel agency again. “It was an informational call where they wanted to talk to see if they should go ahead and start an OTA,” he said. “I told them, ‘If you can’t come up with a billion dollars in marketing, you can’t be a player.’ Three or four months later, John [F. Davis II] got involved and they went forward with Room Key.”

“I think there are some lessons to be learned here, but whether or not we actually learned them is another story,” Kong said. “We should have learned from Travelweb when we launched Room Key. But we basically repeated the same mistake again.”

Room Key’s Biggest Problems

In theory, you might think Room Key, like Travelweb before it, would make a lot of sense for hotels trying to create an industry portal and reducing distribution costs. But the execution of the platform and the current online travel market has crippled it in many fundamental ways. Here are just a few of Room Key’s major challenges.

Times have changed and online travel agencies are huge. As Humphry noted, Expedia, the Priceline Group and, increasingly, Ctrip dominate online travel today, making it that much harder for anyone else to enter the online travel agency market. “To get in that business nowadays, you have to have billions in marketing,” he said. Priceline spent an estimated $2.8 billion on marketing last year, while Marriott’s estimated annual marketing budget is about $100 million.

Marketing matters. Room Key’s brand awareness problem could be addressed if its owners spent more on marketing it. Instead of promoting Room Key, however, those brands are promoting themselves instead, which isn’t a bad thing, but it doesn’t do anything to improve Room Key’s chances.

“With this co-opetition model, you can’t approach this in a half-hearted fashion,” Dev said. “A lot of companies are sort of hedging their bets with this. But you have to either support it wholeheartedly and put your thoughts and money behind it or not do it at all. If you do it half-baked, it’s not going to work.”

So, why aren’t the hotels who founded Room Key promoting it? When Hilton launched “Stop Clicking Around” or when Marriott enticed customers with “It Pays to Book Direct,” why didn’t they ever mention Room Key?

One answer is that hotels have limited marketing budgets compared with OTAs, and the chains would much rather focus on building their own brands and direct traffic rather than committing resources to Room Key.

And why is that in the annual reports that the founding hotel companies file with the U.S. Securities and Exchange Commission, Room Key is never mentioned as part of their strategies for dealing with intermediaries? That probably has to do with the fact that Room Key isn’t material enough to their businesses to even be noted in their government-mandated SEC filings.

Henry Harteveldt of Atmosphere Research Group said, “A key issue, no pun intended, or a key challenge that the hotel space has is that they don’t have enough of their own marketing money to communicate their own brands, and to invest in their own websites, mobile applications, and digital channels. To divert money into a hotel-owned OTA is at best a questionable investment or strategy and at worst, it’s just plain stupid. I’ve told hotels for years, ‘Fix your own house first.'”

When asked why Room Key’s founding hotel companies aren’t promoting Room Key more, Sickel said, “Rather than trying to promote Room Key at what I call the top of the purchase funnel, they’re giving me highly qualified traffic.”

He added, “I have tens of millions of customers that come to me from founders for whom I know (1) are shopping hotels, (2) I know the city that they’re shopping for, and (3) I know the dates that they want to go. That would literally — and this is not an exaggeration— cost me tens of millions of dollars in advertising money to get those customers. I’m getting those customers for free from our founders so I don’t need to advertise because the point of advertising is to get customers who you know are shopping onto your website and I’ve got tens of millions who do that every year.”

Ad blockers exist — and a lot of people use them. Relying on traffic generated by pop-under ads is not a very reliable way of directing traffic to your website. Not only that, but the system by which Room Key brings customers to the portal itself can be a bit jarring even when its pop-under ads appear.

“If you’re a consumer and you go to Hilton.com, let’s say, and then all of a sudden you find yourself at Room Key, you would find yourself feeling confused and you might even be uncomfortable,” said Best Western’s Kong. “It’s not a viable model to drive traffic.”

Loyalty rates won’t cut it. Room Key’s latest initiative, meant to distinguish itself from OTAs, is that it now offers the same member loyalty rates that you will find on its founding hotels’ own brand.com sites. Those rates are usually lower than you’ll find on online travel agency sites. There’s a catch, however: To get access to those rates on Room Key, you still have to sign up to be a member of those hotel loyalty programs.

The way the Room Key site is built currently, if you’re not yet a loyalty member, you will have to register with the hotel before you make the booking on the hotel site after you visit RoomKey.com. Sickel said, “In the future, Room Key will have the ability to enroll in all of these different loyalty programs through a Room Key interface.”

Consider the fact that Room Key pushes pop-under ads to consumers who visit Marriott.com, but don’t book. Consumers then end up on RoomKey.com, and if they find a Holiday Inn rate they like, they have to navigate, via Room Key, back to HolidayInn.com to book the room — after signing up for the IHG loyalty program to take advantage of the lowest rates.

When asked if Room Key will heavily promote these rates, Sickel said, “Yeah. It’s going to be a big campaign for Room Key. Again, I don’t like measuring things based on media spin because Room Key doesn’t necessarily have to spend money on media to get the results that we want to get.” He said he hoped people’s “love of travel,” the “value proposition,” and “social pass-along” will help promote it instead.

Kong, for one, doesn’t think the addition of loyalty rates will help Room Key’s cause, or its revenues, unless Room Key markets it heavily.

“I heard [about] that, and I asked how much money will they put behind it to promote [the loyalty rates]?,” he said. “I’ve heard owners say they want to lower their room rates to stimulate business during softer periods, but how much money are you going to spend to promote it? If no one knows about it, you’re discounting the business you’re going to get anyway. If you don’t promote it, it doesn’t mean anything.”

Harteveldt also pointed out, “That’s like bailing out the Titanic with a water cup. It’s fine that they have it, but GDSs [global distribution systems] carry it, and certain traditional travel agencies have access to these rates, so it’s not like Room Key has a distinct advantage.”

It’s hard to tell how Room Key makes money. Like an OTA, Room Key makes money from commissions but that is problematic because the whole idea behind Room Key is to let hotels pay relatively low commissions.

Sickel described Room Key’s commission structure in this way: “We get paid, we make money based on consumed bookings. A booking that was generated through Room Key and actually happens, doesn’t get cancelled. Actually the booking takes place, then the hotel pays us a commission on that. While I can’t disclose specific commission rates I can tell you that from what I read and probably what you’ve read as well, the third-party travel folks generally charge between 15 and 20 percent commission rate. I don’t know these contracts but that’s what I read. If that’s true, Room Key’s commission rate is well below that.”

So, Room Key’s commissions, at least those generated from its founding partners, are already much lower than what the online travel agencies collect.

Kong said the commission rate for Best Western, as a commercial partner, is “comparable” to what the online travel agencies charge. He said that if a commercial partner agreed to channel its leftover traffic to Room Key, however, the commission rate would be lower. “We didn’t agree to do that,” he said.

When asked why Best Western decided to be a part of Room Key, even though Kong had initial hesitations, he said, “There’s nothing to lose by signing on as a commercial partner. It’s just another channel for us.” He also said that because Room Key was so new in 2012, he didn’t have to commit to a certain amount of spend.

Sickel also said, “What’s even more interesting is Room Key has made a commitment to its suppliers that as we grow, as we get bigger, as we reach different scale and inflexion points we will lower that commission level even further.”

How can a business that already doesn’t generate market-rate commissions afford to lower its commission rates even more if it starts to grow?

“We think that having such an attractive commission structure makes hotel companies more willing to give us these low loyalty rates because it helps protect the hotel’s margins,” Sickel said. “They’re discounting it already but because the commission structure is so low with Room Key, they’re willing to sell it to us where they can’t afford to sell it potentially through more expensive channels.”

It’s tough to get competitors to cooperate with each other. Whether it’s because of competition or the simple fact that each hotel company has different business strategies, it’s difficult for competing hotel companies to work with each other.

Not only that, but Kong said that although the hotels are competitors, the more serviceable, friendly side of hospitality often gets in the way of making the right business decisions, too. “In the hotel industry, we are very nice to one another and we try to compromise on things,” he said. “I know, firsthand, having worked with the American Hotel & Lodging Association, that we sometimes compromise our potential. We have a very fragmented industry and a lot of opinions on how to do things. Even with the best ideas, things get watered down because we want to be nice and respectful to each other.”

Kong suggested that if a private equity firm were involved, things might have ultimately been different with regard to both Travelweb and Room Key. “Private equity firms are driven by results and they stop at nothing to get it.”

Hotels Are Getting Smarter About Distribution

It’s clear that the big hotel chains are getting smarter about distribution, and their respective direct booking and loyalty pushes are evidence of that.

Harteveldt and Accor CEO Sebastien Bazin haven’t minced words when asked for their thoughts on whether Room Key should continue to operate.

In an interview with Skift in November 2015, Bazin said, “All of us. For the last 15 years, we’ve been sleeping. I said that publicly and I got yelled at by my peers. Let’s face it, we’ve missed three waves in the digital revolution. The first wave 12 years ago, the OTAs. Did we move? No, of course not. Yeah, we tried Room Key. ‘Pschitt.'” [There’s no direct translation for this French slang term, but it comes from the sound of opening a can of soda as in something that blew up.]

“Hotels would be much better off, right now, pulling the plug on Room Key,” Harteveldt said. “Shutting it down, before they waste another penny on it. If I were a shareholder at a hotel company, I’d be furious that these brands diverted precious financial resources from the brands to this ill-fated exercise.”

He said the hotels who founded it are also aware of its problems. “Even the hotels themselves have been telling me for years that Room Key has been a disappointment,” Harteveldt said. “That Room Key has not produced the volume of business that they had anticipated. They acknowledge the challenges that Room Key has faced. That people at Room Key are good. They tried. It’s just been an exercise in futility.”

Room Key’s status isn’t make or break for any of its founders.

“Room Key not working doesn’t really change anyone’s strategy in any way,” said Kong. “It’s not the major strategy.”

Today, hotel brands are doing their best to figure out just the right mix of inventory they want to devote to OTAs and which OTAs are worth the commission rates. Smart hoteliers know that as much as they want guests to “stop clicking around,” they can never completely cut out their business with the OTAs, especially if we are headed toward another economic downturn.

They’re also realizing that timing is everything. They also know there’s no better time to start promoting themselves and getting guests to book direct than right now. If they can change consumer behavior now by building up their brand awareness, they’ll be that much better positioned with consumers once the next recession comes.

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TAGS: Room Key | OTA | hotel distribution
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