Making Money Online

As more consumers venture onto the World Wide Web, hoteliers increasingly report profitable Internet reservations operations.

By Joan Marsan, Technology Editor -- HOTELS Magazine, 6/1/1999

One percent. It's an amount that expresses the shot-in-the-dark,

a remote possibility. But as the share of room reservations garnered

by a hotel web site, one percent translates into millions of dollars

in revenues. And rather than remote possibility, it promises certain

and steady growth.

Curiously, it's not the sort of growth many

visionaries originally hoped the Web would provide. The Internet

once was prophesied to be a replacement for global distribution

systems (GDSs). That pronouncement some day may come to pass, but

for now, GDSs remain firmly entrenched as leading reservations

handlers. "There are still a lot of

travel agents with green screen PCs," says Eric Christensen,

president of European operations for WorldRes, San Mateo, California. "They

have long-term contracts with GDSs. They're locked in

because they were so successful."

The Internet, then, provides an additional reservation channel rather

than a GDS replacement, and many executives have worried that the

medium is simply an expensive add-on to an already cash-intensive

reservations operation. So while its ability to distribute information

about properties to a global audience is valued, the Web's success

has been measured largely by its ability to turn a profit. Hosting

a profitable site seems a daunting task. Again and again, reports

crop up of Internet-based retailers operating in the red. And the

costs of hosting a site, rather than declining, have increased--some

estimate doubling each year--with the new functionality and increased

capabilities consumers expect sites to provide.

But in spite of the rising costs of operating a site that employs

the latest technology, more hotels and hotel chains are claiming

online profits. In 1996, after the July launch of their site, Starwood

Hotels and Resorts Worldwide, Phoenix, Arizona, booked roughly US$1

million worth of room reservations online. Sales jumped to US$10

million in 1997, and grew again in 1998, reaching US$25 million.

The group expects to handle US$100 million worth of Internet room

bookings in 1999. Marriott International, Washington, D.C., reported

a 200% growth in online sales in 1998, booking reservations valuing

US$50 million. Overall Internet bookings accounted for less than

US$100 million in 1997 but, according to a Bear Stearns report, will

reach US$3.1 billion in 2002.

More Traffic, More Money

The profitability of the sites has been enabled

first and foremost by the increase in Web traffic. The Travel Industry

of America (TIA) reported the number of Internet users researching

and booking travel online grew 141% in two years, up from 29 million

in 1996 to 70 million in 1998. And more than ever before, these

users are comfortable making purchases online. In general, the

length and frequency of people's experience with the Web has grown.

And the length of experience and frequency of use with the Web

are the best predictors of online buying, according to the 1998

PhoCusWright Travel eCommerce Survey. Among so-called "wired" travelers,

only 23% of those who use the Web less than weekly make online

purchases, while 56% of those who use the Web daily make online

purchases. The statistics suggest that as the number of regular

Internet users grows, so will the volume of Web bookings.

Knowing The Customer

Keeping this volume profitable requires fine-tuning

Web sites for the type of traveler the Web attracts. In many cases,

this means catering to leisure travelers who, according to PhoCusWright,

book more than 70% of online travel reservations. While the GDSs

have traditionally catered to travel agents, who in turn served

mostly business travelers, Greg Jones, president of WorldRes, sees

the Internet as a GDS of the future that addresses the unique behaviors

of leisure travelers. "Leisure travel is destination- and activity-based," Jones

says. So WorldRes markets its hotel clients over the

Internet on travel Web sites that suggest accommodations based

on location and activity type. WorldRes also develops reservation

solutions including Web sites for state travel bureaus and activity-based

Web groups such as ski.com. Shifting the promotion of hotels over

the Internet to a destination- and activity-based approach has

helped WorldRes achieve 20% to 40% bookings increases each month

over the past year, Jones says.

Making it easier for potential customers to

use the Web to do destination-oriented travel research has helped

drive the profitability of Starwood's site, says Brian Pratt, vice

president of interactive marketing. "Customers

originally wanted information about the hotels, but now there's the

desire to physically see the destination." The Starwood site

enables customers to experience destinations by providing

pictures and virtual tours of properties. And to better address destination-driven

travelers, Starwood redesigned its homepage, which now

opens on a world map linking users to accommodations at their destination

of choice. But, in keeping with standard branding strategies, the

homepage also provides conspicuous buttons for each of its brands

along the bottom of the screen--key to retaining customers who are

active participants in brand loyalty programs.

Beverly Hills-based Hilton Hotels Corporation's Web site also appeals

to participants in its guest reward program, allowing customers to

enroll in and to modify accounts online. Hilton's decision to offer

such online amenities stems from an enriched understanding of the

Internet customer base. Hilton has employed White Plains, New York-based

IBM Global Service's SurfAid software, a Web site usage analysis

tool, to track visits to the Hilton site and unveil more about consumer

behavior.

"We were surprised at the length of user visits," Bruce

Rosenberg, vice president of global distribution says, noting that

browsers spend an average of more than five minutes per site visit. "And

the number of people going into the reservations model and the rates

model was surprising." That number doubled over the last year--bulked

up by an ever-increasing return user base.

Rosenberg determined that 30% of the site's

visitors became return visitors, oftentimes coming back to book

after researching a destination further. Many visitors don't book

reservations immediately--in fact, PhoCusWright discovered that

57% of wired travelers look at, but don't book on, travel-related

Web sites, though 70% of those users will, indeed, book travel

later. Rosenberg says this is because Internet clientele are a

unique customer set. "The biggest difference

is that they are information driven." The Internet allows these

customers to acquire the information they require to

make travel decisions in a forum that is comfortable for them and

in a manner that is cost-effective for the hotel.

"They like the control it gives them," Rosenberg says

of users' relationship with the Web site. "And they don't want

to talk to anyone." Rosenberg doesn't mind that the customer

set likes to keep to itself. With its 24-hour-a-day, 7-day-a-week

service, the Web site decreases the burden on the reservation center. "It's

definitely controlling reservation center costs," Rosenberg

says. "We couldn't handle the number of calls they'd get."

Keeping The Business Alive

Even as hoteliers develop more active customer

bases online, they must continue to control the costs of operating

high-volume Web sites. "Bandwidth

increases are a must, streaming video of property and destinations

is a must, being a portal is a must. We need to provide ancillary

services," Starwood's Pratt says. But to do so means the costs

of operating a site double each year, he says.

To keep costs down while keeping up with the

pace of change, Pratt says partnering is important. "It's difficult to get people

who understand travel, as well as the Internet," Pratt says.

So the conceptual aspects of Starwood's site are designed

in-house. But the coding and the hosting operations are aided by

outside partners. The balance keeps the cost of Web bookings equivalent

to the cost of bookings made by other means, such as over the phone

with a reservationist--but the Web costs, Pratt says, are rapidly

decreasing.

A careful balance of in-house and contract

development keeps Marriott's site up and running and securing reservations

at a cost comparable to or less than that of other channels, says

Bill Schallenberg, manager of Internet services. "Anyone who says they do it all themselves

isn't telling the truth," Schallenberg says. "Relying on

a single source is not to your best advantage," he says. Marriott

solicits outside help for about 60% of the site's functionality,

Schallenberg estimates. That assistance comes primarily from programmers.

Work on the site done-in house consists largely of design. "We're

doing more in-house now because of the need for quicker turnaround

and familiarity with the corporate image and the tenor of the company," Schallenberg

says. He estimates that a heavier emphasis on in-house

design has resulted in a 20% reduction in costs.

Web hosting of the site is another matter.

The technological infrastructure is provided entirely by an outside

source, UUNet, Fairfax, Virginia. "We

did not have the skill set in- house, so it made sense to outsource," Schallenberg

says. Additionally, he says, the sheer cost of equipping,

staffing, managing and maintaining a site full-time is manageable

only with the economies of scale produced by a large company that

provides hosting services for multiple sites.

Economy of scale, ultimately, is what drives

the profitability of the Web. As more users get wired, the medium

becomes a more popular reservations tool, and a less expensive

one. The next big step, Hilton's Rosenberg says, is to define a

Web strategy at the hotel level in addition to the corporate level. "It's

just too expensive for them to do the development themselves. That's

what we're working on. How to allow them to promote themselves,

to give them control on the content side, while using the corporate

connection to keep costs down."

Site-building Tips

1. Register two domain names for your site, one with a .com suffix

and one with a country code suffix.

2. If you hire a Web designer, get several estimates.

Price varies tremendously. Be sure you are selecting a Web-hosting

supplier who will be responsive to your needs.

3. Create a plan for your site layout and test it--better

still, ask others to test it to see if it works for users the way

you think it will.

4. English is the international language of the Web.

Post all information in English foremost, and then in other pertinent

languages.

5. Keep the content relevant to the audience and true

to the product. Bear in mind that your Web audience may be different--at

the very least, more tech savvy--than other customer sets. Address

them accordingly, perhaps, for example, by emphasizing your hotel's

high-tech amenities. At the same time, be certain that you are accurately

describing the services you offer and the character of your establishment.

6. To keep things accurate, be sure you update often.

Keep information such as price and event listings current.

7. Internet users appreciate the medium for its ability

to put information at their fingertips quickly. Keep load times low

by minimizing your use of applets and oversized graphics.

8. To increase speed and ease of use, place reservation

buttons on your first page and create quick-access buttons for return

guests.

9. Use the Internet as a networking tool. Work to establish

links with related sites, perhaps local chambers of commerce, theater

companies and restaurants that attract attention from potential tourists.

10. Bear in mind that more than half of all site discoveries

are references from search engines. Register your site with as many

search engines as possible, re-register frequently, and change meta-tags

(search words in the HTML code) to correspond with those that attract

the most hits.

Tech Briefs

Y2K Fortune

The Y2K bug necessitated the replacement of the central reservation

system (CRS) at Nairobi, Kenya-based Block Hotels. But IT manager

Abdul Karim used the onus as an opportunity to add previously impossible

functionality and extra services to the hotel's reservations repertoire.

A list of requirements, derived from the deficiencies of the old

application, guided Karim's CRS selection process. No product met

all of Karim's demands, so the process became a practice of accommodation.

Intellect Data Systems (IDS), Bangalore, India, convinced Karim of

the viability of their Fortune CREScent system by attacking 90% of

Karim's concerns and providing a plan for addressing the remainder

within two months, Karim says.

The prompt Y2K remediation planning allowed Block hotels to switch

from a character-based system on a Unix platform to a full graphical

user interface on Windows NT. The system links room and service (such

as game drives, boat rides and lunches) inventory, allowing packaging

for special promotions via the CRS. Additionally, more than 50 tour

operators were assigned allocations enabling concurrent but independent

booking through the system for 12 properties.

While it is too early to determine actual savings,

advantages of the switch are obvious, Karim says. Communication

costs declined. Hotels and lodges can sell online without reference

to a central reservation office. And fresh forecasts enable indirect

savings. For example, food and beverage departments can order based

on more accurate assessments of occupancy. "Quality decision-making

power is possible at the remotest lodge as all information is available," Karim

says.

Virtually Linked

Radisson Hotels Worldwide, Minneapolis, Minnesota, expects to have

more than 100 VirtuaLINC, Richardson, Texas, videoconferencing systems

installed in properties around the globe by the end of 1999. The

systems are already in place in 46 North American properties.

The VirtuaLINC installations handle multiple uses. Individuals such

as interviewees can connect from a hotel suite or parlor to a corporation's

home office. Meeting planners can arrange conferences for large groups

at the hotel, linking off-site attendees or speakers.

The cost to the hotel varies, based largely on the complexity of

cabling to and throughout the hotel, Tom Griffiths, vice president

of marketing, Radisson, says. The VirtuaLINC equipment itself costs

about US$5000 per unit. Customers using the service are charged rates

starting at US$100 per hour, but prices rise with the number of connection

points.

"It's a slow start-up--we're still getting the word out," Griffiths

says. But he's unfazed. "We believe that we are going to be

able to establish our hotels as satellite offices for

our commercial business travelers."