Taking stock of your margins when fulfilling travel search requests
As an intermediary selling travel products obtained from suppliers, margin management can be summed up as understanding where your money is being made or lost. This might sound straightforward, but even larger firms have trouble optimising the difference between a good deal and a great deal. Or put simply that the opportunity to sell rooms or flights has been achieved at the optimum margin.
With so many distribution channels to choose from, there is a likelihood that a number of intermediaries are selling the same inventory. In other words the same hotel room in the same hotel and location is being offered for sale by multiple outlets. It then becomes a crucial matter of speed and price to make sure that the available inventory from these channels gets included in the options made available to the buyer at the point of purchase. However, price also brings margin considerations into play, especially when a wholesaler holds or accesses inventory from multiple sources. Not all margin agreements are equal. More on margin management in a moment.
Analytics and in particular intelligence from XML shopping streams can help wholesalers manage their inventory levels and fine tune their system business logic to factor in margin implications when responding to searches with their offers. First a word on the infrastructure that supports the request and reply message flow.
XML APIs – The common language
As a consumer, when buying a hotel room, flight or holiday we are used to shopping around online. In the B2B world it’s the same and more intense. In this fragmented marketplace the travel agent or tour operator just wants the best price for the room, while the wholesaler wants to be the one offering the best price to secure the deal.
APIs exchanging XML formatted data is what the industry has adopted as the fast and standardised way to exchange information among the different players, even when the systems and databases they use are different. XML acts as a translator, while APIs are the communication pipes that connect travel product suppliers and travel product buyers, either directly or through gateways. These are the vital infrastructure components of this online market place, where searches for accommodation are despatched to several suppliers who have the opportunity to respond with availability and price offers. With many players in the frame it becomes a race against time to return all necessary information accurately and competitively in order to get the offer ranked in the results page. Robust and responsive systems are needed capable of sifting through all the available inventory options to return results at the breakneck speed needed. If a supplier’s systems fail to keep pace with the action for whatever reason, then the opportunity is missed.
Opportunity management through margin management
Price and speed are not the only criteria for success, if you equate success with being profitable. This is where margin management comes. Margin management can be summed up as understanding where the money is being made or lost. This might sound straightforward, but sometimes even larger firms have trouble understanding well the difference between a good deal and a great deal, where the opportunity to sell rooms has been achieved at the optimum margin.
Wholesalers respond to accommodation search requests either with inventory they have contracted from hotels directly, or with inventory sourced from other consolidators or aggregators. They have a vested interest in responding to search requests with inventory they hold or inventory they can acquire and still sell with a profitable mark-up. To be sure, managing large inventory databases and squeezing the most profit out of them can become a high-wire balancing act of supply and demand. The wholesaler wants to build an attractive selection of room types to satisfy a cross section of categories and travel segments, but not be caught with too much or too little. This is where a solid analytics capability can make all the difference.
Analytics and in particular intelligence from XML shopping streams can also help wholesalers manage their inventory levels and fine tune their system business logic to factor in margin implications when responding to searches with their offers. If a wholesaler has inventory from a variety of sources, it makes sense to push the higher margin products first, or those sitting in the direct inventory bucket. But it would also make sense to push a lower margin product than no product at all, if the direct inventory bucket is empty for the period being searched.
The world is also getting more dynamic and systems are reflecting this. Hotel prices on a Friday may be cheaper or more expensive depending on the segment, location, season, etc. Offers may be thrown in making some nights for longer stays cheaper than others. The first room allocations from a hotel may be sold at a higher price than the middle set. The final remaining rooms from an allocation may be sold at a lower or higher price depending on how quickly they are being sold. The nuances and variations are numerous and all of them can have price and therefore margin implications.
Margin and mark-up are used to calculate how much an intermediary collects as their fee for selling a room night. These are fundamentally different but are often confused. Below are three examples of how margins and mark-ups are calculated. The examples do not reflect actual charges or percentages and have been applied to keep the calculations simple.
Scenario 1 (a hoteliers perspective)
- The wholesaler’ mark-up is equal to 1/3 (33.33%) of the amount the hotelier takes
$50 in contrast to $75.
- The wholesaler’s take will always be equal to 33.33% of the amount the hotel takes, so as the room price may change upwards or downwards the mark-up of that price remains the same.
- The wholesaler’s share of the transaction is equal to 1/4 of the total amount collected.
$50 out of the total $200 charged, and the hotel gets the remaining 3/4 or $150.
- This means the margin is 25% of the hoteliers selling price on this wholesaler’s website.
- So in this example, – a 33.33% mark-up on the total price charged for the room equals a 25.00% margin that the hotel pays to the wholesaler for selling that room.
Scenario 2 (a wholesaler’s perspective)
Scenario 3 (an OTA’s perspective)
Another way is looking at the deal through the extra layer of an OTA
These are examples designed to give a simple illustration of the impact margins can have on prices generated for a single room. Inventory sourced from different providers can be sold at different prices and with different profit margins. Repackaging is an important part of the intermediary value. Wholesalers in the travel trade deal with thousands of room transactions every day and every week, so margin impact quickly mounts up. Total transaction value also comes in different sized packages.
Wholesaler success continues to depend on getting the right accommodation at the best margin prices and securing room fulfilments at the best purchase prices. This means flexible handling and packaging of multiple components from many inventory sources. These components have to be packaged and priced in real-time, and delivered to the buyer with optimised speed, and accurate pricing and margin management. It’s not an industry that can thrive without precision tools such as business analytics extracted from the mountains of requests and replies that are flushed around the system.
Contact us if you would like to find out more about how the Trio analytics platform can help travel intermediaries optimise their operations and manage their margins with precision.