What's Happening?
The hotel industry is grappling with a long-standing issue known as the 'demand origin problem,' which has been misdiagnosed for two decades. This problem arises from the reliance on third-party platforms, such as Online Travel Agencies (OTAs), for bookings.
These platforms charge commissions and control the initial introduction of guests to hotels, creating a gap between who controls the introduction and who controls the guest experience. The industry has traditionally viewed this as a distribution problem, focusing on channel rebalancing to increase direct bookings and reduce commission expenses. However, this approach does not address the underlying structural issue of demand origin, where the intelligence and pricing leverage are accumulated by the platforms rather than the hotels.
Why It's Important?
The demand origin problem has significant implications for the hotel industry's profitability and strategic positioning. By relying on OTAs, hotels inadvertently fund the platforms' growing intelligence about their demand, which can lead to stronger pricing leverage and control over market visibility. This asymmetry in information and control can weaken a hotel's competitive position, as they remain downstream in the booking process. Addressing this issue is crucial for hotels to regain control over their guest relationships and improve their financial performance. The industry's focus on channel rebalancing, while beneficial in reducing costs, does not solve the fundamental problem of who governs demand origin.
What's Next?
To effectively address the demand origin problem, hotels need to invest in upstream demand infrastructure that allows them to reach qualified travelers before intermediary platforms frame the initial consideration set. This involves building direct relationships with potential guests and ensuring that the intelligence from these interactions accrues to the hotel. By doing so, hotels can change their structural position and enhance the effectiveness of downstream marketing tools such as CRM systems, loyalty programs, and direct booking strategies. Ownership groups and asset managers should evaluate their marketing investments to ensure they contribute to changing where demand originates, rather than merely optimizing existing arrangements.
Beyond the Headlines
The demand origin problem highlights a broader issue of information asymmetry in the hospitality industry, similar to the concept of information asymmetry in other markets. This condition can lead to distortions in pricing and market efficiency, as platforms accumulate more relevant information than the hotels themselves. The emergence of AI-mediated travel planning further complicates this issue by adding an upstream layer to the demand origin problem. Hotels must adapt to these changes by developing strategies that allow them to be present in AI-formed consideration sets, ensuring they are not excluded from early decision-making processes.
