– This piece focuses on the benefits offered by the opaque hotel booking channel, i.e. ‘secret hotels’, to both consumers and the hotel industry in general.
– According to TravelClick, the opaque channel accounted for 6% of all hotel reservations in 2012 (up 2% from 2010).
– A study by K. Jenrath et al concluded that the multi-tiered pricing structure enabled by ‘Secret Hotels’ helped unlock ‘latent demand’ amongst leisure travellers, and increased profits for the hotel industry as a whole.
– A study by Chen et al concluded that when hotels selloff unsold inventory without hiding their name, significant downward pressure is placed on pricing.
– Download PDF version here.
Introduction and Definitions
‘Secret Hotels’ is an innovative approach to booking hotel rooms that has become increasingly influential in recent years, offering benefits to both hotels and consumers. The strategy, also known as the opaque channel, offers savings to customers who are willing to entertain a measure of anonymity in the booking process – not knowing the name of the hotel they will stay in until the booking is complete. In return they receive discounts that are unavailable elsewhere. Certainly unusual as a sales strategy, secret hotels has begun to find favour among both hoteliers and guests.
According to TravelClick the opaque channel accounted for 6 percent of hotel reservations for major hotel brands in 2012. This has grown from around 2 percent in 2010. One of the leading secret hotel operators, Hotwire, reported earlier in 2013 that hotel room bookings have doubled in the last year and they have added 5,000 hotels to its secret offering. In times of austerity when fighting for a share of a market valued at £52bn in the UK alone by Visit Britain, the potential for bargains is likely to accelerate this trend.
In basic terms secret hotels offer customers discounted room rates in return for not knowing the identity of the hotel. While the price, star rating, location and amenities are generally accessible, customers only find out the name of the hotel once the booking process is complete.
The biggest draw in booking through a secret hotels website is to secure savings on rooms. These can be considerable with rooms from well-known hotels available at discounts of up to 45-50 percent.
At first glance, the concept appears to have a large degree of uncertainty built in. In reality however, many of the unknown elements are removed because the secret hotel websites usually provide details from the outset of the general location as well as quality indicators, such as the hotel’s star rating and TripAdvisor ratings.
A key feature of Secret hotels is that once a booking is confirmed it is considered final and it is not possible to cancel afterwards. Therefore travellers should be happy to commit to the process from the outset. In many cases the secret hotel websites have a price match guarantee, which means they will refund the difference of any cheaper offer that a customer might find for the same hotel. Generally this must be done within 24 or 48 hours of booking the secret hotel.
Both hotels and consumers can benefit from selling via the opaque channel. It allows hotels to clear unsold rooms, thereby generating revenue that would have gone elsewhere. In researching the field, K. Jenrath, S. Netessine and S.K. Veeraraghavanfound found that opaque selling increases profits for hotels without disrupting sales through their regular channels, by attracting customers they otherwise would not have found.
Hotels that use the opaque channel usually set a certain number of rooms aside for sale via this method. The number will be determined by factors such as whether the hotel attracts a business or tourist client base. The former tend to be quiet at weekends and so would offer more rooms for this period. Conversely, tourist oriented establishments will be eager to fill rooms that are empty mid-week.
In addition, it can often be in a hotel’s interest to offer discounted rates. This is because the vast majority of their costs are incurred before a guest has stepped foot inside the building. Hotels have to pay upfront for rates, commercial mortgages, refurbishment, staffing etc., regardless of whether occupancy is at 50 or 100 percent. Extra guests do not significantly increase costs, whereas every room that is left unfilled represents a lost revenue opportunity. Therefore, from the hotel’s perspective they are not losing money by offering discounts on empty rooms, they are gaining revenue from selling rooms that would otherwise have gone unused.
While hotels sometimes sell discounted rooms through their own or travel agent sites and specify the name of the hotel, this can work to their disadvantage. In a research paper on the opaque distribution channels, Chen, Gal-Or and Roma have pointed out that this approach may exert downward pressure on prices as leisure travellers wait until the last moment before booking. By selling rooms through the opaque channel hotels can avoid selling too many rooms at these discounted prices.
Furthermore, the research indicates that where opaque selling is utilised by hotels, that more leisure guests book rooms earlier, which means that overall revenue increases. As a result selling through the opaque channel can be more profitable for hotels as opposed to offering discounted sales through other channels.
Chen et al also found that when the hotel room has a relatively high value it is more advantageous for a hotel to sell through the opaque channel. This was particularly true in cases where there is a high degree of brand loyalty, such as for boutique or prestigious hotels. Research by Fay referred to by Ogonowska has also supported these findings.
Secret hotels can also be beneficial from a consumer’s perspective, due to the potential savings of up to 50 percent on room rates. The greatest savings tend to be achieved for last minute bookings. At that point hotels are highly motivated to secure 100 percent occupancy and considerable savings are possible. In a test search for a hotel room in New York giving just a few days notice I was able to find savings of 40 percent. Pushing the dates back three months in the future brought the savings down to around 20 percent of the regular room rate. Of course the latter still represents a significant discount.
Pros and cons
Clearly the biggest draw of secret hotel websites is the potential savings to be achieved. These vary from site to site but are generally listed at up to 40 – 50 percent. Of course, this is up to so achieving these kinds of savings is at the upper level. I conducted a search for a four star hotel in London in the City of London / Tower Bridge area for six weeks into the future and used three secret hotel websites. The search delivered rates of £190 – £228, which was equivalent to discounts of 17 – 24 percent on the regular rate. While not at the upper limit the savings were quite attractive.
According to hotel industry website Core Focus Hospitality, typically secret hotel guests are driven principally by rate, rather than by amenities, features, or even in many cases, location.
The research by Chen et al mentioned earlier found that the opaque channel is more profitable for hotels where rooms are high value. This in turn benefits the consumer who may obtain a higher value room via the secret hotel website than might otherwise have been available.
Research in the UK by Mintel, the market research firm, has found that around 14 percent of British holidaymakers would purchase a holiday from an Internet company that they had never heard of if it was cheaper, suggesting that Britons are willing to accept a degree of uncertainty in the booking process.
There should be few surprises in terms of the quality of the hotels, as the venue’s star rating is listed. Additionally, some secret hotel website also include TripAdvisor ratings. In some cases these are aggregated from the reviews of well over a thousand travellers, ensuring a large degree of surety.
To date, opaque booking has been particularly successful for last minute reservations. According to one leading provider of secret hotels, lastminute.com, its Top Secret Hotels service receives 50 percent of sales from customers booking the day before they need them.
However, as the key feature of secret hotels requires an element of chance taking it will not suit every traveller. One of the standard concerns relates to location and whether a person will be located far from where they wish to spend time at a destination. In general the secret hotel websites narrow down the location within manageable areas and this can help to eliminate much of the uncertainty. For example, when searching for hotels in New York it is possible to specify Time Square, Midtown Central, Midtown East etc.
In addition, secret hotel offers are usually for room only and so travellers will need to factor in extra expenses, such as buying breakfast or using any hotel facilities. For cities like New York and Paris it is usually possible to eat reasonably cheaply. London can be more expensive but there are still affordable options. Guides such as Time Out can offer insider tips.
There were one billion tourists in the world in 2012 according to the UN’s World Tourism Organization (UNWTO). This monumental number was responsible for 9 percent of world GDP and one out of every eleven jobs. The industry is certainly growing in importance, including in the UK. In recent years the travel industry has outperformed many other sectors of the economy, growing 12.6 percent between 2007 and 2011, compared to a GDP rise of 8 percent. The travel industry is now worth more than £40bn per annum to the UK.
One of the key drivers in the growth of the tourism industry has been the integration of the Internet into so many facets of our lives. We can now cheaply and easily discover details that inform our holiday decisions, from the facilities that are available at individual hotels, to nearby attractions at our destination, and even which of our friends have visited an area and what they thought of it. For UK users the Internet is particularly important when it comes to holidays. Britons are one of the biggest users worldwide of the web for holiday research and transactions.
Research into the opaque channel is relatively limited but in the U.S. it accounted for approximately 6 percent of hotel reservations for major hotel brands in 2012. In 2011 the figure was 2 percent of all hotel sales (based on around 25,000 hotels), according to figures from STR Global, a leading hotel data consultancy. If the trend continues the channel is likely to become increasingly significant for both hotels and consumers.
It is likely that if customers continue to have positive experiences with the opaque channel their confidence will grow and there will be a greater willingness to turn to it, attracted by the savings on offer. Equally, the uncertainty inherent in the process will lead them to increased loyalty to a small number of trusted providers that can offer access to high value hotels at discounted prices.
Sources & Accreditations
This document was prepared on behalf of www.secrethotels.eu.
Chen, Rachel R.; Gal-Or, Esther; and Roma, Paolo, “Opaque Distribution Channels for Competing Service Providers: Posted Price vs. Name-Your-Own-Price Mechanisms”, University of California at Davis (2010).
Jerath, Kinshuk; Netessine, Serguei; and Veeraraghavan, Senthil K., “Selling to Strategic Customers: Opaque Selling Strategies” (2009). Tepper School of Business.
Liu, Wenyu; “Opaque Selling in the Hospitality Industry: Hotwire’s Hot Rates”, University of Victoria (2012).
Ogonowska, Malgorzata; “Selling Tourism Products through the Opaque Channels”, Université de Nice-Sophia Antipolis, (2012).