Merchant and Hotel Chain Part Ways Over Disagreement on Commission

As the debate over the place of the Merchant Model in the hotel industry continues, two established players in the industry have parted ways after failing to reach an agreement on commission levels.One of the most hotly debated issues in hotel marketing is finally being put to the test. The question over whether hotels need high margin agents or ‘merchants’ selling rooms on their behalf has been a source of tension and division in the hotel industry for almost five years. Finally, two established companies, Skoosh and Danubius Hotel Gellért, have agreed to play out their strategies next year to conclude the argument once and for all.

After weeks of negotiation, the specialist U.K. based hotel review company Skoosh and the landmark property Danubius Hotel Gellért in Budapest have agreed not to sign a contract for 2006. They’re now both eagerly watching to see who predicted the market correctly.

The ‘Merchant Model’ has long been a cornerstone in the sales strategy for individual hotels and chains alike. Positioning themselves between traditional wholesalers and commissionable retailers, the Merchants typically command a margin of around twenty five percent. Merchant distribution is split between direct sales through their own websites and affiliate agreements with other sites and partners in the industry.

During the early days of internet sales the boundaries between the different types of distributors were blurred, with some operators straddling all areas. Some canny wholesalers started to tack retail websites onto their existing businesses. Selling directly to the public, but still buying at wholesale prices, they made phenomenal profits, often around the fifty percent mark. Hoteliers felt that they had been duped and, in many cases, they had. When the hoteliers cottoned on there grew a general antipathy towards any distributors who were perceived to be making excessive profits. Unable to distinguish between the market segments many hotels and hotel chains exercised a blanket policy to exclude wholesalers and Merchants from their distribution plans.

But there was another issue pulling hoteliers away from Merchants and that was the growing evidence that they could market their hotels effectively themselves. Some major corporations, including Hilton and Starwood, dropped all their wholesale and merchant partners to concentrate on selling directly through their corporate websites and through commissionable online agents who typically earn around 10% of the gross sales price for a hotel room. Their explanation was simple - they believed that their brands were strong enough and that customers could and would book with them through their corporate websites without the need to pay the Merchants their cut.

ADVERTISEMENT

The policy to cut out all 3rd party internet sales caused huge tension in the market. Dorian Harris (pictured), Director of Sales for the Merchant operator Skoosh, argues that it was an unnecessarily radical move.

“Hotels have always needed different distribution channels and the arrival of the internet doesn’t negate that need,” he comments. “I don’t think the hoteliers realized what they were getting for their twenty five percent. The marketing and advertising budgets of Merchants are huge and we’ve built strong brands ourselves. Hilton may think that customers want a Hilton or nothing at all but frankly that’s naïve. We have a lot of loyal customers at Skoosh and if Hilton hotels don’t appear on our sites our customers won’t book them.”

Not all hoteliers have risked excluding Merchants altogether. Some are now trying to encourage merchants to drop their margins from 25% to 10% to match those offered to the major airline systems or GDS’s. Zoltán Bogár, director of sales, for Danubius Hotel Gellért in Budapest, is trying to convince long term merchant partners to do just that. “Right now we are comfortable with sales from our own site, from local specialists and direct bookings from the public,” Bogár explains, “but we accept we may need to work again with the merchant model in the future.”

The strategy pursued by the Danubius Hotel Gellért is not the same being advocated for the rest of the Danubius chain which will retain its cooperation with the merchants on the same basis as it has until now. Bogár comments, “There are many hotels within Danubius Hotels Group where the merchant model is very useful and has a positive effect even on average rates.”

But Harris believes the Danubius Hotel Gellért will be back online with merchants within a year. “Discussions have been very amicable between Skoosh and the Gellért and it just comes down to who judged the market correctly. Naturally, I think it’s us because the internet is our business and we’re in a far better position to predict the future. Even though the internet has allowed hotels to operate on a more level playing field in terms of getting their site found, an individual hotel will never be able to market itself without a variety of distribution channels and that includes the Merchants. The merchant model is far from dead.”

——-