chapter 7 distribution channels and e-commerce

C H A P T E R 7

Distribution channelsand e-commerce

Peter OConnor

Distribution channels and e-commerce

Introduction

Information technology can fulll various roles in tourism, acting asa creator, protector, enhancer, focal point and/or destroyer of thetourism experience (Stipanuk, 1993, p. 267). However, many peoplebelieve that its greatest impact has been the change it has caused in howtourism products and services are marketed and sold. Developments intechnology have driven a revolution in tourism distribution channels,totally changing relationships between suppliers and intermediaries,and even the very structure of the distribution network itself. Suppliers,intermediaries, and consumers have all embraced the electronic world,with the result that tourism, in common with many other aspects ofsociety, increasingly operates in a digital world (Buhalis, 1998).A variety of different electronic systems have been developed to facil-

itate tourism distribution and these have dramatically affected the wayin which tourism products are marketed, sold, and delivered (Connelland Reynolds, 1999). Before examining these effects, this chapter out-lines how electronic distribution has developed within tourism toexplain where we nd ourselves today. The evolutionary path frommanual systems to the closed Global Distribution Systems (GDS)-basedsystems to the open distribution network enabled by the Internet isexplored. Current challenges, such as managing multiple simultaneousdistribution channels, working with online intermediaries, and react-ing to rapidly changing technology are also examined to help readersunderstand this highly complex environment. The absence of qualityacademic research on tourism distribution is highlighted, and sugges-tions are made as to why and how this deciency should be addressed.

The importance of information

Information has been described as the lifeblood of the tourism industry,as, without it, the potential customers incentive and ability to travelis severely limited (Wagner, 1991). In few other activities are the gen-eration, collection, processing, communication, and use of informationas important for day-to-day operations as in the tourism sector (Poon,1993). Potential travelers need appropriate information before depart-ing on a trip to help with planning and help them choose betweendifferent options, and also need access to accurate and detailed infor-mation during their visit, as the trend toward more independent travelincreases (Preston and Trunkeld, 2006).Certain characteristics of tourism heighten this dependence on infor-

mation. Foremost among these is the intangibility of the tourismproduct; unlike manufactured goods, a travel experience cannot beinspected prior to purchase and therefore consumers are almost com-pletely dependent on descriptions or representations when makinga purchase decision (Middleton, 1994). Tourisms diversity is also

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Handbook of Hospitality Marketing Management

important, as in many cases it is this heterogeneity that makes sucha product attractive in the rst place. Tourism products are also xedgeographically, meaning that the customer cannot pre-test the productand must travel in effect, consume the product in order to expe-rience what they are buying (Lewis et al., 1995). These characteristicscombine to make consumers highly dependent upon accurate infor-mation to gain an indirect sense of a tourism products qualities andto help differentiate between competing products (Go and Pine, 1995).In addition, tourism products are rarely bought in isolation, and theendless combinations and permutations of alternative travel routes,transportation modes, time and lodging accommodation make traveldecisions difcult even for the initiated, further increasing the need forappropriate information to aid in the decision-making process (Kaven,1994, p.116).Recent changes in social life heightened the need for information

(Vaughan et al., 1999). In todays world, time has become a scarcecommodity and thus leisure travel represents an important emotionalinvestment that cannot be easily replaced if something goes wrong.As a result, annual holidays or even weekend breaks have becomeincreasingly associated with risk. Planning the simplest trip meanschoosing among a bewildering array of options and running a riskof making an inappropriate choice. As Buhalis (1997) points out thegreater the degree of perceived risk in a pre-purchase context, the greaterthe consumer propensity to seek information about the product.. Therefore,to minimize such risk, consumers seek out appropriate informationto minimize the gap between their expectations and their subsequentexperience.Consumers have also become more knowledgeable and demanding.

Having grown up comfortably with foreign travel through packageholidays in their formative years, and with exposure to broader hori-zons as a result of television and increased education, many want morethan the sun, sea, and sangria experience, and are increasingly com-fortable organizing it for themselves (Poon, 1994). Travel frequency hasincreased, and instead of (or frequently in addition to) an annual sum-mer vacation, these new leisure travellers take multiple short breaksthroughout the year, often organized independently and at short lead-times (Preston and Trunkeld, 2006). To facilitate such customers, thefast, efcient exchange of information between the supplier and thecustomer (or their agent) is essential.Consumers have traditionally sourced travel information in a vari-

ety of ways. These include either directly from tourism suppliers suchas hotels, airlines and car hire companies, or through intermediariessuch as travel agents and tour operators, who act as information bro-kers making the connection between customer and supplier (Kotleret al., 1996). The latter have traditionally serviced travelers infor-mation needs in one of two ways: either by distributing print-based

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promotional materials or through personal contact (Dube andRenaghan, 2000). Print-based materials, such as brochures, catalogues,and travel trade manuals, suffer from several limitations. Print is astatic, one-dimensional medium that is limited in its capacity to ade-quately communicate the intricacies of the multi-sensory tourism expe-rience (Middleton, 1994). In addition, developing print-based media iscostly and time consuming, with the resulting material becoming out-dated quickly. Space limitations also mean that choices must be madein terms of content, potentially limiting the effectiveness of the sellingmessage.Communicating information personally is more effective, as the

information provided to potential customers can be more closelymatched to their needs. However, this approach is also problematic.Tourism is the ultimate dispersed industry, with potential clients com-ing from everywhere and wanting to go everywhere. Each has verydifferent information needs. With millions of individualistic purchasersand thousands of heterogeneous tourism experiences, the permuta-tions of information expand to a fearsome level far above the levelwith which a typical travel advisor could be expected to be familiar,irrespective of their level of training or expertise. Developments ininformation technology have provided a solution to this knowledgegap (Buhalis, 2000).

The origins of travel e-commerce

Go and Pine (1995, p.307) dene a channel of distribution as one thatprovides sufcient information to the right people at the right time andin the right place to allow a purchase decision to be made, and providesa mechanism where the consumer can purchase the required product.This viewpoint is supported by a variety of authors (e.g. Bitner and

Blooms 1982; Middleton 1994; Buhalis 2000; OConnor and Frew, 2003)who support the argument that the primary purposes of distributionchannels within tourism are to provide information for prospectivepurchasers (be they end consumers or intermediaries) as well as toestablish some mechanism to enable consumers to make, conrm, andpay for reservations.The highly perishable nature of the tourism product makes efcient

and effective distribution particularly important, as any unsold itemcannot be stored and subsequently consumed at a later date. Thus,selling every airline seat, hotel room, cruise-berth, or excursion seatevery night at an optimum price is key to protability. As was dis-cussed above, most tourism suppliers make use of intermediaries suchas travel agents and tour operators, but increased emphasis is beingplaced on direct sales using electronic channels (Tse, 2003). Electronicsystems have many advantages over their traditional, labor-intensivecounterparts. They have few capacity limitations, offer innitely more

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geographical reach, have a low marginal cost, and are more easily ableto incorporate dynamic data such as room inventory/rates (OConnor,1999). Furthermore, while traditional distribution channels have to beused in pairs i.e., combining an advertising medium (e.g., brochuresor guidebooks) with an interactive medium (e.g., a telesales agentor a travel agent) to complete the transaction, electronic systemscan potentially fulll both roles and allow travelers to make reserva-tions for themselves in a fraction of the time, cost, and inconvenienceinvolved in traditional methods (Chung and Law, 2003). These benetsprompted widespread adoption of electronic systems throughout thetourism value chain, and thus have changed the way in which travelgoods and services are sold forever!Electronic distribution in tourism has its origins in the travel-agent-

focused GDSs. Originally conceived by the airlines as internal inventorycontrol systems in the late 1960s, the GDSs subsequently broadenedtheir scope by incorporating travel products, in addition to airlineseats, and by providing direct access to travel agents to their systems(Karcher, 1995). From a travel agent perspective, processing reserva-tions manually is a time-consuming, labour-intensive, and, therefore,costly process. Using a computerized system allow them to see real-time availability and pricing information, and to make instant book-ings, making the entire searching/booking process faster, cheaper, andmore efcient. De-regulation of the airline sector in the United States inthe 1970s accelerated GDS adoption, as a computerized system became,to a large extent, essential to help untangle the vastly increased num-ber of ight and fare options (Hitchins, 1991). At the same time, mostairline reservation systems began cross-selling complementary travelproducts, including hotel accommodation, car hire, cruises, rail ticketsand virtually every other travel product, both to increase service levelsto their travel-agent customers and to help offset the high costs of run-ning the system. This ultimately resulted in the one-stop-travel-shopsthat we know today as Global Distribution Systems or GDSs (Knowlesand Garland, 1994). Subsequent mergers and acquisition have resultedin four main companies (Amadeus, Galileo, WorldSpan, and Sabre)dominating the sector. GDSs today are used by approximately 95% oftravel agencies worldwide, and many of the major travel agency chainswill no longer make a booking for a client unless it can be processedelectronically (HEDNA, 1997). This makes representation on the majorGDSs essential for any tourism company wishing to sell through thetravel-agent community (Bennett, 1993).The GDSs are not without their limitations. First, they service a

small (although inuential) user base in effect, just travel agents.Although consumers can now access the systems over the Internet,their structure and methods of operations still focus primarily on theneeds of travel agents, resulting in complex procedures, cryptic codes,and unintelligible data. A further problem is the lack of exibility in

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terms of the data displayed to the user. While less of a problem in theUnited States where hospitality chains predominate, the majority oftourism products are heterogeneous, not standardized, and relativelycomplex. Indeed, in many cases it is these characteristics that makethem attractive to travelers, in the rst place (Bennett, 1996). However,as the GDSs were designed to distribute the more homogeneous airlineproduct, the structure of their databases cannot cope with the depthand diversity of data needed to effectively market such diverse tourismproducts (Emmer et al., 1993). Given their size, complexity and thefact that they rely on technology that is over 30 years old, changingthese databases to incorporate more complex requirements is a nearlyimpossible task.In response to this problem, many tourism companies have devel-

oped their own reservation systems (known as central reservationsystems (CRS)) with more appropriate database structures, and havesubsequently linked them electronically to the GDSs for access to thetravel agent market (McGufe, 1994). However, developing and main-taining a reservation system is relatively expensive, with both highupfront capital costs and substantial running and transaction costs.As a result, many companies outsource their electronic distributionto third-party providers. For example, in the hotel sector, represen-tation companies have emerged to provide distribution services tosmaller non-chain hotels, providing them with CRS capabilities andconnecting them to the GDS market (Morrison et al., 1999). Destina-tion Management Systems, which concentrate on distributing tourismproducts of particularly smaller and independent tourism suppliersfrom a distinct geographical region, could be regarded as providingsimilar services (Pollock, 1995). However, with the exception in a smallnumber of European countries, the impact of destination managementsystems has been relatively minimal, as most have failed to evolvebeyond the experimental stage into full commercial systems (Frew andOConnor, 1999).

The arrival of the e-commerce

Until the early 1990s, electronic channels of distribution in tourismwere as described above a cozy status quo where the operators ofelectronic systems cooperated, rather than competed, with each other.Relationships were effectively linear and participants had a mutuallybenecial role to play (Anderson Consulting, 1998). From the perspec-tive of the supplier, electronic channels of distribution were effective inthat they generated business, but at the same time were unpopular inthat they were expensive to develop and use. Between 1993 and 1997,commissions and other reservation costs increased by approximately117%, prompting many suppliers to seek alternative ways of distribut-ing their product (Waller, 1999). During this period, one of the most

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revolutionary technological developments of all time the Internet became available for public and commercial use. The widespread con-sumer adoption of the World Wide Web one of the key servicesenabled by the Internet provided an outstanding opportunity forsuppliers to bypass the multiple intermediaries controlling electronicdistribution and reach out to transact business directly with the cus-tomer (Smith and Jenner, 1998).Tourism suppliers were quick to exploit the opportunity presented

by the Web, in part because of the existing high level of comput-erization in airlines and travel agencies. As a commercial mediumthe Web is ideal, facilitating direct access to customers with a highpropensity to travel, as well as potentially offering major savings, asthe cost of processing voice calls and intermediary commission can beeliminated (Jeong and Lambert, 1999). These benets prompted whatBuhalis (2000b) described as a radical change in the operation, distri-bution and structure of the tourism industry. The majority of tourismsuppliers began distributing over the medium (Pusateri and Manno,1998) and it had a profound effect on the way in which travel productswere being marketed, distributed, sold, and delivered (Williams andPalmer, 1999).Perhaps the most signicant effect was the shake up that it prompted

in channel structure. While the previous GDS-based network had beenlinear, closed, and cooperative, Web-based distribution was open, com-petitive, and extremely confusing! In addition to cooperating with eachother as they did in the past, most participants in the travel distribu-tion chain began directly competing with each other by developingconsumer-orientated websites with provision of information and book-ing facilities (Connolly et al., 1998). The situation is well summarizedby Dombey (1998, p. 3) as little short of a technological stampede.Up and down the traditional distribution chain providers are work-ing feverishly to re-engineer their travel systems to bypass both theGDS and the travel agent and create a direct link with the customer.In essence, the level of mutual dependence between participants hasdecreased as each tried to circumnavigate intermediaries lower downon the distribution chain and transact business directly with the cus-tomer (Jarvela and Loikkanen, 1999).Paradoxically, in addition to more competition, there was also

more cooperation a phenomenon which Werthner and Klein (1999)dubbed coopetition! As will be discussed, the more successful onlinetravel sites offer multiple products (air, hotel, car, etc) from multiplevendors, as their key attraction (Preston and Trunkeld, 2006). Tobe successful, they need to be full-service and provide the ability toresearch and purchase an entire trip on-line. In order to do this, theyneed the detailed content and access to reservation facilities that theycan only get by cooperating with other distribution providers (Wadeand Raffour, 2000). Non-exclusive virtual alliances were thus formed,

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with companies joining to develop new synergistic relationships(Dale, 2003). Dale maintains that establishing such virtual clustersleads to synergistic strategic value, with each partner reciprocallyand mutually beneting from the relationship, generating inimitableand non-substitutable network resources. For example, the GDS, inaddition to facilitating travel agent bookings, also began providingthe reservation engine behind many of the online travel agencywebsites in effect, to their own competitors. However, each partnerwith the GDS beneted by leveraging their investment, and theirvirtual partners, by having access to an efcient information andreservation service without having to develop a reservation engine forthemselves. Dale (2003) identies ve different levels of relationships:Channel, which enables one company to access the distributionchannels of another; Collaborative, where competitors cooperate witheach other to achieve goals that would be difcult in isolation;Communicative, where content from infomediaries enriches and addsvalue to partner websites; Complementary, where companies cross-sellproducts normally bought together (e.g., ights and hotel rooms);and Converse, where the partners distribute unrelated products, thusallowing each one to access the distribution channels of the otherin a non-threatening manner. He speculates that competition in thefuture will be dictated more by the network of partners as a wholethan by single intermediaries, and advises rms to participate in suchnetworks unless they want to be left at a competitive disadvantage(Dale, 2003).The arrival of the Web upset the tourism distribution apple cart and

prompted major changes in the way tourism products were being sold.Movement toward web-based distribution has been swift, and travelhas quickly become the most popular product sold online. While actualdollar estimates vary, most analysts agree that spending on travel isabout one third of total online business-to-consumer (B2C) transac-tions. At the time of publication of their US online travel market reportInternet analyst rm PhoCusWright put the size of the US marketat over US$50 billion (PhoCusWright, 2006). While both Europe andAsia lag considerably, their pace of growth is higher and, with big-ger potential markets, are likely to catch up with and even overtakeUS penetration rates in the very near future (Carroll and OConnor,2005). However revenue gures alone do not demonstrate the impor-tance of e-commerce to the tourism sector. Online statistics effec-tively ignore bookings inuenced by, but not completed, in the onlineenvironment. Estimates say that over 40% of travelers who researchtravel online subsequently make their bookings in some other way. Assuch revenues are not included in online travel statistics, publishedgures in reality signicantly understated the importance of the webfor travel.

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Broken promises direct distribution to the customer

As e-commerce developed during the 1990s, many commentatorsfocused on its ability to facilitate direct communication with, and evendirect sales to the customer. Most claimed that travel distribution as weknew it would change forever, and the trade press was packed withpredictions of dis-intermediation and the death of the travel agent.Tourism suppliers were naturally enthusiastic about this potential, asfewer (or ideally no) middlemen meant fewer commissions and notransaction charges (Heung, 2003). Web distribution was also called thegreat leveler, potentially offering smaller and independent suppliersthe opportunity to compete effectively on an equal footing with big-ger companies by selling directly to the customer (Buhalis, 1999). Yetover 10 years later, intermediaries are stronger than ever, and onlinetravel distribution is controlled by a handful of companies all of themintermediaries! Precisely, how did this occur?The adoption of the Web as a mainstream consumer research and

commerce tool certainly prompted major change in the way tourismproducts and services were being sold. In addition to bringing togethera vast network of suppliers and a widely dispersed customer pool intoa centralized electronic market place, in contrast to earlier electronicchannels, the Web allowed for a much richer consumer experience.Developing web technology allowed both suppliers and intermediariesto place a full color, interactive multi-media brochure directly into thehands of potential customers at a relatively low cost (Murphy et al.,1996). Furthermore, it permitted two-way communications, allowingtransactions to be carried out directly and instantly with the customer.And unlike with physical products, fulllment of transaction was nota problem with travel services, particularly as the use of electronicticketing grew.Tourism suppliers were quick to take advantage of the direct dis-

tribution potent of the Web. For example, a 2002 survey published inthe Cornell Quarterly shows how the majority of major hotel chainsprovided both detailed product information and reservation facili-ties directly to consumers on their brand websites. Similar studies ofAragonese hotels (Garcs et al., 2004), Balearic hotels (Vich-i-Martorell,2003), Scottish hotels (Buick, 2003), and Italian hotels (Minghetti, 2003)indicate that usage of the Internet as a distribution channel had alsodiffused into smaller unbranded hotels, typically producing between2 and 5% of revenues for such properties. Unfortunately, brand-directwebsites typically provide limited utility in that shoppers can onlyview and purchase the products of that particular supplier. Even thelargest operators (for example, the airlines) essentially limited them-selves to distributing just their core product. However, research hasshown that consumers do not purchase travel in this way. A travelerbooking an airline ticket also usually needs a hotel (or vice versa), orto nd out something about the destination, and would like to know

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about visas and health requirements (Poon, 1994). To satisfy these com-plex and diverse information needs, consumers increasingly turnedto online travel agencies, whose key differentiating point was broadchoice, not only in terms of offering products from multiple competingbrands, but also by providing a full product range and thus offer-ing a one-stop-travel-shop for the harassed consumer (Preston andTrunkeld, 2006).Offering full-service has become a key aspect of online travel agent

strategy (Preston, 2005). Driven by falling (or even eliminated) airlinecommission, most began placing great emphasis on cross-selling hotel,car hire and destination services products that are attractive becauseof their relatively high prot margins. By encouraging consumers tobuy all their travel needs from the same site, they can both increaseaverage spending and generate higher prots. This strategy is rein-forced by the promotion of dynamic packaging services, which leveragethe online intermediarys product portfolio and technological expertiseto provide customers with the facilities to interactively assemble theirown made-to-measure travel packages (Cai et al., 2004). Brand-directsupplier sites simply cannot compete in terms of breadth of serviceor depth of functionality. The mega agencies have also been investingmillions in ofine and online advertising to build brand awareness andhave, to a large extent, succeeded in convincing the consumer that thebest bargains and best service can be found on their sites. Thus, despiteefforts by tourism suppliers, the combination of features, i.e., brandand pricing, is accelerating a trend toward re-intermediation, with thebig winners in the growth of the sale of travel online being the megaagencies rather than the travel supplier.It is interesting to note that many of the online travel agencies have

their origins outside the travel sector. Thus, while traditional travelagents hesitate to change their archaic methods of operations (Ozturanand Akis-Roney, 2003), online companies are not conceptually lim-ited by pre-existing relationships or traditional notions of how to dobusiness, which has allowed them to challenge the status quo and intro-duce new and innovative business practices. For example, the businessmodel that most online intermediaries use to work with travel suppliershas come to be known as the merchant model (Carroll and Siguaw,2003). In contrast to the traditional commission-based agent relation-ship (where suppliers paid intermediaries a commission each time theysold a product), with the merchant model the intermediary negotiatesxed allocations of inventory at highly discounted net rates and subse-quently sells these products at a mark up, taking as prot the differencebetween the rate negotiated and the price at which they manage tosell the product online (OConnor, 2003). While this might look like agood deal for the supplier (no commissions or other transaction costs,and the ability to set net rates to reect the minimum amount they areprepared to accept for their product), the stronger negotiating power of

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the online merchants means they can demand rates signicantly lowerthan what the supplier might freely wish to give. In addition, by carefulmanagement of their margin, they can then sell onward such rooms athighly competitive prices in many cases cheaper than the rates beingoffered on the suppliers own website! For example, OConnors (2002)study of online hotel chain pricing found that online travel agenciesfrequently offered the cheapest prices for hotel rooms, particularly atthe upper end of the market. Of course suppliers are always free torefuse to participate, but, in classic fashion, nobody wants to be therst to leave the online agencies, as to do so risks losing out on largevolumes of potential (even if low yield) bookings.

Managing multiple channels of distribution

With electronic distribution in tourism growing more complex, a vari-ety of issues associated with the management of the area have devel-oped. As Sigala and Buhalis (2002) note, hoteliers who successfullymanage their electronic distribution add value, develop their brand,and build customer loyalty; those who fail risk losing customers tointermediaries. This section examines four of the most topical issuesin tourism distribution channel management identied from the lit-erature channel choice, pricing over multiple channels, managingdistribution cost, and ownership of the customer.

Channel choice

One effect of the growth in tourism e-commerce is an exponen-tial growth in the number of distribution channels through whichthe tourism product can be sold. As has been discussed, a largevariety of electronic channels have developed to supplement, but neverquite completely replace, traditional ofine intermediaries. GDS-basedchannels continue to thrive and, at the same time, Internet-based chan-nels have also grown into an important source of business for mosttourism suppliers.However, the set of channels used cannot be increased innitum. As

the number of channels increases, so too does the complexity of thesupporting infrastructure and, in turn, the cost of running the overalldistribution system (OConnor and Picolli, 2003). For example, work-ing with multiple distribution channels implies maintaining both priceand inventory in multiple distribution databases. If the supplier workswith online travel agencies, this can be cumbersome, labor-intensive,and therefore costly as most require suppliers to perform these tasksmanually on an extranet-based system. Suppliers have to log into eachsystem in turn, process reservations or cancellations, and manuallychange pricing/availability data to reect updated market conditions.

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Obviously, developing interfaces between the online travel agencysystems and the reservation systems of tourism suppliers would greatlysimplify this process. Such developments would not only allow avail-ability and prices to be updated automatically, but would also allowsuppliers yield management modules to work more effectively, as theywould have more complete and accurate historical data on allocationtake-up and could therefore forecast more accurately. And while the-oretically the technology exists to automate this process (in particularusing the Open Travel Alliances XML standard), online travel agentshave little motivation to facilitate such connectivity, as they effectivelyprot from the market disequilibria created by suppliers who have tomanually perform updates. Faced with a cumbersome, time-consumingtask, many suppliers simply do not make updates as frequently as theyshould, allowing the online agents to make higher margins by exploit-ing the differences between the prices charged and actual demand.Automation of the process would eliminate these differences as pricesand availability would be instantaneously updated whenever marketconditions changed. Thus, despite promises to the contrary, only thelargest tourism companies have been successful at convincing onlinetravel agencies to provide such direct connect facilities.How then can suppliers decide which of the growing range of chan-

nels to include in their portfolio of distribution channels? As OConnorand Frew (2004, p.180) point out, the decision as to which channel touse has become increasingly complex, and hotel managers currentlyhave little guidance to help them determine which best match theirneeds. In their paper, they propose an evaluation methodology forelectronic channels of distribution to help practitioners make this deci-sion. In contrast to contemporary literature, which stresses evaluatingprojects on nancial or marketing criteria, OConnor and Frew sug-gest that technical and operational factors should instead drive theevaluation and decision process. The study highlights the complexnature of such evaluations, as well as demonstrates how the increas-ingly complex environment makes the use of a formal methodologymore important. However, as Enz (2003) points out, in reality mostsuppliers are using multiple simultaneous electronic channels withouta clear understanding of their impact and the effect this has on theiroverall protability, as will be discussed below.

Pricing in an online world

Yield management is a set of techniques frequently used by airlines,hotels, and other service rms with xed capacity to try to balance sup-ply of their perishable product with forecasted demand in such a wayas to maximize revenue in the long term (Kimes and Wagner, 2001).Being already a complex process, yield management has become moredifcult to implement because of the growth in the use and variety of

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electronic distribution channels discussed above. In addition to provid-ing suppliers with more distribution options, each channel has differentrevenue characteristics, costs, and levels of control (Helsel and Cullen,2005), making the manipulation of the channel over which the customermakes a reservation an important issue (OConnor and Frew, 2002).In the past, suppliers achieved this by segmenting customers and

offering different prices/conditions for each segment over differentchannels (Choi and Kimes, 2002). Inefciencies in information distri-bution effectively prevented rates destined for one market segmentfrom being seen or booked by the others (Lehmann, 2003). However,the adoption of the Internet as an information medium has greatlyincreased price and rate transparency (OConnor, 2003). Consumers canquickly and easily search multiple online channels before committingto making a reservation (PriceWaterhouseCoopers, 1999). In addition,a new type of online tool (known as meta-search) has developed thatallows travelers to comparison shop a large number of sites in prac-tically a single click (well known examples include Kayak, Sidestep,TravelAxe and Kelkoo). As a result, it has become increasingly difcultto use differential pricing, either by market segment or by point of sale.In practice, any rate, given to any distributor, can potentially end upon the Web and thus be seen and booked by all customers.Thus managing price has become both more important and, at the

same time, more difcult. One widely adopted strategy is price con-sistency having the same rate for each customer on all distributionchannels and at all points-of-sale (Santoma and OConnor, 2006). Analternative is to offer cheaper prices on direct websites a strategy thatis often used to try to encourage customers to book directly, rather thanthrough intermediaries. In a 2003 study, OConnor analyzed the onlinehotel market to establish which pricing strategy had become the norm.His ndings show that hotel companies typically use multiple simulta-neous distribution channels, but that no one channel was consistentlycheapest. Analyses reveals differences based on market segment, withconsumers more likely to nd cheaper prices on direct channels (chainwebsite and call center) at the lower end of the market, and throughintermediaries, at the upper end. Highlighting how up-market and lux-ury hotels appear to be offering their cheapest prices though channelswith the highest cost of distribution, OConnor concludes that hotels,in general, do a poor job of managing prices over multiple distributionchannels and urges them to develop well-thought-out pricing policiesthat would encourage consumers to book directly through brand web-sites. Anecdotal evidence would seem to suggest that operators havefollowed this advice, as evidenced by the recent growth in the inclu-sion of Best Rate Guarantees on many supplier websites (Chin-Chienand Schwartz, 2006).However a worrying effect of such guarantees is the downward

pressure they appear to place on rates. With everyone promising the

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best rate, suppliers and intermediaries are in effect engaged in aprice war that, while benecial for the consumer, has resulted in lowerand lower margins for suppliers (PriceWaterHouseCoopers, 2005). Thisdownward spiral is being amplied by the online intermediaries, whoemploy market managers to encourage suppliers to further reduce theirnegotiated rate in return for better placement on search results listings.Consumers are also learning that they can often nd better prices bywaiting until the last minute to make their booking (Thompson andFailmezger, 2005). Thus, while the Web promised incremental businessby allowing suppliers to reach customers that they could otherwise nothave attracted, in practice many of the customers that actually bookonline are ones who would have booked through some other channel,in any case. The difference is, however, that the prices that are paidresults in a far lower yield for the hotel than had the booking beenmade in the normal fashion. Some more street-smart customers arebooking far in advance, monitoring online channels for better pricesand wherever possible canceling their original reservation to re-book ata cheaper rate, closer to the arrival date. Failure to include appropriaterestrictions or fences to prevent such practices can potentially have adrastic effect on protability (Enz, 2003).

Managing distribution cost

As can be seen from the above discussion, Internet-based distributionhas created both opportunities and problems for revenue managers(Choi and Kimes, 2002). More channels generally mean increased reach,potentially allowing hotels to sell more rooms. However the cost ofusing such channels can vary greatly. Considering only transactioncosts, direct Internet channels (e.g., the hotels own website) tendto be cheaper than indirect channels (Helsel and Cullen, 2005). Yet,more than half of all online bookings come through intermediaries,whose transaction costs vary from around 10% to substantially higher(PhoCusWright, 2006). Informal discussions with industry practition-ers indicate that most online intermediaries demand (and frequentlyreceive) mark-ups of between 17 and 30%. In addition, other admin-istrative, technical, and organizational costs mean that working withcertain online intermediaries can be between two to three times moreexpensive than using traditional methods.Thus, in order to maximize protability rather than just sales, dis-

tribution managers need to shift their focus from what rate can beachieved through a channel to the incremental cost of using that chan-nel (Choi and Kimes, 2002). However, little empirical research hasfocused on how to manage distribution costs across multiple elec-tronic channels. In a 1999 paper, Noone and Grifn propose combiningActivity Based Costing with yield management principles in what theycall Customer Protability Analysis, while in a 2002 paper Choi and

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Kimes use a simulation to demonstrate the application of yield man-agement techniques to multi-channel problems. No study providespractical advice on how to implement yield management in such situ-ations, or to help yield managers decide what rate to charge on whatchannel.

Ownership of the customer

The growth in the number and diversity of tourism distribution chan-nels has also lead to another problem ownership of the customer.Travelers now have the ability to search for and book travel productsin many different ways. As has been discussed above, online travelagencies are particularly attractive to consumers because of their con-venience, their rich feature set, and their competitive prices (Preston,2005). Consumers searching and booking on such sites practicallyalways nd a product that meets their needs and, in most cases, thesite will propose several alternatives, in direct contrast to supplier sitesthat may not have a suitable product available or may be booked outfor the dates requested. As has also been discussed above, in manycases the prices offered by the online intermediary will frequently beas good as, if not better than, those available on supplier-direct sites.Given such levels of service, where is the customer likely to go thenext time he or she wants to make a travel booking? Few studies pro-vide concrete guidelines about how to develop and maintain effectivelodging websites, making it difcult for suppliers to know how tocompete (Jeong et al., 2003). Chung and Law (2003) do provide someguidelines as to the type of information that should be included tohelp develop better sites. More guidance on best practice is neededas the majority of online agencies have started to put more emphasison building customer loyalty, by developing reward programs thatrecognize frequent and high value customers and use electronic mar-keting techniques to develop a closer relationship with them (Prestonand Trunkeld, 2006).OConnor and Picolli (2003) highlight this threat and stress the need

for suppliers to drive customers to direct websites to help regain own-ership of the shopping experience and gather valuable customer data.They council hoteliers to rethink their approach to distribution and tomove away from a shelf space approach being present on as many chan-nels as possible toward being more selective in terms of the channelswith which they work (Castleberry et al., 1998). OConnor and Frew(2004) similarly stress the need to drive customers to the direct web-sites. They suggest that by using sophisticated customer relationshipmanagement (CRM) techniques based on their personal contact withthe customer, they can build customer loyalty and in this way combatthe growing power of the online intermediaries. Only by developingsuch close relationships with the customer can they reduce the danger

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of substitution, thus helping to ensure long-term protability (Piccoliet al., 2003).Suppliers have begun to give customers increased incentives to book

directly on branded websites, with trends indicating that the promiseof the Web as a facilitator of direct distribution may nally be aboutto happen. Rewards for booking directly include extra frequent-yermiles, tiered benets and special prices. Suppliers are also becomingmore aggressive in their pricing strategies, want everyone to knowthat the best deals are available on their own websites, and thus areunwilling to allow any intermediaries to have a noticeable advantagein pricing. Many are also increasing the range of products sold throughtheir brand-direct sites. As was discussed above, one of the primaryreasons that suppliers have not been successful at driving signicantamount of business to their sites is that consumers often want a one-stop-shop offering both brand choice and the ability to cater for all theirtravel booking requirements something that is clearly not availableon a single companys branded website. This has not stopped somesuppliers from trying; for example, SouthWest.com now offers hoteland car rentals, Hyatt.com provides air and car booking facilities aswell as packaged vacations, and Dollar.com, air and hotel reservationcapabilities (Buhalis and OConnor, 2006).Are suppliers winning the battle? PhoCusWright estimates that

direct to supplier sales comprised 51% of the total online market in2005 a very insignicant increase over prior years (PhoCusWright,2005). Despite considerable effort, the majority has failed to signi-cantly change their distribution mix. While brand-direct websites arein general quite successful at selling to loyalty club members in effectto their existing customers they are less successful at attracting incre-mental business. The online agencies, with their broader choice andproduct categories, offer the opportunity both to attract new businessand also make a valuable contribution in terms of keeping planes andhotels full. An adaptation of the merchant model discussed above mayhelp to preserve this relationship. With this strategy, both parties win;the supplier gets to set the minimum acceptable rate that they are will-ing to accept as the net rate offered and the online agency can achievean acceptable level of protability by adding their own margin beforesale to the customer.

Summary and conclusion

It can be seen that trouble continues to brew in the online travel sector.While suppliers would ideally like consumers to book directly, theyface severe competition from online travel agencies. Both parties areengaged in a battle for the hearts and minds of the traveler a battlethat is being fought in the relatively unexplored terrain of Internetcommerce.

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From the above discussion, it is clear that empirical research in thisarea could best be described as sparse. At a strategic level, little usefulguidance is available to either suppliers or intermediaries as to howbest to attract, convert, and build loyalty in todays elusive travel con-sumer. In common with most of the tourism and hospitality research,the little published research that exists in the eld of electronic distribu-tion in tourism tends to be relatively weak (Lynn, 2002). As OConnorand Murphy (2005) point out, the majority of studies display an over-reliance on the survey method, unrepresentative and convenience sam-pling, shallow analyses, misinterpretations of data, and a tendency todraw conclusions and make broad generalizations without providingadequate evidence. They also point out that there appears to be a lackof meta-knowledge as to what other researchers are doing, with theresult that many studies replicated each other with minor difference infocus or geographical area, and that few articles build on each other toextend the pool of available knowledge in any meaningful way.It is clear that e-commerce and distribution in tourism is a topic

that is important, but not well understood. A very large number ofresearch opportunities are self-evident. What has been the effect, nan-cially and strategically, of the move from a commission model to themerchant model? How should suppliers price their products acrossmultiple simultaneous channels to both drive as much business aspossible directly, but at the same time benet from the reach that inter-mediary channels provide? Research from the consumer perspectiveis particularly needed to help clarify many issues. What motivates aconsumer to use one distribution channel rather than another? Howdo price, convenience, website design, and website content encourageconsumers to change from lookers into bookers? How do consumersreact to seeing different prices on different distribution channels? Doesthe use of restrictions or fences have an effect on their perceptions, oron where they book? How effectively do loyalty or frequent-yer pro-grams attract, retain, and build customer loyalty? Will current devel-opments in user-generated content result in customers displaying lessfaith in brands? These suggestions, albeit in no way exhaustive, illus-trate the rich and interesting range of potential research questions thatcould be addressed.The Chinese have a saying May you live in interesting times

which may be interpreted as either a blessing or a curse. Its meaningis particularly relevant in the eld of electronic distribution in tourismand e-commerce. In this chapter, I have attempted to provide anoverview of the current state of play in this rapidly evolving arena.Intellectually, I nd this segment of the tourism industry to beparticularly fascinating. Technology continues to develop at a rapidpace, and in fact has been identied as one of the top ve most volatilefactors affecting tourism (Olsen, M. 1995). Each change presents newchallenges and opportunities, making the distribution arena both

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difcult to understand and at the same time highly exciting. To besuccessful, tourism suppliers and intermediaries must continuallyassess the likely impact of new developments and examine how tointegrate them into their methods of operation. Doing so presentstremendous opportunities, yet is risky as technology may move oneven before implementation is complete. Yet, not to do so risks beingleft behind in a state of competitive disadvantage. Such choices arefaced by tourism companies every day, and its only by having athorough understanding of the electronic distribution environmentthat they can succeed in the long run.

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Handbook of Hospitality Marketing ManagementCopyright PageContentsPrefaceList of ContributorsPart One Hospitality Marketing ConceptsChapter 1 Marketing hospitality and tourism experiencesChapter 2 Socially responsible hospitality and tourism marketingChapter 3 Hospitality marketing mix and service marketing principles

Part Two Hospitality Marketing Functions and StrategiesChapter 4 Branding, brand equity, and brand extensionsChapter 5 Relationship and loyalty marketingChapter 6 Advertising, public relations and crisis managementChapter 7 Distribution channels and e-commerceChapter 8 Service quality and business performance

Part Three Hospitality Consumer BehaviorChapter 9 Motivations, attitudes, and beliefsChapter 10 Travelers information search behaviorChapter 11 Customer satisfaction, service failure, and service recoveryChapter 12 Experiential consumption: Affect emotions hedonismChapter 13 Psychology of pricing: A review and suggestions

Part Four Destination MarketingChapter 14 Destination branding and marketing: The role of marketing organizationsChapter 15 Pushpull dynamics in travel decisionsChapter 16 Group decision making

Part Five Special TopicsChapter 17 Internal marketingChapter 18 Strategic alliancesChapter 19 Research on the casino industry

IndexHandbook of Hospitality Marketing ManagementCopyright PageContentsPrefaceList of ContributorsPart One Hospitality Marketing ConceptsChapter 1 Marketing hospitality and tourism experiencesChapter 2 Socially responsible hospitality and tourism marketingChapter 3 Hospitality marketing mix and service marketing principles

Part Two Hospitality Marketing Functions and StrategiesChapter 4 Branding, brand equity, and brand extensionsChapter 5 Relationship and loyalty marketingChapter 6 Advertising, public relations and crisis managementChapter 7 Distribution channels and e-commerceChapter 8 Service quality and business performance

Part Three Hospitality Consumer BehaviorChapter 9 Motivations, attitudes, and beliefsChapter 10 Travelers information search behaviorChapter 11 Customer satisfaction, service failure, and service recoveryChapter 12 Experiential consumption: Affect emotions hedonismChapter 13 Psychology of pricing: A review and suggestions

Part Four Destination MarketingChapter 14 Destination branding and marketing: The role of marketing organizationsChapter 15 Pushpull dynamics in travel decisionsChapter 16 Group decision making

Part Five Special TopicsChapter 17 Internal marketingChapter 18 Strategic alliancesChapter 19 Research on the casino industry

Index

chapter 7 distribution channels and e-commerce

Documents

tourism distribution

tourism toexplain

tourism industry

electronic distribution

tourism sector poon

open distribution network

electronic world

travel experience