NB: I’ve received a couple of comments regards the below and so I feel I need to clarify. I am only referring to those businesses who sell holidays (flight + hotel). I am not talking about those businesses who focus on one product or who are search engines. For example, Booking.com wouldn’t be affected by the forces I talk about because they’re not focusing on beach holidays, furthermore, they’re multinational. Skyscanner are also not affect, Syscanner is a search engine, an advertising businesses. Hope this clears things up a little.
Shake Your Asset
Recent events and conversations have reminded me how quickly the landscape of the travel industry can move. It got me thinking about the future, the next couple of years to be precise about which I am in a permanent state of worry given I am trying to start a business.
Anyway, I have a theory that those with assets will gain market share. Here’s why.
Over the past decade or so I think we’ve seen a sort of golden age of on line advertising. Many travel businesses thrived using paid search marketing as an efficient channel of attracting customers. So long as conversions are high enough that the spend doesn’t eat into your commission too much, put your feet on the desk, sunglasses on (indoors obviously) and let the good times roll.
Yet in recent times these very enjoyable conditions have materially changed. We’ve seen a shift in consumer behavior as smart phones and tablets became affordable to the mass market. In some cases the prices of advertising are rising. On line advertising is getting a little less efficient. Feet on the floor. Sunglasses most definitely off.
The rise of mobile and the infrastructure progression to 4G means more people can search more often. That means they can click on ads more often but doesn’t necessarily mean they buy more often. For many businesses this is a worrying trend. More clicks mean higher costs and if sales aren’t rising at the same rate the result is lower conversion.
Putting it another way, the cost of acquisition may be going up which means profits are going down all things being equal. Everyone knows ‘profits going down’ is not a good thing. How to stop this ?
Ideally, one might like to have a strong brand: customers wouldn’t think of going anywhere else and come direct to your business whilst missing out all on line advertising. The problem is, one can’t build a brand overnight. Building a brand isn’t easy, if it was everyone would do it. Building a brand is hard, it is I think, like building a relationship, it takes time and trust will eventually be born so long as there is always honesty and integrity. Is there another way to attract customers quickly and directly?
Yes of course, but it helps to have a good asset.
Lets say I own a book publishing business. I also have a shop and a website where I sell my books. Third parties also sell my books for a commission. I let them sell at the same price as me. However, some use their commission to discount.
This means they undercut my direct selling price which makes me uncompetitive, the little rascals! Given I want customers direct I have a number of choices now:
- Increase the price at which the third parties sell my books, making my direct channels the lowest price on the market
- Reduce availability to my third parties so they just don’t have the stock
- Charge third parties to sell my stock which makes up for any deficit in yield I might otherwise have to absorb
The above strategies are not without danger, I will damage my relationship with some distributors, suppose I need them in future?
Using the above, change book publisher to airline. The airline industry is narrow, there are not many players in the short haul European market (unlike the hotel industry which is fragmented and the reason it is so good!). If I own an airline I own the asset and I can do what I like with prices and distribution. If I own hotels the same principals apply. This is a good place to be as I can ensure the direct channel is the best for the customer. Asset owners, feet on desks again.
Now, lets suppose I am a reseller or agent of the asset owners. I sell their stock for a commission which I may use to discount. However, I am in some danger if either the prices I am able to sell at rise or availability is cut vs. the asset owners direct channel, I won’t be able to compete on price.
If we assume marketing costs are rising then it makes sense for asset owners to want more direct sales as they can produce a better yield. Therefore asset owners may begin to increase the pressure on the third party distribution channels they use, making them less competitive and the direct channel more competitive.
It then follows that those without assets may find price and / or availability moving and not in their favour.
Asset light businesses need to find ways to compete through differentiation. This may be building efficiencies in marketing and cutting the cost of acquisition thus being able to either discount prices or produce better yield.
There are other options like getting an asset or two, building on CRM or focusing customer service but lets wait to see what happens, it makes for fascinating viewing. Interestingly, if an asset light business has built a strong brand they’ll be less affected because customers have an emotional attachment to the company.
This allows some leeway with price as the customer wants to purchase from the company, they are loyal and enjoy transacting with the company.
Once again, I think developing a brand is so vitally important as it is adds a defence in changing conditions. Of course, it’s not unlikely I might be wrong, this is all theoretical. One certainty is that winter is coming. I mean change, change is coming.