The Owned Inventory Merchant Model is an inventory model and a hotel contracting strategy alternative for travel startups and travel companies that sell hotel rooms as any part of their travel product. I’ve been consulting with travel startups for the last three years and I’ve been amazed by the myth surrounding the idea of owning your own inventory. When I talk to startups about the idea they just cringe and get all tense. I get this deer in the headlights look, like why in the heck would I want to do that when I can just get the inventory via an XML feed from a 3rd party.
Today’s travel startups want to aggregate inventory or in its simplest form have the ability to sell inventory without ever taking ownership or rights to control the inventory. I’ve learned that most travel technology startups just don’t understand that there are other ways of acquiring inventory other than a 3rd party XML feed.
Technology has made it easy to feed inventory into web based systems through GDS, wholesalers, switches, marketplaces and other intermediaries that just move inventory and prices from one computer to the other. Back in the day before OTAs and online travel, tour operators worked directly with hotels to acquire inventory to package in their tours and vacation packages.
Both Tour Operators and OTA’s generally look to write what they call “Free-Sell” FIT wholesale net rate contract agreements. FIT stands for an individual traveler booking (not group). Free sell means that the tour operator has the “rights” to sell all the inventory and prices in the contract agreement without having to pay any money upfront and can sell the inventory freely without having to check on availability. The Tour Operator gets the rates from the hotel directly in either a static rate sheet (in an excel document) or they get the rates dynamically, sent via an XML feed or sent through a switch like Pegasus Solutions or EZYield. The contract gives the tour operator the right to sell all the room types or a select few of room types that the hotel and tour operator negotiate out. The traditional discount or % off the hotels BAR (Best Available Rate) is 20% off.
In a pure “Wholesale net rate agreement” the tour operator or OTA can not only sell direct to consumer but can package the lower rate into a tour or vacation package and distribute the product to travel agencies to resell.
The Owned Inventory Merchant Model will get you lower rates than a traditional FIT wholesale net rate. Generally lower than the OTAs and tour operators. You get better rates because you are taking ownership and or control of the inventory by making a financial commitment upfront to the hotel. The key to the entire Owned Inventory Merchant Model is your financial commitment upfront. In the Owned Inventory Merchant Model you are negotiating one-on-one with either the Director of Sales or the Revenue Manager of the hotel. If your pre-buying a substantial amount of inventory then there may be an entire team involved from the hotel in your negotiations.
Why in the world would your travel startup or travel company want to own the inventory?
There are many reasons but I’ll cover a few here below.
- Higher margins = Increased profitability. When you own the inventory or control the inventory you get the best rates. You enter a new world that hardly anyone plays in. Even the big boys like Expedia, Orbitz, Hotels.com, Booking.com don’t utilize the Owned Inventory Merchant Model . Most of the big brands don’t own any inventory. They do all run on some form of free-sell contracting program where they have the rights to sell the rooms at a negotiated rate. They have either a net rate or they earn a commission % on the sale. Some of the big OTA’s may have allocations of rooms blocked for them but hardly any are paying upfront.
- No More Inventory Dilemmas. When you own or control the inventory you don’t have to worry about not having any inventory. You don’t have to worry about the price changing as well. One of the most asked questions travel entrepreneurs have about the travel industry is, “where and how do I access inventory?” You can access inventory direct if your smart and apply this model to your core travel product that you sell.
- Strong Supplier Relationships. The key to any successful travel product is strong supplier relationships. You can’t build a more stronger relationship with a hotel supplier than the Owned Inventory Merchant Model. If you want to build long-term value for your company you need strong relationships with suppliers. You can’t build lasting relationships if you feed inventory from 3rd parties.
How To Implement the Owned Inventory Merchant Model.
Here is a simple, low-risk technique that you can implement today and get the Owned Inventory Merchant Model working for you right now whether you are Expedia or a new travel startup.
Step #1: Determine the top 5 most booked hotels that your customers are booking by analyzing your sales. If you are a travel startup pick 5 hotels you believe will be your top sellers.
Step #2: Call the Director of Sales or Revenue Manager of all 5 hotels and tell them that you want to discuss the opportunity to build a closer relationship with the hotel by taking ownership in some of their hotel inventory. This will open the door for you immediately because all your competitors and all the rest of the travel startups will be calling asking for the same thing the “free-sell” contract agreement. You’ve now separated yourself from the heard.
Step #3: Determine the average monthly or quarterly gross revenue for each of the top 5 selling hotels (this may be from your aggregated 3rd party hotel inventory). Let’s say one of your top 5 hotels does $50,000 a month and has been selling $50,000 on average for the past 12 months using 3rd party inventory.
Step#4: Offer the hotel $5,000 a month pre-payment (NON-refundable) a deposit payment guaranteed every 1st of the month in exchange for a lower rate below the standard 20% off or whatever commission your currently getting from your 3rd party hotel inventory partners. You can negotiate better room types, payment terms and cancellation terms as well. You then need to integrate your own rates and inventory into your web based systems and databases because you are now dealing direct with the hotel for all bookings.
If your a new travel startup then you most likely don’t have substantial revenue. You can still implement the Owned Inventory Merchant Model but do it on a smaller scale. Say your just launching your travel startup. Approach 1 hotel with the plan above and instead of saying you’ll pay $5,000 or 10% of the monthly revenue, ask for a deal on inventory if you agree to pay $1,000 a month upfront. You’ll be surprised what hotels will do for you when you pitch the Owned Inventory Merchant Model. Hotels are looking for long-term sustainable partners and when you change the conversation and don’t act like everyone else you’ll be surprised at what you can get and do.
I have a professional hotel contracting training product that helps travel companies contract with hotel inventory directly and acquire killer room rates.