Flash Sales, Group Buying and the Travel Deal: ATTA Members Chime in on this Controversial Trend

17 August 2012

Flash sales, group buying and deal sites - the travel industry trend that consumers love, industry people love to hate and the media loves to talk about.

As economic woes and technological shifts have pushed consumer buying habits towards more deal-centric and value-driven purchases, many companies are being forced to adjust by taking part - and despite how they feel about the trend, it is not likely to go away soon, even as many economies move towards recovery. Despite some recent backlash on the profitability of companies such as Groupon (whose shares hit an all time low at summer’s outset), Douglas Quinby, Senior Research Director at PhocusWright reported that if Groupon and LivingSocial’s 2011 numbers continue at the same rate annually, they’ll be in the top one percent -  or one of the largest 50 -  of all travel agencies in the United States. These sites offer a set number of package deals during a limited time to consumers for rates advertised as 50 to 75 percent off, although research shows that most prices are closer to one third and one half off.

The Washington Post reports that the impulse purchase behavior that spurs many flash deal purchases has shifted consumers’ buying patterns towards booking more quickly to take advantage of offers - and that these bargain seekers will approach short getaways with a very open mind (read: booking an experience that was completely unplanned), while usually having a general destination in mind for international or longer duration trips. Both the Greater Portland Tourism Alliance in Oregon and the Massachusetts Office of Travel and Tourism told the Post that “consumers are booking regional getaways based on the hotel deals they see. The traveler is less likely to know where he wants to go.”

Both deal sites and social networks are examples of how distribution channels themselves are becoming central to the way travel is packaged and sold - a smaller study on hotel bookings by Hawk Partners asked customers which channels had the most influence on their selections. Promotion and deal-centric sites and social media were the top ranking influencers, with advertising coming in at fourth place. While this might seem to point to price being the most important factor, the study claims that brand still matters:

As review sites, promotion sites and discount travel accommodation sites morph and evolve, their marketers need to delve deeper into consumers’ behavior to understand who to target with specific promotions.

Quinby elaborates that "There has to be the right cocktail of price, proximity and spontaneity to make the deal attractive.” For example, a half day tour and a night at a local inn for a 25 percent discount might get around 1,000 purchases while an African safari (requiring additional airfare and longer vacation time) at a discount of 70 percent off might only get a small handful of takers - which might be equally fine from both operators’ perspectives depending on the price point, and their target audience.

Interviews with select ATTA Member Operators support this concept, revealing that many operators are finding measures of success mainly in discounting specific types of trips via flash and group sales: shorter-term, more locally-based and segmented experiences versus longer, international or high-end packages.

Simon Goodall, Vice President of Groupon Getaways, defended the company against claims that its model harms the travel industry by saying that the site helped fill off-peak vacancies and even elicited purchases from consumers who had no prior intention of traveling:

We’re not looking to be an everyday distribution channel and fill rooms during the busiest days of the year at discounted rates.

Still, the industry widely accepts that such promotions fail to attract customers consistent with the companies’ brands, insufficient revenue per product, a lack of repeat business, and often yield too much of the profits to the partnering deal aggregators, according to EyeforTravel.com.

Travel Weekly reported on a study released in February by the Cornell School of Hotel Administration on hotel operators and daily-deal sites which reveals that accommodation businesses are using the sites equally for marketing as for revenue generation, despite the fact that the customer repeat rate is only 11 percent, or one in nine travelers. The average discount offered on these sites were 45-55 percent but some as steep as 75 percent were recorded. Travel Weekly stated:

In contrast, hotels typically sell rooms to OTAs at about a 25% discount, and they pay about 10% commissions on rooms sold through conventional travel agents. The issue is topical because travel and tourism represent the third-largest category in the flash-sales industry...In a report released last year, PhoCusWright estimated that Groupon, which does not break out revenue by the categories of goods it sells, might have generated as much as $400 million in gross travel sales in 2011. Some of Groupon’s flash-sale offers have generated as many as 4,000 room-night sales for a single hotel, PhoCusWright reported.

Even the providers who are finding value in such promotions and plan to keep using them have qualms about their overall effect on the industry at large, as well as how their own brands might be affected - yet they find enough short-term or specific value to make them worthwhile. The consensus seems to be that careful targeting of specific types of promotions can protect one’s brand while seizing multiple benefits. Here are some that our membership reported:

Filling seats on unbooked or unprofitable trips: An anonymous representative of an outbound, small-ship tour operator, who has worked several times with deal sites such as Jetsetter and Rue La La, reported that they anticipated their company to increase its use of these sites based on success in booking trips that had become a financial risk due to underbooking.

The respondent said that:

We use these opportunities on voyages where we are not expecting to make a profit. We are often trying to recoup as much fixed costs as possible and also earn more toward overhead and hope there is a little extra above that. Each traveler gained, even at a greatly reduced cost, went towards fixed costs and overhead.

However, when queried about whether these sales hurt pricing they answered:
Definitely. Discounting is not the brand image we want to portray. However, because of the financial need of certain trips and pressure from company stakeholders, we decided to test this sales channel. It definitely causes price undercutting in the industry and perpetuates the discounting problem that is affecting booking cycles.

The bottom line value:
The value is getting travelers that fill cabins that would otherwise remain empty. Of course getting these clients to return and tell their friends is also the goal. There is value in getting our name out there, however as I mentioned the brand promise is not there.

Branding to new customers: Christian Wolters, Director of Sales and Marketing at Intrepid Travel, an outbound tour operator specializing in small group adventure travel, reports that Intrepid has tried several flash deal sites in the past, including Groupon:
We wanted to reach out to a new audience, beyond those who are loyal to our brand. Adventure travel is gaining great momentum in a mainstream market and using a group buying site was a great way for us to develop new brand exposure and allow people to sample the product with less financial commitment.

Intrepid is not currently working with any deal sites and looks to be scaling back discounting of all types; Wolters said "We are waiting to see the amount of Groupon vouchers that have been redeemed and then tracking to see if these customers become return customers.” He also added: "They are not sustainable for any company to participate in on a long-term basis so I don’t feel they hurt pricing or cause price undercutting. There is, however, always concern about managing customer expectations by way of pricing and discounts when booking.”

The bottom-line value?

The benefit of the group buying sites is the incredibly large database they have developed. We can offer a very targeted discount and reach out to people who may be a bit wary about trying the product for a first time at full price. It is not profitable in the short run, however we gain value out of the brand exposure associated with reaching the large databases the group buying sites have developed. Hopefully the flash sale customers will return and pay full price if they enjoy the trip but that is yet to be proven as it is too early. Should we see this activity we might be encouraged to participate in additional flash sales.

For selling increased value - not decreased price:  Jorge Pérez of Tierra del Volcán, which supplies both in and outbound product, has experimented with the flash deals both in-house and through external companies. He says his company uses them very specifically in the low season and commented, “If you don't manage these kind of programs well, they do affect [industry]  prices.We have changed the way we do them. Instead of basing them on price, we have based them on added value - a benefit like an upgrade or a free extra attraction.”

The bottom-line value?

These are profitable when you point [customers] in the right direction of value instead of price - in our case, to help to sell more nights. But my recommendation is that you don’t work with companies that ask you to give very low price just to fill up your spaces. If you do, then all your clients will ask you for the same price, and once you reduce your prices it is very difficult to raise them again.

To maintain an efficient edge in a competitive niche: Steve Markle of O.A.R.S. said that the rafting operator has been carefully using flash deals seasonally, several times a year and on day trips only:
In a day trips market, if we can fill one out of every five boats with discounted customers and push discounted clients to off-peak trips (mid-week and Sunday mornings), our fixed costs have already been covered and we gain better cost efficiencies, provide employment for our guides and introduce more people to the joy of whitewater rafting. That being said, I would also add that after 3 years of experimenting with various group purchasing sites, we're anxious to pull the plug and get back to a policy of no discounting. In general, we think it's bad for business and it's unlikely we'll continue working with any group purchasing or flash sale companies in the future.

The bottom-line value?
Our experience with Zozi has been generally positive and in the end they've helped contribute to our profitability on the South Fork of the American River in California. Our experience has been that if you set your limits and manage the amount of inventory you "give away" at discounted rates for a trip like the South Fork, you can make it up in volume. Overall, folks who we acquired through Zozi only represented a small fraction of our business for the year and we managed to not cannibalize our bookings from full-fare pax while acquiring several hundred new clients that we might not have reached otherwise. But don't bank on customers from flash sales becoming loyal repeat clients...they're more likely to write a review about you on Yelp, but we have yet to see them transition to paying full price...

Fill specific trips off-season and appeal to local market: Dan Moore of Evergreen Escapes agrees that in general, the travel industry should stay away from daily deals but argues they can be really useful in certain cases. After working with several companies including Travelzoo and Zozi, he said:
The big thing is programming during the off season so [discounted customers] in no way take full paying seats. We use them when we are typically underutilized, have plenty of guides looking for work, and primarily target them towards locals who are intimidated by winter. They want to experience winter but afraid of avalanches, putting chains on their cars, etc. - these are customers who are not already doing adventure activities so we can appeal to them by providing a skillset or experience they want and see as a tangible, good deal.

Moore explains while flash sales are hurting the industry on a macro level, Evergreen Escapes is only using them with customers outside their normal market who would never pay full price: "We’ll open 50 trips and only open up more once they fill - so we only are running trips at break even or higher. We don’t do the deals for the marketing - the marketing isn’t worth that much.” He adds that this local market often opens the the doors to full price business in Evergreen’s other product lines, such as corporate team building and international trips.

Bottom-line value?

For us the value is cash flow at tight times of year and providing employment for guides in low seasons to reduce turnover. Our advice is to really know your goals. We only choose tours where it is possible to break even despite the discount and where it doesn’t compete with our normal business.

Boost last-minute bookings and online presence: An anonymous employee at a small, outbound, industry-leading niche expedition tour operator reflected on the company’s consistent seasonal use of deal and flash sale sites, both -in-house and through external sites, and said “We continue to use them strategically, but only where they have proven to provide a return on investment. We began [using them] to maximize remaining revenue potential for low season departures and to sell last minute direct bookings.”

They said that while the sales do cause disintermediation, increase competition and in some cases devalue product for full-price buyers, the company continues to use them because they are profitable in off-seasons and had several beneficial side effects in terms of online marketing and branding. They added that these sales tend to “condition customers to wait for last minute deals and trawl offer sites for deals.”

Bottom-line value?

The value we derived from these initiatives has been as follows:
·         Exceeded sales & passenger targets as well as revenue targets
·         Significantly Increased Facebook likes
·         High ranking results indexed in Google related to the promotion
·         Good media pick up in major market publications

Another issue to consider with such promotions is whether or not you can send discounted clients on the same trips with clients paying your full price. One anonymous interviewee said it was a “very contentious issue” that did come up on some of their company’s tours; another reported that while their company’s usual clientele does not discuss cost, they were forced to give an entire tour trip credit when the issue did arise. Some comments on the issue from other members:
  • Wolters from Intrepid Travel: “We allow all of our passengers to travel together regardless of the price they pay or where they booked. Some passengers book their spot on our tours with discounts and we have introduced variable pricing on our site, so passengers on our tours have rarely all paid the same price.”
  • Perez from Tierra del Volcan: “Clients will always talk. That is another reason not to [run flash promotions] based only on prices.”
  • Moore from Evergreen Escapes: “It’s come up but hasn’t really been an issue. We have definitely had ‘We've heard that you're running this deal - how about I just pay you directly.’ We see the attraction but that's what leads to undercutting and it is not fair  to the deal company, so we refuse and ask them to take the deal or book at full price.”
  • The anonymous employee from the cruise operator noted, “There is definitely a difference between the client looking for a deal and those that don’t. We cater to and serve those that don’t, and want to remain that way.”
There is also the issue of what type of clients you’re getting with such deals. Wolters reflected:
We can’t generalize and say that all passengers that book on discount or through group buying sites fit into one category or another – it really is a mix. That being said, the only risk with reaching out to external channels is that customers may not be as familiar with our product and may book mainly based on the discount.

Markle added that sale clients were no different than those coming from their internal marketing lists, but "They’re just able to make a more spontaneous decision to travel. We have, however, noticed they’re far less likely to become a repeat client.”

It’s for this reason that Trish Sare, owner of BikeHike Adventures, refuses to use such deal programs for her company despite the fact that she herself buys them for weekend escapes and outdoor activities:

Everyone likes a deal. But we don't believe that it is the right medium for our type of business. We believe that it truly devalues a product and the types of buyers who frequent the sites are not dedicated clients, but rather those looking for a deal. We feel that it is unfair to those who booked at full price early on, and then the last minute folks get the deals. For us, we need early bookings to get trips off the ground. If people all wait until the last minute, trips don't take off. Everyone wants to fill seats, but again to discount to some, but not all is a slippery slope in our opinion.

ATTA Advisory Board Member Manal Saad of Gateway to Egypt explains why flash sales are not a good fit for their company either:
We have analyzed the advantages and disadvantages of using flash deals and group buying, which made us realize that tourism businesses with limited capacity and variable cost base can not benefit from it. The main issues are:

  • The high percentage of discounts that has to be offered, makes the customer acquisition costs relatively high.
  • The high discount will definitely have a negative effect on our main sales channels partners with the possibility that we will have to undercut them.
  • The highly discounted product can negatively affect the products in its regular markets and consequently establish unconsciously a new market value for the products.

Interestingly, Saad is however considering creating a unique product for the high-end deals market as an alternative to discounting her regular products: “This would allow us to fix the costs and revenue, allowing you to determine the costs based on a specific product rather than damage the main products.”

Nate Appy who represents The Clymb, a members-only outdoor online retailer that runs flash sales on outdoor gear and apparel will soon launch similar deals on adventures. He counsels that choosing the type of site and prospective customers is key in finding value:

When you put a high quality multi-day guided trip next to a heavily discounted beachfront resort package, the value of the guided adventure is completely lost. For the most part, repeat business is what sustains tour companies. So I encourage any tour operators who are considering a flash sale promotion to think about the type of people who traffic the site that's running the promotion. If you don't attract the right customer, there is no way you'll be able to see a good ROI.

Finally, deal sites aren't going anywhere, so I think all tour operators should strategize about how to craft effective promotions and find partners who respect their brand and understand their business.

While travel deal sites will likely have to evolve into more specialized brands to survive the glut of sale websites and a rebounding economy, it’s true that their popularity is growing and they will continue to affect the travel industry. Suppliers considering using them must make a hard analysis of their goals, available outlets and channels, and weigh the potential rewards to the risks.

Interested in getting involved? For a great article on fine tuning your product for a successful deal site experience, read Fine-tuning for flash sales: what works and what doesn’t