A study by the Cornell School of Hotel Administration appears to support the theory that hotel operators use daily-deal sites such as Groupon and LivingSocial as much for marketing purposes as for directly generating revenue.
The Cornell study found that flash sites cost hoteliers who use them about twice as much, in the form of discounted rates, as online travel agency (OTA) sales cost them.
It also found that the flash sites generate a low repeat-customer rate of just 11%.
Hoteliers typically offer vouchers through daily-deal sites such as Groupon and LivingSocial at 45% to 55% discounts from their published rates, though some have offered discounts as high as 75%, according to the study’s 22-page report.
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. Only spa treatment centers and restaurants generate more revenue, the study found.
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.
Still, the Cornell study, believed to be the first of its kind, examines a sales channel whose effect on profitability is unclear.
While sites like Groupon pitch flash sales as a way to fill an otherwise empty room while generating potential repeat customers, about eight in nine customers who purchase a room via daily deal never return, the Cornell study found.
Because of this, hoteliers have a “love-hate” relationship with flash sites, said Gabriele Piccoli, associate professor at Italy’s University of Sassari and co-author of the report. About 42% of those polled said they’d offered some sort of product for a flash sale, while 46% said they had no intention of selling a daily deal.
“I have had many interactions with hoteliers who seem to either swear by or swear at flash-sales sites,” Piccoli said.
The results were culled from the 225 respondents to Cornell’s survey, though just 136 hoteliers answered all the questions. The median size of the hotel operated by respondents was about 150 rooms, and while the study did not measure the percentage of chain hotels vs. independents in the survey sample, the co-authors found at least one chain that barred its owner-partners from using flash sales.
Simon Goodall, vice president of Groupon Getaways, said the report might be underestimating the flash-sale repeat-customer rate because it was only seven months ago that the company launched Groupon Getaways, a travel-oriented section of Groupon’s website for which it partnered with Expedia.
He added that flash sales add value by filling rooms at off-peak times with customers who had no travel intentions before seeing the daily deal.
“We’re not looking to be an everyday distribution channel and fill rooms during the busiest days of the year at discounted rates,” Goodall said.
How quickly flash sales continue to gain traction as a hotel-room sales channel remains to be seen. Piccoli said that as the economy continues to recover, hoteliers will typically be less inclined to offer the deep discounts typically sold on Groupon and LivingSocial because they’ll fill more rooms at higher rates.
That said, as flash sales go more mainstream, newer customers who buy a daily deal might be more likely to be repeat customers, according to the report’s co-author Chekitan Dev, associate professor at Cornell’s School of Hotel Administration.
“Early customer adopters of these channels tend to be deal-seekers, so they may go on to the next deal,” Dev said. “Over time, though, as more and more customers try these channels, I expect repeat business to go up.”
Regardless, flash-sale sites continue to gain exposure through more traditional sales channels. Expedia recently added a tab on top of its home page that links to Groupon Getaways.
Groupon, which started trading publicly in November, tripled its Q4 revenue from a year earlier, to $502.5 million. The company does not disclose what percentage of Groupon Getaways’ Web traffic comes from Expedia.
However, Expedia CEO Dara Khosrowshahi said in a conference call with analysts earlier this month that revenue generated from his company’s partnership with Groupon is “just too small to move the needle along.”
Follow Danny King on Twitter @dktravelweekly.