Discount Web sites have become habit-forming for hotel companies. Using sites such as Expedia, Travelocity and Priceline to fill empty hotel rooms with last-minute deal-seekers has helped cushion the effects of the travel slump. But the service comes at a price. Not only do hotel companies pay a fee for each room sold, but these sites also help build customer loyalty for themselves — not for their own hotel brands.

Now, hotel companies are hoping to take back the customer connection and improve their profits by fortifying their own Web sites and offering their excess inventory directly to consumers. The question now is whether the hotel companies can beat the discounters at their own game — without sacrificing margins.

When a company lists its hotels on a discount Web site, it reimburses the booking agent by paying a straight commission ranging from 5% to 20% of the room price, or negotiates a lower net rate and then allows the discounter to mark up the price.

“Hotel companies did not initially realize that they were giving out rooms to a competitor that would take loyalty to an intermediary,” says Thomas Corcoran, president and CEO of FelCor Lodging Trust, an Irving, Texas-based REIT that owns more than 180 hotels.

Intermediary Web sites can produce upwards of 1,000 rooms per month for a single hotel. During the month of August, FelCor's Holiday Inn San Antonio booked 1,700 rooms through third-party sites such as Priceline, Hotwire and Site 59. That volume represents a significant 15.7% of total rooms available at the 350-room hotel.

Still, the price can be steep. “We are concerned with the cost of being on those sites,” says Bruce Rosenberg, senior vice president of distribution marketing for Beverly Hills, Calif.-based Hilton Hotels Corp.

“It can take a pretty high margin off of profitability,” adds Brian Stage, executive vice president for sales, distribution and reservation services at Carlson Hotels Worldwide in Minnetonka, Minn.

For example, a hotel paying a 10% commission to a discount site that books 100 rooms per month at $100 per room will pay the intermediary $1,000 per month. That may not seem like much, but multiply those numbers out over a full year, and then multiply again across an entire portfolio of hotels and those numbers quickly add up to hundreds of thousands — even millions — of dollars in lost revenue.

Competitive Pricing

To compete with the independents, hotel Web sites need to adopt the same tricks — and discounts. “Brands began to see that they were losing customers to these discount sites because they were not providing competitive pricing,” Corcoran of FelCor says. “So this year, brands have begun offering a price guarantee.”

In June, Starwood Hotels & Resorts Worldwide Inc. introduced a new “Best Rate Guarantee” for its brands, which include Westin, Sheraton and Four Points. If travelers find lower published rates for Starwood brand hotels in the U.S. or Canada through any other online distributor, Starwood will match the lower rate and take an additional 10% off.

“We're telling consumers, ‘You don't have to shop anymore — you have the lowest price right here at Starwood,’” says Tom Botts, Starwood's director of distribution strategy and operations. Starwood also offers 500 bonus points to Starwood Preferred Guest members for booking directly through its Web sites. The bonus points can be used in exchange for free room nights, hotel services and room upgrades. The result is a significant rise in online bookings. Although Botts declined to give specific numbers, Starwood's conversion rate — the number of site visitors vs. the number of customers who book rooms — has nearly doubled since the offer was introduced.

“That is not to say that third-party sites are not important to our overall distribution strategy,” Botts says. “We want to have product available at those sites as well because they have built a good following.”

The chains are also using their upgraded sites to offer perks and incentives, as well as outright discounts. Hilton Hotels and Atlanta-based Six Continents Hotels, which owns Holiday Inn and Crowne Plaza brands, offer members of its frequent-traveler programs an additional 1,000 points for each online booking. Marriott International Inc. even launched a sweepstakes on its Web site this fall. Guests who booked reservations at Marriott.com by Dec. 15 were automatically entered into a “Big Game” raffle for Super Bowl tickets.

Upgrading the Offerings

The hotel sites are also moving onto the discounters' turf by providing some of the one-stop travel shopping that sites such as Expedia are known for. Carlson Hotels has experimented with links to online luggage sellers and rental car companies, for example. “Our goal is to make our site as useful as possible,” Stage explains.

Carlson Hotels has also entered into an agreement with 10Best, an online publisher of travel, service and entertainment information that provides links to local attractions, entertainment events, restaurants and special services. The concept is being tested at Radisson properties, including the Radisson Hotel Boston, whose site features a “Virtual Concierge” page that offers links to attractions such as the 10 closest dining options, 10 closest golf courses and 10 closest art museums.

Hotel companies are working to boost the number of online customers by making their Web sites more convenient to browse. Hilton plans to introduce an enhanced reservation engine that will simplify the booking process.

The improved system will enable consumers to shop across Hilton's brands:, including Doubletree, Embassy Suites and Hampton Inns. The booking engine also will allow customers to cancel reservations. “We're making the reservation process faster and more intuitive,” says Rosenberg. “What we really want to do is give the consumer more control.”

Growing Profit Center

Efforts to enhance hotel brand Web sites already are beginning to pay off. At Marriott International, 75% of online bookings are generated through its own branded Web site. In 2001, Marriott.com booked more than 5 million rooms totaling $715 million in revenue.

Marriott expected revenues for 2002 from online bookings at the company Web site to reach more than $1 billion.

Although online bookings represent a small percentage of reservations — less than 10% at most chains — the Internet is the fastest-growing distribution channel. Boston-based Forrester Research estimates that 26 million households will buy leisure travel online in 2002, up from an estimated 22 million this year.

Those growing numbers go directly to a hotel's bottom line. Once the infrastructure is in place, online reservations represent a fixed cost, whether there are 5,000 or 50,000 bookings. So, as the volume of online reservations rises, companies will be able to realize greater savings.

Notes Corcoran of FelCor Lodging; “It's the cheapest form of booking engine that we have ever seen.”

Beth Mattson-Teig is a Minneapolis-based writer.