Counting the cost: is online the best-value route to market?

The assumption that selling online is cheaper could be flawed, according to proper cost analysis by Tui Travel. Lee Hayhurst reports

You don’t need to ask Tui Travel distribution director Nick Longman twice to wax lyrical about the cost of customer acquisition.

Accurately accounting for the cost of finding customers, whether it is online or offline is, he admits, one of his pet subjects, and something he has been working on for Tui for two years.

“Maybe it’s my accountancy background,” said Longman, “but you can only put together a plan for your routes to market if you understand the true costs that lie behind each sale.”

Longman says he recalled an early integration meeting in 2007, after the merger of Thomson and First Choice, when the only costs ascribed to web were pay per click and affiliate costs.

“There was no reference to the biggest cost, which was online discounts, and other overheads,” he said. “The online discount has to come out of the web P&L (profit and loss account).”

For travel companies distributing in a multi-channel world, pressure on pricing online and higher pay per click costs mean it has never been more important to account for costs properly.

Tui Travel refers to this as “net cost of distribution” and a model pioneered in its Luton headquarters has started to be adopted in other countries in which the travel giant operates.

Longman said the biggest surprise from the analysis was finding that the cost of distributing online was equal to that of the high street. The most expensive avenue was selling through third parties, while selling though Tui’s own call centres was the cheapest.

Although at first glance the web was cheaper, when Tui’s virtual call centre, which channels calls to stores, was accounted for, the overall cost was broadly the same, Longman said.

It was partly this that prompted Tui earlier this year to announce a programme of shop openings, among a flurry of similar moves from rivals and non-traditional bricks and mortar firms like Kuoni and Teletext Holidays.

Another outcome of Tui’s analysis was to give stores more credit for the role they play when a customer starts their research in a shop but ends up booking online.

“Something like 40% or 50% of people who book on the web have a brochure with them as a reference point, so the question is, do you put half the cost of that brochure in your web budget?” Longman said.

Online sales that can be attributed to shops are going towards that shop’s or consultant’s targets. “When consumers come into the shops we always encourage our staff to log an enquiry. If we have a postcode we can run a report that matches that booking,” said Longman.

“We can see that person started in the shop and can provide a credit back to the shop. Surprisingly, this has not been as big a deal as we thought – now staff know they will be credited.”

Tui operates a differential pricing strategy between offline and online, and is keen to make sure the added value offered in store is reflected in its prices and revenues.

Although Tui’s high street consultants can match web prices, Longman said the focus was on maintaining the higher average selling prices offline, something he wants the online operation to learn from.

“As long as we are giving good service there should be an additional price for that service,” he added.

“Plus, if customers come in store we can make sure they have the right holiday for them and can upsell them and sell extras like insurance and parking.

“The reason we have a retail estate which effectively produces costs similar to the internet is because of the other things we sell like foreign exchange, UK domestic holidays and cruise.

“We would never go down the route of selling our own products only in our shops. For someone like us – an integrated tour operator – you have to have a balanced portfolio.

“We are often criticised for discounting, but I am the first person who wants to reduce those discounts, because I see the P&L. If my web discounts are high that has an impact on high street retail as well.

“Pre-merger Thomson went down the route of ‘web prices on the high street’ but I’m not an advocate of that because it devalues the service you provide in the shops.”

For big travel firms like Tui, the secret to success is understanding how channels can be integrated to work complementarily and having the analytical tools to assess impact.

Ian McCaig, lastminute.com chief executive, said: “E-commerce, in general, is increasingly becoming a game of analytics expertise and constant measurement. You are absolutely looking at economics channel by channel, whether its metasearch, affiliates, natural search or branding. That’s the way this game is now and how it is increasingly going.

“Those who do best will have the best analytics and be swiftest at working across online and other channels.”

Lastminute’s recent online campaign, starring Louie Spence of Pineapple Studios fame, was one example of a fully integrated campaign through social media and other digital channels.

“The degree to which you integrate it is based on economic return. This is a pretty clinical game when you are talking about marketing economics.

“That’s why attribution and the tools you are investing in and employing around the data become so important.”

James van Thiel, Google’s industry head for travel, said one of the hot topics at the moment is attribution. “A customer’s final click might be on a brand ad, but is that the only time they have interacted before they converted? There are all these different interactions happening. The question now is, do you see that across all the different channels?

“The players who will do best are the ones who come to an agreement internally that they understand this interplay and put their advertisements in those
channels and attribute that back.”

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