Definitely Doug 11/8/24: Strategies for Tech Vendors Entering Hospitality

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I recently wrote on the topic of how hotels can capitalize on innovation without taking on the high risks often associated with less-established vendors – which are often the best technology innovators.

Today’s topic will be the flip side, or how these same companies can position themselves for success in an industry that often makes that difficult. Startup and early-stage companies that offer technology solutions for hotels face daunting barriers to success. The same is true for vendors that have achieved success in other vertical markets and that see opportunities to disrupt hospitality by adapting their technology for hotels.

If your company has been selling technology to hospitality for less than a few years, this article is for you, although there may be some useful ideas for established companies as well. It can also help hoteliers better understand the challenges faced by their technology vendors, to help the vendors overcome them and reduce the likelihood of bad outcomes for you’re the hotel’s projects.

Over the years, I have spoken to many hundreds, perhaps even more than a thousand market entrants with technologies for hotels. Serving for more than a decade as CEO of the trade association HTNG, I was often one of the first calls companies would make as they began exploring opportunities in the industry, and I took one or two such calls each week. In more recent years, this column, as well as formal and informal mentoring activities, have given me the opportunity to connect with hundreds more.

I have followed many of these new entrants over the years: a few to great success, some to adequacy, and unfortunately many of them to failure. Obviously to some extent the different outcomes depended on the quality of their products, services, and management team, but I have seen mediocre ideas succeed and great ones fail. Often the differences relate more to how well the company understands the structure of the hospitality market and crafts a successful go-to-market strategy.

That structure is well understood by most who have played in the hotel tech space for a decade or more, but industry entrants tend to assume that it mirrors other industries with which they are familiar. It does not. And while there is no single formula for success, I have found correlations with several recurring themes over the years, and that will be my focus for today.

Who Is Your Customer?

Obviously the first task is to identify the types of properties or hotel groups that can benefit from your solution: luxury, midscale or economy; group or transient; mainstream hotel vs. resort or casino, short-term rentals vs. traditional hotel; there are many other potential target segments as well. Most companies have already done at least initial research on this question, and the answers are very specific to the type of product. I will therefore focus on the more general issues.

The global hotel industry is huge, and it is easy to put together a persuasive investor deck showing a very large available market for almost any product. But with any business-to-business (B2B) product or service, you need to be able to reach your prospective customers cost-effectively. Many new market entrants to hospitality initially think they should target the big brands, with their tens of thousands of hotels. And while this can work for certain products and services and in some geographic markets, it will fail for the vast majority.

Fundamentally, despite the presence of large brands, the hotel industry has few large buyers of technology. I estimate that only about 10% to 15% of the technology used in hotels is bought by brands. While there are important exceptions, most hotels and rooms are owned not by large corporations with familiar names, but by families, small investor groups, and other small- to medium-sized companies. Each hotel has one individual, family, partnership, or company (usually small) that owns the property and building and one that manages day-to-day operations. The brand puts its name on the door, but usually is not the owner or manager.

The owner, manager, and brand are often three different entities, and some combination of them (sometimes all three) must agree on technology purchases costing more than a minimal amount. And any agreement they reach usually applies to just one or a small number of hotels with exactly that combination of stakeholders. To be sure, there are exceptions (a few smaller brands do own and manage all or most of their properties, especially in Europe and parts of Asia), but the major global brands own and manage very few hotels, or none at all.

However, the three entities each play distinct roles in hotel operations, and technology products that can align with one of them can often find markets successfully. Brands generally own and manage certain key marketing technologies, such as reservation systems and loyalty platforms; many also select the property management system and mandate its use by their hotels. If you are selling one of the technologies that is bought by brands, your go-to-market strategy is not difficult.

With most technology products and services, however, identifying the prospective customer is more difficult. You can often determine who might be willing and able to fund a particular technology (brand, manager, or owner), but the bigger battle is getting all three of them to agree. Most technologies require integration with different systems within the hotel, including those provided by or mandated by brands (which can vary from hotel to hotel within the same management or ownership group), those selected as standards by each management or ownership group, and those embedded within the building itself, such as network infrastructure or building management systems.

This means that to sell, you may need to persuade three different entities to align and to support necessary integrations in their existing systems. You may also need to develop new integrations on your side to the solutions the brand, management company, or ownership group they already use, and/or to the systems embedded in the building (which were often selected by a previous owner or manager and not cheaply replaceable).

This is further complicated by the fact that brands, managers, and owners all have different ROI calculations. Each may (or may not) contribute to costs or other financial support of the project you hope to win. But more important, each will (or will not) recognize different revenue streams or expense savings. Regardless of who funds the costs of any technology, owners get the largest share of any incremental revenue (all of it, less any share they have to pay to brands under franchise agreements or to management companies under management contracts). Brands, on the other hand, make most of their revenue from fees that are based on room revenue (a few also get some from food and beverage and other ancillary revenues).

Brands are therefore interested primarily in technologies that can produce room revenue, but even then they only earn a small fraction of it (typically 5% to 10%). They may be willing to fund solutions that drive revenue, but their ROI calculations will frequently be based on only their fraction of the revenue…but all of the cost. So many technologies that would make eminent sense for a hotel that is owned and managed by a brand will fail the ROI test applied by a brand for its franchise portfolio. Sometimes brands can recover some or all of the costs from their properties, but usually these opportunities are limited and time-consuming, often requiring a vote by a majority of the branded hotels to accept the additional fees.

Management companies typically have combination deals that are based on both fixed fees and a percentage of operating profit. The calculations vary and can be complex, but the end result is that they are more responsive to traditional ROI calculations than brands, but less responsive than owners.

The only sweet spot where corporate deals can be sold without facing these issues is multi-property hotel brands that own and manage all or most of their properties. Unfortunately, this is a very small slice of the total market, especially in North America, and even the largest such brands are tiny compared with the major brands; most have fewer than 50 properties.

Many new entrants consider all the above market factors and decide to focus on independent hotels. These are typically owned and managed by a single entity or person, and are not affiliated with a brand, or are affiliated only with a “soft brand” that plays limited roles, mostly in reservations and loyalty. Soft brands are often less rigid in the systems their hotels must use, meaning that more of them can be sold without brand approval. There are a lot of independents in the world (they are a large minority in North America and the majority in many other regions), so this can be a viable strategy for products and services that can be used by a single hotel.

However, for this strategy to succeed financially for all but the highest-ticket products, it typically requires a mass marketing approach rather than direct sales. Prospective customers need to hear about the product or service from marketing and advertising activities; they need to be able to buy or subscribe digitally (with little or no interaction with costly sales staff); and they need to be able to onboard cheaply. For software, this ideally means online training, self-configuration and automated data conversion. Hardware should be preconfigured, labeled for its intended installation location (even down to specific guest room numbers), and ready to simply plug into power and network. Some products and deployments may still require customer support, but these can represent significant costs and need to be designed out of the process as much as possible.

A final area of market opportunity for certain technology solutions is hotel developers. They are involved in the design and construction of hotels, a process that can span several years, and that often occurs before a brand or management company has been identified. And while some developers build with the intent to own and manage their properties, many more do so with the expectation of selling the building once it is complete. Technology products that need to be physically installed in a building before it can be occupied are often bought by developers (or their electrical or mechanical contractors) at some phase of the construction process. Depending on the timing and project specifics, a brand or management company may have some influence, or not. But hotel development operates as a very distinct segment from existing hotels, and requires its own strategy.

The Big Brand Challenge

Even if you are not selling to the big brands, you may well need to manage relationships with them. Most technology solutions need to integrate with core solutions provided by or mandated by brands (commonly central reservations, loyalty, and brand app; often property management), or with a limited set of brand-approved options. This will require both the approval of the brand, and often a commitment of integration resources by the brand or its approved partners.

This often creates cost barriers. Even if a brand is willing to fund integrations to in-house systems, partner-provided systems are often a different story. In a few cases, the partner may place enough strategic importance on the relationship to fund an integration to a new partner, but more often they will expect the provider of that system to cover the costs (or fees, which are sometimes far greater than the costs). Or they may have a standard practice of charging their hotel customers license, support, and/or software-as-a-service (SaaS) fees, often several thousand dollars per year per property. This not infrequently makes the end cost to the hotel customer impossibly high.

Brands also have rigorous technology review processes, especially around the handling of sensitive personal and payment data. If your solution touches such data, or even if it looks like it might (as in the case where you use a hosted payment solution to keep your software out of the scope of payment card industry regulations), you can expect an exhaustive, time-consuming, and expensive security review with any of the major brands. I have been tangentially involved in a few of these, and even with highly competent resources, they can take as long as 12-18 months and a few thousand hours of senior level technical talent. Even if your solution touches no sensitive data, but still needs to be connected to the hotel network, implementing the necessary security protocols can be daunting.

Most technology solutions sold in the hotel market today require a strategy to work with brands, if only to get the required approvals and “hunting license” to sell to the owners and managers of their properties. Where this is the case, most companies find they need to bring on a senior business development executive charged with creating and nurturing the necessary brand relationships: getting buy-in for brand approvals, navigating integration and security issues, and promoting your solution within the brand. The executives you will be dealing with are relatively senior, and you will need an appropriately seasoned sales executive to deal with them successfully.

A marketing budget for brand relationships is also usually needed: fees from technology vendors are an important source of revenue for many brands, and you should not be surprised to find you need to pay significant sums to earn and maintain brand approval and the opportunity to sell to hotels within the brand. Sometimes these fees are structurally tied to revenues, other times you are simply paying for access (such as to exhibit at the brand’s annual conference).

Direct or Indirect?

Many solutions providers who sell direct to end-customers in other industries have found that an indirect strategy works better in hospitality. Hotels buy an enormous number of technology solutions. I track almost 300 categories in total, of which you can find 75-100 deployed in most mainstream hotels. There are thousands of other companies already selling technology to your prospective customers, and only a few of them are competitors.

Building a direct sales force, especially if you need to sell to individual hotels, is expensive. It is difficult or impossible to make the ROI work unless you are selling a particularly high-value product. In many cases the alternative is to identify partners who are already selling other products to your target customers, where the product lifecycles and decision makers are aligned (meaning they are often purchased at the same time), and where the sales staff have the right skills for selling your product.  

For many successful technology companies, a key part of their hospitality strategy leans on such partnerships. Sometimes partners can use your solutions to make their products more competitive or to meet specific needs of customers. For example, today we often see point-of-sale solutions partnering with payment companies and vice versa, because it enables the same physical device to both take a restaurant order and to accept payments, with significant benefits in terms of both operational impact and the hardware cost.

Other times, partners are simply in the mix with the right prospective customer at the right time; for example, companies that sell into newly built hotels (typically for things like door locks, thermostats, building management systems, life safety systems, and network infrastructure) all need to sell to the building developer during the construction process. Partnerships among these types of companies are therefore very common and can result in cooperative selling that benefits both them and the customer.

Hybrid strategies are common as well. While some partnerships are important enough that you can rely on a partner to sell your product (perhaps as a component of theirs, or as an add-on), in many cases (such as for new buildings) they may be just a source of qualified leads and introductions, in which case you will still need sales resources to close them. But those salespeople will be much more efficient than if they must resort to cold calls.

Have Enough Financial Runway

The complex sales process that most technologies face in hospitality means that sales cycles for most products are usually in the range of 12 to 24 months. Other industries selling technology more commonly face 5-to-9-month cycles.

This creates two issues. The first is that you will need more cash to survive until you can reach positive cash flow – typically two to three times as much as you might in other industries.

The second is that if you have money from investors, there is often an expectations gap. If you get funding from venture capitalists or private equity investors, be sure they understand that hospitality is a longer-term play and that they must evaluate financial performance accordingly. Equity funds often have specific timelines for exit, and these are usually somewhat short-term. Entrepreneurs may paint a rosier and faster financial return than is realistic in order to fit a fund’s time frame. When seeking funds, you will be more successful if you can find a source with an exit timeline that is consistent with hospitality’s longer sales cycle, and make sure your investors understand that significant sales ramp-up will take more than a year.

The same is even more critical if you work for a company that has deployed a solution in other vertical markets but has now decided to try its hand in hospitality. Most such companies of any size follow formulistic metrics. Some of the biggest brand names in the global technology industry have tried (in some cases multiple times over decades) to form hospitality verticals. Usually, the division is evaluated after one year, and more often than not gets shut down for perceived poor performance (too few sales). In many cases this happens just as the sales team is starting to get traction in the hotel industry’s extended sales cycle. But the budgeting and performance measurement practices do not accommodate this.

Economics and Psychology

One of the most common questions I hear from new market entrants with technology solutions is whether hotels will be willing to pay what the vendor wants to charge. There is no simple answer to this question, of course, and the economics will depend in part on the ROI calculations described above (whether formally analyzed or simply based on a hotelier’s gut feel). But I have found a few rules of thumb that may be useful.

First, products that produce revenue indirectly – such as by improving the guest experience – are difficult to sell on that basis alone. It is almost impossible to definitively quantify the value, since guest experience results from a large combination of factors. And if the product really does impact revenue through better guest experience, it is usually impossible to show that it (and not other factors) was the primary cause.

Second, products with ROIs that are heavily dependent on reducing labor cost are difficult to market unless it is clear which specific positions can be eliminated. Right or wrong, most hoteliers do not believe labor savings will result from cutting a few minutes off some task commonly performed by hotel staff, unless all of those minutes account for all of the time of at least one staff member. Yes, faster processing of check-ins may leave the front desk staff with more time to focus on the customer and their experience, but… see the first point above.

Third, products whose costs are closely tied to the direct revenue they produce for hotels find the least marketplace resistance. If your product can produce ancillary revenue that a hotel is not currently receiving, you may find very little objection to charging even a significant commission. But at the same time, if the product works well, you can expect the hotel to come back in year two or three looking for something closer to a fixed-price deal. You will likely have to do this anyway, so it can be smart to highlight the option to convert to a fixed fee up front, so that hotels can work it into their ROI calculations and so that you don’t have to return to the negotiating table.

Fourth, new products without comparable offerings from competitors are difficult to price. I have been asked by more than a few such companies trying to sell nice-to-have but non-essential technology products to hotels whether their pricing is reasonable. However they present their costs, I always convert them to an all-in cost per room per month; this is a metric that many hotel owners will apply. Nice-to-have products that cannot produce guaranteed incremental revenues or specific cost savings should be in the range of around $1 per room per month, or maybe $2 if the target is the luxury end of the market. Yet I see many companies come in thinking they can charge $5 or $10. Those kind of numbers can work for certain core technology systems that every hotel needs to keep the lights on, but that’s not what most of these companies are offering.

Finally, I have seen very few products that do not benefit from having an ROI calculator to provide to prospective clients. Hotels can see the cost of your solution, but need help understanding what it will do in terms of generating revenue and/or cost savings. A lot of these calculations depend on their existing business relationships, technology stack, operating processes, and cost structures, about which you have only limited insight. The best ROI calculators provide some default parameters based on industry averages, but encourage the buyer to plug in their own specific parameters, such as their cost per hour for a housekeeper or royalty, marketing, loyalty and other fees paid to brands on room revenue. When the prospective customer takes ownership of the assumptions, it’s much easier for them to buy into the result.

Conclusion

The hospitality tech market is not for the faint-of-heart. It is highly fragmented, has a decision process that is usually opaque, slow, and riven by competing financial motivations. Selling costs can be prohibitive unless you have architected your strategy to minimize them. Yet companies with good products, sufficient financial runway, and solid go-to-market strategies can and do succeed. There is just much less room for error than in other vertical markets.

As always, feedback to my articles is welcome. Since the host site does not support discussions, I will post a link to this article on my own LinkedIn page once it has been published, and I invite you to comment, like, or share from there!

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