Ctrip scientifically managing travel services

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Professor David A. Garvin and HBS-APRC Senior Researcher Nancy Hua Dai prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2012, 2013 President and Fellows of HarvardCollege. To order copies or request permission to reproduce materials, call 1-800-545- 7685, write Harvard Business School Publishing, Boston, MA02163, or go to www.hbsp.harvard.edu/educators. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

D A V I D A . G A R V I N

N A N C Y H U A D A I

Ctrip: Scientifically Managing Travel Services

When you are in a safe place, you have to think about what to do when you are in danger.

—Chinese proverb

On July 28, 2011, Jane Sun, CFO of Ctrip.com International Ltd. (Ctrip), was preparing to meet with Min Fan, cofounder and CEO, so that he, together with other members of the senior executive team, could decide whether Ctrip should broaden its offerings and focus more on budget and luxury travelers. Ctrip was China’s leading travel consolidator, with a 3% market share in the overall travel market and a 51.6% market share in the online travel agency (OTA) segment (see Exhibit 1 for market share data). It provided hotel reservations, air ticketing, packaged tours, and corporate travel management, primarily to frequent independent travelers (FITs): business travelers at the medium- and high-end of the market (see Exhibit 2 for an organization chart). Ctrip had 2010 revenues of 2.9 billion renminbi (RMB) (US $437 million) and net income of RMB 1.1 billion (US $159 million); in 2003, it was listed on NASDAQ (see Exhibits 3 and 4 for financial information and a breakdown by product lines).1 The company conducted 60% of its transactions through a call center and 40% online; both were based on a scientific approach to managing service. The executive team would meet in the afternoon to discuss several questions: Should Ctrip stick to FITs or begin to diversify its customer base? Did online competitors targeting budget travelers pose a serious threat? And would the company’s call center model continue to provide competitive advantage for the foreseeable future, or was it likely to be displaced by online systems?

Industry Background

When Ctrip was established in Shanghai in 1999, Fan noted, “Chinese travel agencies were small, weak, fragmented, and poor at service.” Firms were either state-owned enterprises (SOEs) with autonomous, loosely controlled local operations or small, independent players. Agencies focused on group tours and attracted customers with low prices. However, tours often included red-eye flights, low-quality meals, and mandatory shopping trips so that tour guides could earn commissions. At the time, there were no aggregators for either hotels or airlines. Fan recalled, “Less than 5% of the hotels belonged to hotel groups. Even when there were groups, they operated independently. And before the Internet boom, the only way for hotels to promote themselves nationally was to advertise in newspapers, but that was costly.” Most travelers therefore did not know which hotels were available in which cities. Airlines were all state-owned, and e-tickets did not yet exist. Moreover, travelers

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could only book flights departing from their city with a local travel agent. Maria Sun, vice president of service, explained:

Travel agencies received information on government policy, price, and commission by fax. Then an agent searched the TravelSky terminal [TravelSky was the online platform for air ticket distribution and transaction processing in China, developed and operated by an SOE] for ticket availability and calculated the price for the customer. Travel agencies only had access to local flight information because they could not keep large volumes of information about other cities on hand. Airlines also had different policies for different cities, so the same ticket from Shanghai to Shenyang might cost RMB 500 [US $60] if it was issued in Shanghai but RMB 1,000 [US $121] if it was issued in Beijing.

Demand for travel service, however, was rising due to the rapid growth of Chinese private enterprises. Employees at these companies had to make travel arrangements for themselves. Government policy was also loosening. For these reasons, Fan observed, Ctrip’s success as a travel aggregator and consolidator was partly a matter of luck: “It was the right time for Ctrip. In 1995, government policy was very rigid, the need was not so strong, and few people cared about service quality. If we had started five years earlier, we probably would have died.”

Developing the Business

Inception of Ctrip

Ctrip’s founding team consisted of four individuals with complementary talents.2 Qi Ji was an experienced entrepreneur, familiar with start-ups. Neil Shen had over eight years of experience in investment banking. Min Fan had worked as a senior executive in the travel industry for over a decade. And James Liang, at the time the head of Oracle China’s ERP division, knew how to develop systems and scale up businesses. Liang came up with the idea of launching an Internet travel business in 1999, and Ji became the company’s first full-time CEO. Liang became co-CEO in early 2000 and CEO in mid-2000. Min Fan became CEO in 2006. They named the firm Ctrip (“China trip”); the Chinese name 携程 (pronounced xie cheng) meant “going together to share the journey.” Following U.S. companies like Travelocity, Ctrip first developed a travel website, Ctrip.com, which provided information but did not allow for any transactions. Due to its superior content, extensive online community, and user-friendly design, Ctrip.com soon was ranked among the most popular of over 300 Chinese travel websites. At that time, page views were the only focus for investors. Ji recalled, “The first question investors asked me was how many visits we had. No one asked how much revenues and profits we made.” In October 1999, Ctrip received RMB 4.1 million (US $500,000) in the first round of financing.

Hotel Reservations

That same month, Ctrip entered the hotel reservations business. Ji explained, “No license was needed. The Chinese government regulated air ticketing and packaged tours because it worried about fraud, but it didn’t regulate hotel reservations.” Existing players negotiated a price with hotels, solicited customers over the telephone, and received their commissions after customers stayed at the hotel. Ctrip used the Internet to overcome the constraints of these small, off-line competitors. It was able to provide more comprehensive, transparent, and up-to-date information about a much broader base of hotel suppliers, and also build a database with customers’ historical orders and consumption habits for targeted promotions. Liang noted, “We realized that if we could use technology, there was not much competition. Besides, the margin for hotel reservations was much higher than for air

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ticketing. All we needed to do was develop a hotel inventory nationally.”Ctrip decided to target FITs and provide them with “convenience at a reasonable price.”

Ctrip launched an online platform and an 800-number, creating a 24-hour hotline to take orders and maintain relationships with hotel suppliers. It set up the first call center system in 2000. To accelerate growth, Ctrip acquired a hotel reservation company, largely for the know-how of its management team. Because credit cards were not popular in China before 2000, a prepaid model was dominant, with hotel reservation companies paying deposits to hotels beforehand.3 Fan, who was then leading Ctrip’s hotel reservations business, crafted a new model and began to enter into allotment agreements with hotels in 2000.

Fan’s team began by convincing hotels to accept the payment-upon-check-in model, and then worked to convince more and more hotels with whom the firm had good relations to put aside an allotment of rooms especially for Ctrip. This would ensure immediate confirmation for customers while booking on- and off-line. To facilitate the hotel booking process, Fan and his team developed the EBooking network, which electronically connected bookable hotels to Ctrip via the Internet and enabled them to exchange booking information. This EBooking system now acts as the company’s hotel global distribution system (GDS) in China. Within three months, the team had convinced 800 hotels to cooperate with Ctrip. At these hotels, Ctrip’s customers could reserve and confirm rooms but would only pay upon check-in, without any advance deposit. Ctrip also avoided advance payments. Moreover, it set the commission rate at 15% so that hotels would not be motivated to set up their own online channels.

In March 2000, Ctrip received RMB 37 million (US $4.5 million) in its second round of financing. In November 2000, after acquiring another hotel reservation company, Ctrip secured an additional RMB 99 million (US $12 million) in its third round of financing, which was critical to the company’s survival during the Internet downturn. By the end of 2010, Ctrip had about 17,000 hotel suppliers in China, including 12,500 hotels with allotment agreements, and had stakes in two of China’s leading budget hotel chains, Home Inns and Hanting. It also had about 20,000 hotel suppliers abroad.

In the first 10 years, Ctrip relied on two primary channels for acquiring customers: distributing free membership cards and brochures at airports, railway stations, and office buildings; and building alliances with all major airlines and banks so that their customers could become Ctrip members and enjoy discounts and bonus points. Because it was relatively easy for competitors to imitate the first approach, Ctrip made several changes. In 2006, the company equipped sales staff with handheld personal digital assistants (PDAs) and developed an IT system to help them work more effectively. Sales staff could register members directly by their mobile phone numbers on their PDAs. After getting the mobile phone number, the system would access the customer’s record, identify the customer segments to which he or she belonged, and provide tips on how the sales staff should focus the conversation. By tracking the number of customers that sales staff talked with every day as well as the length of the conversations, this system also helped Ctrip manage over 1,000 sales staff dispersed in over 50 cities more effectively. In 2011, Ctrip upgraded the PDAs to tablet PCs so that sales staff could show photos and videos of their products to customers, further improving the quality of their interaction with customers. Many competitors were unable to keep pace with Ctrip’s technology upgrades and shifted to online channels for customer acquisition.

Air Ticketing

In 2000, Ctrip first experimented with air ticketing, but because it was difficult to work with diverse travel agencies in different cities, the effort remained small. In 2002, Ctrip officially launched the air ticketing business, acquiring Beijing Coast Air Service Company to add scale and coverage as

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well as management know-how. It created a nationwide platform and developed relationships with travel agencies in over 60 cities. Fan noted,

It was a very important turning point. If you book flights from Ctrip and you are in Shanghai, you are not only able to book return tickets from Shanghai to another city, say, Beijing, but also book a flight that departs from a third city, for example, from Hangzhou to Guangzhou. Before Ctrip partnered with air ticketing companies in different cities and developed the online platform for air ticketing, no one had the technology to issue a ticket for a flight that departed from a third city. Now, this practice has been widely adopted.

Jane Sun added, “We can utilize different policies on our platform to offer the best price.” Moreover, while it took considerable training and skills for staff at traditional travel agencies to interpret the complex codes on the TravelSky terminal, translate them into language customers could understand, and then calculate the ticket price based on discount policies that were listed on faxes, Ctrip’s IT system modularized all information so that even young, inexperienced call center staff could immediately quote an accurate price.

The growing use of credit cards and the introduction of e-tickets in 2006 accelerated Ctrip’s growth while also reducing fraud and errors. To improve quality and gain competitive advantage, Ctrip established its own ticket delivery teams in major cities. These teams, equipped with motor scooters, ensured two-hour delivery and payment collection anywhere in the city: at home, in the office, even while visiting a park. Direct delivery soon accounted for over 50% of air ticket volume. Customers who purchased e-tickets using credit cards accounted for another 30%–40% of the business, requiring Ctrip to rely on partners for delivery and payment collection for only 10%–20% of its business. In 2004, Ctrip launched an online platform for international flight reservations, the first in China. In recent years, airlines reduced their commission rates to agents; some also built their own direct sales channels online.4