NB: This is a guest article by Sean Millar, CEO of NYC.com.
Anyone reading Andrey Spektor’s article on hotel affiliate programs could be forgiven for wondering why any established travel brand would ever work with an online travel agency.
He collectively refers to these companies - Priceline, Expedia et al – as “The Beast”.
The piece lists a string of reasons and evidence, focused on commission margins, as to why you would steer clear of working with these companies if you were anything other than a start-up.
There are certainly some valid points here about the importance of keeping an eye on your commission levels and being aware how they are affecting your organization and revenue model.
However, the article does not acknowledge that the term “affiliate” can also describe a relationship that I prefer to call “partnership”.
Starter
Through working closely with The Beast using white label solutions, which provide the tools, content and platform to create new travel offerings, it is possible to add significant value to an online travel brand’s site.
This can ultimately lead to a better conversion rate and a higher profit margin. In short, Spektor creates a false choice where one’s only avenues are to work with The Beast as a low margin, “cookie cutter” affiliate or to avoid them entirely.
This is a misguided and uninformed approach to what represents a significant opportunity to grow one’s business.
As the CEO of an established online travel company, which has been working with a leading OTA for over ten years, I’d like to shed some light on why an online travel brand would chose to work with an affiliate or private-label partner model.
To give some background, NYC.com has worked with Hotels.com and the Expedia Affiliate Network (EAN) for over ten years, and there is no question that having access to their inventory and technology has helped immeasurably in growing our site to where we are today.
NYC.com receives over eight million annual visitors, has eight figure annual revenue for travel-related services, and is the leading New York City travel site.
EAN understands something fundamental that many hotel brands fail to grasp. Our site visitors are OUR customers. Our brand and reputation are what is at stake.
As such they give us a platform that allows us to control the customer experience from end to end. Critically this platform also offers the technology we need to offer visitors near instant access to information, rates and inventory for over 500 hotels in the New York area.
This allows us to fulfill our mission to offer the most competitive pricing and deals on the market. Further, as one would expect of a true partner, we also have access to significant human resources in the form of dedicated account managers and access to some of the most talented minds in the travel space.
The Beast turns out to be comprised of individuals who are not, as Spektor seems to imply, engaged in some nefarious plot at world hotel domination, but travel professionals dedicated to ensuring we all deliver a compelling travel product to our customers.
Main course
In that light, NYC.com’s business is knowing what our customers want to see and experience when they visit New York. We would much rather focus on creating a compelling and exciting user experience for these customers than draining significant resources sourcing and maintaining inventory from numerous hoteliers.
With advanced tools, content and platform provided by a third party, we can focus on the more exciting areas of marketing, content creation, and all the little things that ensure our customers are happy with their user experience.
Through feeding the beast, our platform is updated and enhanced more quickly than an organization our size could ever maintain ourselves. When we recently upgraded to a major new version of the API it took only 100 man hours to fully implement, test and debug.
Since then, we’ve seen a 13% increase in room bookings, which easily pays for that investment. Furthermore, working with a larger company with internal teams specifically devoted to site upkeep means a reliable and stable hotel booking platform underpins our hotel booking engine.
Down-time is almost unheard of. As anyone operating an online transactional site knows, speed and reliability are essential for delivering conversions.
It’s also worth remembering that commission rates should not be seen in isolation. They need to be analyzed in relation to conversion rates and volume.
If you’re looking for large booking volumes you need assets beyond breadth of inventory.
The role of an OTA partner in helping with conversion rates is important here – user reviews from trusted sources, quality images of hotels offered, tailored deals to meet customers’ needs, late room availability and a fast, stable experience turns lookers into bookers, boosting conversion rates and the overall site profitability.
Dessert
To finish on a word of caution: I would never advise an online travel company to sit back and let their affiliate partner do all the work for them.
It is your organization’s responsibility to make sure that commissions are adding up and the site is keeping up with customer demand and competitor offerings. You should always have an ear to the ground and make sure your partner is meeting your needs.
It is this combination of understanding what the options are, what works best for your customers and where you should (and shouldn’t) be working with third parties which will help you excel beyond your competitors.
From my own experience, dismissing the role that the large OTA affiliate programs can play in achieving your goals is myopic at best and detrimental to your business at worst.
NB: This is a guest article by Sean Millar, CEO of NYC.com.
NB2: Monster eating image via Shutterstock.
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About Special Nodes
Not to play devil’s advocate to someone playing devil’s advocate… (I’m getting confused… for simplicity sake, let’s just assume that the Beast we are speaking of has a “666″ tattooed on its forehead…)
Sean, I can’t agree more – a destination using an OTA simplifies a lot of things, but I think you perspective may be a bit too simplistic. The OTAs are smart business people and they have created a good product on a solid platform. Unfortunately, the white label businesses also strategically supports the core brand more than the affiliate benefiting from the revenue share.
Here’s why:
1) Pricing – As most US hotels sell rooms under rate parity, the price will be identical on an OTA site and the affiliate site.
2) Inventory – As most white label engines pull from the same availability pool as the main OTA, hotel inventory is also identical.
3) User Experience – OTA sites generally offer superior navigation and enriched content versus the affiliate using an API – producing a comparably better user experience.
4) Business Intelligence – The OTA is able to evaluate all booking conversion and navigation statistics to better understand the needs of destination-specific customers as compared with typical OTA customers (or hotel brand customers if a hotel brand uses a white label product.)
For a consumer, the burning question is in over the long run, why should consumers book on NYC.com as opposed to an OTA? That is what feeds the beast.
However, that raises an even more interesting question. NYC.com is not the official website for New York City – NYCgo.com is the site backed by the tourism authority NYC & Company.
In many ways, NYC.com is similar to NewYork.com – another website with a great, destination-specific URL that can glean traffic from the official tourism boards and city websites. NYC.com and NewYork.com are simple affiliate sites where reducing tech spend/overheads and maximizing revenue share is the key to the game.
The objectives for true destination sites is much different.
From a hotelier perspective, NYCgo.com is at least partially funded by an organization that receives hotel occupancy tax revenues. If bookings from the site are channeled through an OTA, even though the consumer pays an identical retail price, the hotel only captures revenue based on the net rate after deducting the merchant margin – part of which funds the destination in the form of a revenue share.
The lower hotel revenue reduces the hotel’s tax liability, but does nothing to impact the consumer’s retail price, so it does not stimulate demand or shift share.
Let’s look at the relative profitability of the hotel, OTA & destination in the scenario you described. I will use some conservative numbers. If you want to plug in your actuals, my thinking is that the picture gets uglier.
Assume a typical NYC leisure hotel booking:
Average Daily Rate = $200.00
Average Length of Stay = 2.0 nights
Consumer Hotel Spend per Booking = $400.00
Sales & Room Occupancy Taxes = 14.75% + 3.50 per night
Total Consumer Price = $459.00
Average Merchant Discount = 22.3% ($89.20 per booking)
Net Hotel Revenue per Booking = $310.80
Revenue Share % to Destination = 10% of consumer hotel spend
Revenue Share to Destination = $40.00
Hotel Room Occupancy Tax Liability (excluding Sales Taxes) = 5.875% of consumer price + $2.00/night + $1.50/night = $30.50
So from a hotel’s perspective, selling a room through a destination processing via an OTA results in significantly lower revenue capture for a consumer paying the same retail price. Having more than 1/5 trimmed from its top line revenue by an organization that is funded by tax revenues compounds the perceived profit sieve.
This lower revenue capture also impacts destination tax revenues – this is why so many US destinations are either suing OTAs (in many cases frivolously as the OTAs have been in compliance with their tax code) or like New York City, changed their tax code to tax the retail price paid by the consumer.
So, who is the Beast? I don’t believe Destinations, OTAs or Affiliate sites are inherently evil, but I can say that an official destination employing the merchant business model is not conducive to sustaining hotel profitability.
One result of unprofitable hotels is reduced headcount – something destinations want even more than tax revenues – an employed workforce. Even worse, many hotel owners desperate for cash flow wind up reducing rates to shift share from competitors – causing a downward spiral in rates if the competitors match or undercut. That in turn, lowers tax revenues – not good for the destination.
Yes Sean, I can certainly see why you like feeding the Beast. You don’t need to expend many marketing dollars to promote the destination and if you are good at SEO, a nice short, destination-relevant URL when paired with a revenue share from a major OTA is a beautiful thing – for you, but not the hoteliers or the destination.
Dear Sean,
Congratulations on a well written article. Your response to our article is much appreciated, and sheds an interesting light on this important matter.
That being said, it seems to me that you have taken our message to a wrong direction, and I think it is appropriate to set things straight.
To be clear, we have nothing against the Beasts from their own business perspective. They have remarkable infrastructure and offering, and I have great respect for their monumental achievements.
My main argument is that while the Beast is great for a young budget-conscious start-up, it is much less appropriate for an established brand, which already has the business infrastructure in place to professionally handle sales by itself.
NYC.com brings remarkable offering to your clients – first and foremost due to the wide breadth of information you and your team have put together, to the benefit of your customers. With all this content in place, you capitalize on the traffic you gain via hotel sales.
Since you are focused on one destination only, where as you noted you offer access to ONLY 500 hotels (!), your choice to continue working with the Beast is just the more baffling. The massive traffic you report surely converts to healthy revenue as you report, even with the 10% you are most likely getting from the Beast. Revenue is grand – only that at least half of your potential revenue never reaches your coffers…
With only 500 properties at hand, signing them up directly should not be as grand of an endeavor as you portray it to be. No doubt, given your large volume you can easily negotiate solid rates with them, and by doing it directly, to actually earn twice as much on every reservation, depending whether you’re ready to become a merchant of record, or utilize pay-at-the-hotel model. You win not only larger margin, but also greater control over what you offer on your portal.
The software you require to make this happen was most likely absent or too expensive ten years ago and the Beast was a wonderful partner, but these days great inventory systems are abound – that can contain these hotels on one hand, and sustain your large traffic on another. You don’t even need robust server farm – just put it on a cloud.
This is just one way to go about it – another way can be the use of a channel manger to whom you can outsource this “hard” work (the cost of which should really amount to not more than a couple of percentage points of your revenue, and still double your bottom line at the very least).
Sean, you’ve spent a decade building a massive hub of information, and earned the recognition and popularity of NY visitors. This is the hard part which you successfully completed through the hard work of your team. Simple yet robust alternatives to the Beast which could provide you equally stable and smooth booking environment are out there, and every day that you do not take advantage of it – you feeding a massive amount of your potential revenue to the Beast.
One must question whether the comfort and peace of mind provided by the Beast is really worth the massive chunk of revenue fed to it in return?
I appreciate the responses to the article though they seem to ignore my most salient points.
First and foremost, the human resource and technology costs associated with negotiating rates, building and maintaining competitive and timely offerings, handling transaction processing fees, customer service issues, etc. are far greater then Spektor seems to assume. Second, commission with an OTA is obviously going to be pegged to the volume you can deliver. In short, the arbitrary numbers posited here on both sides of the equation do not reflect reality.
And I’m not going to get into an ontological discussion with Cole on what comprises a “true travel site.” Suffice to say that if NYC.com isn’t a true travel site, i’m not sure what the term even means. For Cole this seems to mean the local, partially tax funded, CVB or organization tasked with promoting travel in a city. These organizations have many constituents and their overall goal should be promoting travel, not simply increasing hoteliers bottom line. NYCGo has done a remarkable job in that respect. Moreover, to state the obvious, NYC’s tourism dollars impact on the local economy extends far beyond hotel revenue and occupancy tax. Tourism in NYC generates over $30 billion in direct visitor spending annually.
Some other points, in no particular order:
1: Working with an OTA doesn’t foreclose working with hoteliers directly.
2: Working with an OTA doesn’t foreclose the ability to enhance their content and technology and provide additional value to consumers. Indeed you had better be doing that… Our popular NYC hotel map ( http://www.nyc.com/hotel-map/ ) is but one example of a unique product not found at any OTA.
3: Working with an OTA doesn’t impact in the slightest the ability to use business intelligence. In many respects it vastly simplifies the huge amount of data our analytics deliver.
Sean,
First, I never said you were not a “true travel site” – the correct quote was you were not a “true destination site.” I have no idea what a “true travel site” is either because I never said it. Additionally, I never even implied that the overall goal of an official destination site should be “simply increasing hoteliers bottom lines.” Hotels are merely one aspect, albeit an important one because the total spend for an overnight visitor typically exceeds that of a day-tripper.
I wasn’t intending to diss NYC.com. You are most definitely a travel site and quite an accomplished one.Proof in point, you beat have the top unique visitor counts of any New York travel site. My, perhaps tangential point is that while NYC.com specializes in one specific destination and operates on an affiliate model, it is perhaps more similar in scope and method to a destination site than a major OTA.
My definition of a “True” destination site is the official one funded by city tax revenues. This does not mean they are better – in the vast majority of cases, they are much worse. And that is exactly my point. There are very few reasons that the “official” sites should not be able to own the destination by creating a dominant position with visitor traffic and local travel-related supplier participation. They simply lack strategy, technical expertise and execution capability…
I know the costs involved with negotiating deals, aggregating content, transacting, and servicing business from a GDS, Switch, OTA, technology provider, hotel and attraction perspective. Sorry – Andrey is right – Connectivity options have increased, technology costs have fallen and human resources can be deployed more efficiently and cost-effectively than ever before. I have clients that are executing strategies at a fraction of the cost compared with five, ten or fifteen years ago.
I also clearly understand the dynamics of tourism/convention & visitors bureaus and their focus beyond selling merely hotel rooms. That is not my point. Tax revenues increase from all inbound visitors, regardless of their booking method. However, aside from rental car taxes, there are very few taxes that specifically monetize travelers independently from general sales taxes.
My point is that the monetization dynamics and business model for official, taxpayer funded destination sites and the travel suppliers located within those taxing jurisdictions SHOULD be able to provide a much more cost-effective, efficient and competitive platform than the OTAs and their affiliates. They currently DON’T, and that is a shame.
I am wondering a bit about the title tag on the booking widget pop-up from your NYC Hotel map that reads “NYC.com – The Official New York Hotel Site” or the map itself that states “New York Hotels, Manhattan Hotels, NYC Hotels | NYC.com – Official Site” or the title tag of the main NYC.com site that reads “NYC.com | New York Hotels – Broadway Tickets – New York Restaurants – Official Site”
Given that NYC.com does not have any form of official relationship with the City of New York, The State of New York, NYC & Company or the Hotel Association of New York, exactly what makes NYC.com “Official?”
Plus, for the various hotel neighborhood web pages like “Financial District” or “Theater District”, you not only put “Official Site” in the title tag, but post “The Official New York Travel Site™” in the top right corner of every page. It is a bit odd that the US Patent & Trademark Office website doesn’t return anything when that phrase is searched in their trademark database…
It is clear that you are much more astute than NYC & Company from an SEO perspective, incorporating the keyword terms “Official Site” and New York Hotel” or “New York Hotels” into your title tags and such helps you rank #3 for “new york hotel official site” and #6 for “new york hotels official site” scoring 10 and 13 slots higher respectively over NYCgo.com, the highest ranking site formally endorsed by the city.
I am also fairly certain that your lawyer advises you that there is nothing wrong and that you are merely informing people that you are indeed the “official” NYC.com site and nothing more.
Bottom line – you guys are successful. You are also smart – you have a great URL, plus a great phone number (888)VISIT-NY. You splash the term “Official” all over your site and you use an OTA on an affiliate basis to transact bookings. This is undoubtedly an extremely sustainable model for you.
My point is that you employ a model that increases hotel distribution costs / reduces hotel revenues that in turn lowers tax revenues (except in New York where the room occupancy tax law was changed.). From a hotelier’s perspective that is not a great long term model. The hoteliers deserve better and the tax-funded destinations should be stepping up to the challenge.
The beast should not be killed as some have suggested, it should just be put on a smart, healthy diet that can more efficiently nourish the hoteliers who contribute the vast majority of the intermediary margins and tax revenues at this point.
Robert,
As a follower of your always informative and meticulously argued “Views from a Corner Suite” Blog, i should have known to exercise more semantic caution. That said, I do think your point RE what you are calling ” “True” destination sites” and your feelings on how they should operate is indeed tangential to the discussion. Perhaps we’ll discuss government funded destination sites over a beer one day. I have a lot of amusing stories in that regard.
At bottom the issue at hand is whether it makes any sense for travel brands to work with OTAs. Any serious travel brand looking at this decision can easily make the economic comparison. Beyond the economic comparison they should weigh carefully the technology component. A small increase or decrease in conversion % can mean the difference between a good or bad decision.
Bottom line is that any serious travel brand should be able to negotiate a deal where working with an OTA exclusively or as part of a mix of offerings, simply makes a hell of a lot of sense. OTAs don’t exist in a vacuum. They need to respond to market conditions.
The overriding gist of your position and Andre’s is that it’s not a great deal for the hoteliers. But the article was not about hoteliers. It was about whether Travel Brands should work with OTAs.
Risk and reward. A relevant comparison is Vegas.com, who similar to NYC.com is a travel destination site but through developing their own booking engine and negotiating directly with the hotels have managed to compete directly with the OTA’s.