Feeding The Beast in travel might work for startups but is not helping in the long term

NB: This is a guest article by Andrey Spektor, founding CEO of Gimmonix (Carsolize).

We constantly monitor the technologies used and products offered by travel brands worldwide – and have found some striking oddities.

The tendency these days of many established brands is to use low-margin affiliate iFrames and white labels for high-profit segments like hotels.

The large assortment of accommodations coupled with a free, turn-key operation certainly has an appeal, but is it really worth the real cost?

By using affiliate programs, travel brands not only diminish their profit margin to ridiculously low levels, but also support the rapid exponential growth of their greatest online rival.

Affiliate networks are great for young entrepreneurs – not serious travel brands

Three companies (who are doing a great job for themselves) bite into a growing segment of the global travel industry, forming what we refer to as The Beast:

  • Expedia (aka Hotels.com, Egencia, Hotwire, eLong, Venere, CarRentals, etc)
  • Travelocity (aka Zuji, WCTravel, Lastminute.com, etc)
  • Priceline (aka Booking.com, Traveljigsaw, Agoda, Rentalcars, etc)

Affiliate programs are perfect for startups who know very little about the intricacies of the travel industry, and have little to no money in their pockets.

Following a quick sign up process, an iFrame is ready to be installed on your site – with numerous properties available for instant booking.

Your share? Around 3% to 7% – at best.

While it is a great start for someone new to the industry, it hardly makes any sense for professional organizations and well-funded travel startups to follow this path.

75% of revenue is fed to The Beast

With average hotel booking value of EUR 250, 5% affiliate VS >20% wholesaler commissions – travel brands lose up to 75% of their revenue – as much as EUR 40 per booking!

Considering a normal booking conversion rate of 2.5%, a well positioned online travel brand with 100,000 visitors a month gives away as much as EUR 100,000 every single month to their affiliate network. Looking for a self-destructing industry?

Look no further! Every referral dollar earned, feeds $40 to the OTA beast.

Selling traffic is not sustainable

Many young OTAs have attracted significant investment in recent years.

  • With all the hype Hipmunk created, for hotels it still just links to Hotelscombined, which then redirects to leading OTAs for actual bookings.
  • Russian newbie Ostrovok, links to Expedia.

These and other brands have attracted substantial investments, and the list goes on.

At an estimated 300:1 conversion, selling one’s traffic a buck a pop might be cool, but in the long run it’s not sustainable: with full dependency on traffic, these OTAs will die as soon as user acquisition cost becomes too high, which is a matter of time, given the growing market share of The Beast.

Professional travel brands are committing silent suicide

The bankruptcies of large local tour operators and the financial hardships of global, so-called old-school brands witnessed in recent years are a testimony of the need for change.

Travel brands must earn well on sales to thrive. Feeding The Beast exacerbates the situation, making things harder to fix as time goes by.

These companies, with supplier agreements in place, IATA licenses, and BSP arrangements, will thrive only by providing their sub-agents and online clients with true value, and that can be achieved by putting their resources together.

Sounds hard to do? It must be easier than being consumed by The Beast.

Those feeding the beast are bound to be consumed by it

Whether you are an established travel brand or an innovative OTA, redirecting your traffic to The Beast is not sustainable and something must be done.

Existing technology and prevalence of professional wholesale resources makes it possible to beat the Beast in its own game instead of feeding it. It is time to take back what is yours – your clients, and those 75% of the profit you are willingly giving away.

Why are you feeding The Beast?

NB: This is a guest article by Andrey Spektor, founding CEO of Gimmonix (Carsolize).

NB2: Scary beast image via Shutterstock.

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Viewpoints

About the Writer :: Viewpoints

A founding principle of tnooz was a diversity of viewpoints from across the spectrum. Viewpoints are articles by guest contributors from around the travel and hospitality industries. The views expressed are those of the author. and do not necessarily reflect those of the author's employer, or tnooz and its partners.

 

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  1. Mark H

    I’m not sure I understand this. If you have more affiliates, you have more traffic, but lower profit margin. I think you earn more in absolute number while using affiliates. I recently started working in tourism industry (SE Europe) and I’m little confused by this.

     
  2. Andrew Wolodzko

    The standard agreeent with OTA separates you from the customer. You do not know the name of the person, who booked the room, you do not deal with the hotel, the further requests are directed to OTA, and the next time the client will go directly to OTA website not yours. So if you are an established agency, you should not use OTA for selling the products you are capable to sell by yourself.
    And this is exactly what Ostrovok does in Russia.They sell their own products. But they do not exist abroad, so the person, who is looking for the hotel in UK is not their customer. They will loose them anyway, so why not to try to earn some money with Expedia.
    In the following years they can try to establish their own connections abroad, or negotiate better conditions with Expedia.

     
    • Nikolai Avrutov

      Very interesting comment @Andrew Wolodzko, one important point to clarify though:

      Ostrovok is a Russian portal. It’s clients are Russian, and if someone is looking for a hotel in UK, it is most likely a traveler originating from there – hence, a great deal of interest to preserve the client, and serve him for his travel needs locally as well as outbound.

      With that being said, since they have all required infrastructure in place, what stops them from contracting 6-7 3rd party providers, to offer superb inventory, and earn a decent margin while doing so?

      Operating in a country, where outbound segment is growing by the minute, and online booking of travel arrangements is done by more and more people, exploring additional avenues from where to draw their hotel resource makes perfect sense.

       
      • Andrew Wolodzko

        I think Ostrovok will try to do what you suggest, it is only the matter of time.
        Ostrovok came to life in October 2010 and may face more paper work to do as Russia is not a member of EU. Thanks to cooperation with Expedia they can build up the statistics how many Russians book online a hotel room abroad and later choose to act independent.
        The article is right to the point that the standard affiliate solution offered by OTA sucks,
        and you should not accept it. But then you have two choices, either act independently, or try to negotiate the agreement with OTA. Which Ostrovok did. They use customized integration with Expedia, which works different than iframe described in the article and definitely do not feed the beast, at least they seem not to.

         
        • Nikolai Avrutov

          @Andrew,

          This article did not aim to have a specific take on Ostrovok, who clearly has a very interesting model, and a great deal of potential to succeed on their market. That being said – if they are working with Expedia with the goal of building up the statistics – that’s one expensive market research they do I must note.

          What the article asks to highlight is the prevalence of OTA affiliation by organizations that can and should capitalize on their existing infrastructure, and the availability of the technology on the market to actually do so.

          Even if it is an XML integration to an OTA – you are still feeding the Beast, which is fine for small or starting operation – one that is still at the proof of concept stage. However, when it comes to serious play, if travel organizations use OTA links instead of direct access to multiple 3rd party resources acting as a merchant of record – they are giving up a massive chunk of their profit margin away.

           
  3. Carsten

    Sorry, but I can’t agree with the premises this article makes. What you are completely neglecting is the fact that with affiliate marketing, you only have to fork over cash after you had a sale, as opposed to general online or search engine marketing. It really is a win-win model because brands that engage in this get a lot of exposure and brand recognition for free.

    If you had monitored the development of prices in, for instance, Google Adwords for competitive search terms in travel over recent years, you’d know that some, if not most, have skyrocketed and it has become increasingly difficult to be present in that market with a sensible customer acquisition cost. I believe that it makes far more sense to give affiliates a bigger cut of a definite sale than to fork over large amounts of money for,say, tv advertising or newspaper ads which have NO guaranteed results or even reliable ways of measuring their success.

    And I have to say, that even for a comparatively small affiliate sites like mine, big OTAs and “beasts” such as booking.com and the like totally understand this and are more than willing to give much, much better cuts than the measly 3-7% you described.

     
    • Nikolai Avrutov

      Carsten hi,

      The high cost of customer acquisition is precisely the point in place.
      Certainly, for a simple affiliate – it is a win win. At the end of the day, an affiliate will remain an affiliate – be it a global OTA or a local player.

      But, if you already have an established local presence, if you have set up your customer support infrastructure, and using 3rd party resources for your main product, we argue that there is little sense simply reselling your traffic to an OTA when it comes to online sales.

      A scenario that repeated itself in several countries already, saw local tour operators relying on OTAs for their online sales. Do it for a while – your clients figure out where you get the product from.
      The moment the OTA you are affiliated with enters your market – guess where these clients go. That’s right, to that same brand they already got to know thanks to the tour operators.

      This is a normal process, and tour operators have the tools and the infrastructure they need to maintain their position – be it by specializing on niche categories, level of service, or even same product but at a sustainable margin (i.e. over 15%). We argue that they should use it, in light of the technology already available to make it happen.

       
  4. Yofes Mwesige

    Thank you for such fascinating information .we shall follow this example and hope beating the best we be the best way we can progress otherwise we are grateful to once again introduce to you (P ES) we would wish to partner with your in our area of knowledge and expertise. We are interested in providing you with the following services.
    Vehicle hire for city running, Tourism services to your desired destinations around East Africa, Airport transfers and we are willing to give you friendly packages for charity programs and tour in our National parks in Uganda, and a 10% discount . This will be from the total profits after deducting the cost of total expenditure as the guest will need maximum satisfaction .We hope this will bind our mutual business relationship. Please let me know if you may need to look at any of our packages
    Yofes Mwesige
    Travel Consultant

     
  5. Dieter Holle

    Interesting comments, and I’m learning alot. From our perspective (inbound wholesale business model in a long-haul destination) it’s then best we feed The Beasts from the supply side, – which with the right technology, we can do succesfully, as we already have the contracts in place with suppliers and are very competitvely priced.

    Interesting info about Ostrovok using a hybrid solution for their purpose. Really like that idea. Use The Beast for destinations/products in which you are not yet established, and your own solution in areas where you are. Need to get my head around bringing that all together.

     
  6. Yury Glikin

    I am with Serge on this one, I have no idea where Andrey gets his numbers, but they are way off. Affiliate programs are a very powerful distribution channel and, if managed properly, can be highly lucrative to start-ups AND established brands – otherwise networks wouldn’t exist at all.

     
    • Andrey Spektor

      Hi Yury,

      Would love to hear your take on the numbers 🙂

      Again, I am not saying that Affiliate programs are bad and should not be used – all I am saying is that additional resources must be tapped by companies who are able to sustain the operation. This also relates to http://www.hotelscombined.com.

      As noted in the comments above, analyzing a variety of Net rate resources, we’ve identified major price differences, and opportunities for significant mark ups in some instances, and an average of 20%. What if your clients could get OTA rates along with other 3rd party resources through a single feed? It can have a dramatic effect on your as well as your client’s bottom line.

       
  7. KMB

    Interesting that the author is CEO of a company that offers (surprise!) an alternative hotel booking solution…that draws supply from more traditional wholesale inventory vs the OTAs. http://www.carsolize.com/carsolize-booking-products/carsolize-booking-engines/carsolize-hotel-booking-engine Really? C’mon guys.

     
    • Nikolai Avrutov

      Hi KMB,

      Of course I am writing about a topic that I understand well, have years of experience working with, and a decent degree of insight into. I am not a journalist, and my opinions are biased.

      Tnooz is a terrific place to be heard, share your vision and ideas, and to listen to what others have to say.

      This article reflects the philosophy on which I have built my company – recognizing that professional travel brands should have the tools to capitalize on their existing infrastructure, by accessing multiple resources.

       
  8. Ming

    Good article Andrey, and I couldnt agree more.

    The cost of development these days, as well as access to travel content (Wholesale or distribution) should make it no excuse for even start ups to consider how much control over the margin they should have.

    I have worked with different and large audience portals where the affiliate model still make sense as the conversion is lower and the lead less qualified. The audience is there for the editorial content not to buy travel products necessarily. However, if it is a highly qualified lead, one should do the homework to figure out how much margin they are giving away.

    I’d lke a T-Shirt too Matt!

     
    • Nikolai Avrutov

      Hi Ming,

      The cost of the development should be irrelevant – no need to reinvent the wheel. The technology is already there, and its current cost does not exceed 1% of overall turnover.

      The challenge and greater costs are in running the operation itself. The argument of the article is that those companies already running this sort of operation – should utilize it to the fullest.

       
  9. Serge Faguet

    I really don’t agree with the premise of this article. It’s just plain wrong.

    Firstly, there are quite a bit more options for an affiliate partnership program than the three companies you describe. There are at least 10 more with solid global coverage.

    Secondly, the economics are better than you describe. I can’t comment on any of our deals, but we are certainly not earning commission in the “3 to 7% commission range” or converting our traffic at an “estimated 300:1 conversion.”

    The global players provide a valuable service: they aggregate a lot of hotels from around the world. But because there are over 10 companies providing this service, they don’t have that much market power, and differentiation comes down to the quality of service they provide, the quality of the integration they provide, strong inventory in a highly specific location etc.

    If you get a major affiliate of one of the networks above to comment to you off the record, they will tell you that they command around 80-90% profit share. this pretty much destroys your argument because “the beast” gets 15% for doing all the hard work of signing up hotels from Paraguay to Malaysia, whereas the affiliate gets 85% for doing search engine marketing.

    – Serge (Ostrovok.ru)

     
    • Kevin May

      Andrey Spektor

      NB: POSTING THIS ON BEHALF OF ANDREY AS HE WAS HAVING PROBLEMS RESPONDING…..

      Hi Serge ,

      Thank you for your comment. Let’s sort things out.

      We’ve covered the top 3 companies and their respective brands – as they command a vast majority of global affiliate programs. A multitude of channels – from wholesalers, to channel managers, to Pegs exist – most of them with net rates 15 to 40 percent lower than offered by the OTAs – on average. Moreover, we’ve analyzed several operations, demonstrating how the same hotel can have a whopping 70 percent net rate difference from one source to another. My argument – is that as an established organization, you should be tapping these resources too, and you don’t need to reinvent the wheel to achieve that.

      Some of your competitors (oktogo.ru for example) already use that very same multi-channel technology we are talking about, to access global hotels from multiple channels.
      Let’s take a look at the economics:

      You need to be really big to get around 10 pc commission from Expedia. Let’s say that this is in fact the case with you. Let’s also assume that your conversion is an impressive 100:1.

      You’ve set out to become “Russia’s booking.com”. You are making direct agreements with hotels locally, run a superb operation, and turn a handsome profit. But what happens when you are selling outbound? Enter your Expedia deal.

      Expedia makes about 25pc commission on every hotel booking, giving 10 pc to you – their affiliate. They keep 15pc. You see – they need this fat margin to keep you – their affiliate – happy.
      Taking the numbers above, let’s see what happens with 10,000 visitors on ostrovok.ru:

      Current model:
      10,000 visitors convert to 1000 bookings. Average sale: EUR 250.
      Net profit: EUR 62.5
      Expedia’s share: EUR 37.5
      Your Share: EUR 25

      If you access additional channels, on Net rates:
      Net profit: EUR 62.5
      CC processing, fraud control, charge backs, etc = 2pc = EUR 5
      Technology cost 1pc = EUR 2.5
      Ostrovok share: EUR 55. That’s EUR 30 more.

      Difference with 1,000 bookings between the two models amounts to: EUR 30,000 Expedia gets to keep instead of you.
      I am not saying “don’t work with your OTA”, I am merely suggesting you should look at adding additional channels to get your product from.

       
  10. Tom Reynolds

    Great post Andrey!

    Do you have recommendations on technology partners/solutions for 2-way communication (rate/availability info and booking data) with as many hotels as possible?

    I’m going to be launching a scrappy, self-funded OTA and looking to negotiate direct deals with hotels while to the greatest extent possible minimizing the financial cost of integrating with multiple channel managers, PMS’, CMS’, etc. Wondering if you are familiar with any aggregators on the OTA side of the business, or alternatively the best approach to this with limited financial resources?

    Thanks again for the post!

     
    • Nikolai Avrutov

      Hi Tom,

      Depending on your actual budget there might be several options.

      However, it sounds like you want to set up something very simple and low-budget. In this case, going with http://www.hotelscombined.com, or directly with any of the OTAs – is exactly what you need. 🙂

      “Affiliate programs are perfect for startups who know very little about the intricacies of the travel industry, and have little to no money in their pockets.”

       
  11. Matthew Raymond

    There is an old English proverb which expresses the same sentiment, slightly differently:

    “Never feed another man’s dog”

     
  12. Psycho

    I guess, “feeding the beast” is the good way to start and test business model without spending time on building direct hotel connections. We’re just starting our startup and gonna “feed Expedia” for a while. It’s good to know that there are some opportunities besides “feeding the beast” and we’ll think about it later on.

     
  13. Psycho

    Ostrovok uses Expedia for hotel booking outside Russia – it has direct connections with hotels inside the country and with some foreign hotels also.

     
    • Nikolai Avrutov

      Absolutely. And what a great business model – to combine direct agreements in a growing market, along with solid offering abroad.

      That being said – taking the affiliate path was a low-risk move at the beginning, but now – when the volumes are there and the finances in place – why not take it to the next, professional level?

      If I had my money invested in Ostrovok, I would be asking why am I still getting a meager commission selling traffic away to a major OTA, instead of turning a solid profit on every booking while creating a repeat customer base, and brand loyalty.

       
  14. Bob Mc Millen

    Great article Audrey! I’ve had the same experience. Although we are strictly a luxury travel company, we still get quite a few commodity shoppers. In an attempt to give them the option of booking themselves, we tried the top affiliates so we wouldn’t leave the clients angry because we don’t sell cheap vacations. Unfortunately, this scheme proved what Audrey said was correct and a bad move, even for our reasoning.

     
  15. Dorian

    Andrey, good article. I see it differently though (for a change!).

    Every company has a position in the market place. The vast majority don’t have aspirations to be at the top but some do and, when they get there, they’re almost impossible to topple.

    It’s not just travel – almost all sectors are dominated by global brands. ‘Beasts’ if you prefer. Coca-cola, Colgate, Marlboro. These guys have been market leaders since forever and long before affiliate programs existed to support their status.

    The rest – the market followers – need to find their niche. I take your point about brand leakage through linking out to your competitors but your job, as a follower in the market, is to maintain your brand in many ways. Better design, better functionality, better service. It’s almost always easy to get a lead on the beasts in these areas.

    At some stage the follower may want to go head to head with the beasts and then they may well want to cut them out of their business. Until then, if you’re being offered a leg-up by a giant, I say take it.

     
    • Andrey Spektor

      Thank you for the compliments Dorian.

      I agree – the major, well established brands are indeed almost impossible to topple. I am not suggesting that anyone should actually try doing that. These companies have excellent product, superb infrastructure, excellent management teams, and a solid marketing budget.

      Comparing to other sectors – I can’t think of any affiliate or franchise program that does what the large OTAs are doing: imagine Coca Cola approaching a local beverage firm, saying “the bottles are yours, but the liquid inside is coming from us, and because it is so delicious and comes in so many tastes, we will give you a quarter of what you could be earning yourself, given your existing factories and access to deals with other professional beverage providers”.

      If you are brand new – the leg-up by a giant is great. But if you are a professional travel brand, with proper infrastructure in place – why not capitalize on the multi-channel content availability?

      As a small or midsize organization, you don’t need to do hundreds of thousands of bookings a day. If you can earn a ~20% commission accessing multiple resources through single interface – a thousand bookings a month would make a world of difference on your bottom line.

       
  16. George

    they are not ‘beasts’ as you have mentioned. they have proper technology and huge resources integrated through the, there is no meaning in being jealous.

     
    • Andrey Spektor

      Hi George,

      Don’t get me wrong – I have huge respect for these companies, what they accomplished, and the massive effect their brought on the industry as a whole.

      I also think that the capability they offer anyone interested to enter the travel industry – to deploy a full-scale travel website is quite amazing. I can’t think of a more entrepreneur empowering industry than ours, when it comes to affiliate programs.

      Nevertheless, when it comes to professional organizations, I think that using OTA affiliate programs is a shortcut, and a very expensive one in the mid-long terms.

       
  17. Matt Zito

    Andrey, I love this article! I think I will have some T-shirts made up that say “Don’t Feed The Beast.” I am currently working with a premium travel brand in making the transition from an affiliate model to an OTA.

     
    • Andrey Spektor

      Sounds good Matt, be sure to send us one. Actually a whole bunch – we’ll have our clients to wear it 🙂

       
    • DJBorkowski

      Being on the Hotel Supply side of things, can definitely understand the pain of the Beast…. For probably slightly different reasons I would also love a shirt!!

       
  18. Dieter Holle

    Thank you for the article. Isn’t the right approach to test the waters via the affiliate models and have a clear exit/go-it-alone strategy based on success factors? Limits the risk a bit. The Monster is then more ‘abused’ than used.

     
    • Nikolai Avrutov

      Absolutely Dieter,

      As the article says “Affiliate programs are perfect for startups who know very little about the intricacies of the travel industry, and have little to no money in their pockets.”

      With that being said “it hardly makes any sense for professional organizations and well-funded travel startups to follow this path.”

       
  19. Stuart McD

    Think you’re share figures for a flat affiliate deal are low and you don’t really touch on the very significant expense of being a wholesaler. Why reinvent the wheel? Taking your example of Hipmunk, hotels are just one of a stream of rev streams (I assume).

     
    • Nikolai Avrutov

      @Stuart,

      What the article refers to is how professional well established and diversified travel brands, who often times already have agreements with wholesalers – fail to keep the profits to themselves, by adopting fast shortcuts with the Beast. Of course there is a cost involved, and that’s why new industry players who lack the financial backing have little choice but to settle for low margin affiliate programs.

      Hotels specifically, when sold using Net agreements have a very high profit margin, and travel brands give away to large of a share, when all they need to do is to complete a technological piece of the puzzle on their side.

       
  20. Lindsay B

    As I am working to launch my own travel startup this article was very relevant. Do you have specific suggestions on how to leverage existing technologies to avoid feeding the “beast”?

    Thanks!

     
    • Nikolai Avrutov

      Hi Lindsay,

      Would be great to know a bit more about your startup and what exactly it aims to do.

      In a few words, my suggestion would be to determine which product categories you would like to offer online (hotels for example), to partner with professional 3rd party content providers – like hotel wholesalers, and work alongside a technological specialist in realizing your startup.

      Specifically, I would suggest you to connect with a travel software provider (quite a few options exist), which would be able to:
      a. Facilitate your supplier agreements
      b. Provide you with online/B2B distributional tools
      c. Give you the option to acquire partial license to get started, and expand as you turn profit.

      Hope this helps!

      Nikolai

       
 
 

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