Data suggests hotel loyalty rates may hurt owners more than OTA fees do

A recent Deutsche Bank Research Report published July 13, 2016, highlighted hotel owners’ creeping concerns. Something just isn’t quite right when it comes to the proliferation of loyalty rates.

NB: This is a guest viewpoint from Peter O’Connor, professor of information systems at Essec Business School in Paris, and European online analyst for Phocuswright.

A close examination of hotel property financial statements reveals the truth: for many branded hotel properties, online travel agency (OTA) channels are now driving more value, and increasingly more room revenue, than!

How could this be? Let’s take a look at an interesting case study. (Editor’s note: Tnooz has agreed to not name the brand for confidentiality, but we confirm that the data is for one of world’s most recognized brands.)

I examined the Franchise Disclosure Document for a leading global lodging brand and discovered a dazzling array of fees that owners can expect to pay for their distribution. (See footnotes for sourcing at the bottom of this article.)
• Franchise Fee: 6%
• Reservation Fees: $4.24*
• Transaction Fee: $0.0895*
• Marketing Fee: 1%
• Loyalty Fee: 4.5%*
• Large Global OTA Commission: 13%*
• Commission Processing Fee: $0.16 + 2% of commissions paid*
• Paid Search Fee: 9%*
• Credit Card Fees: 2%
Other key data points:
• ADR: $153.43*
• Average Loyalty Discount: 4%*

hotel loyalty rates

Figure 1, above, demonstrates that an OTA with a primarily merchant based model can expect to drive $119.81 to the bottom line of an owner.

This represents a 1.2% increase or $1.37 more than a Loyalty Member on a standalone booking!

Note also that the loyalty discount offered by this brand is relatively conservative, with several of its competitors offering far more aggressive ‘savings’.

The economic delta might seem narrow. After all, what’s a $1.37 to build a relationship with a customer and truly own that customer?

But what this model doesn’t show is the dilution caused by offering a loyalty discount to customers who would probably have booked directly anyway.

In this large brand’s case, they estimate that in 2015 in North America, room nights from their channels (, GDS, voice, and OTA) were as follows (Room Nights figures are per a Franchise Disclosure Document March 2016):

loyalty rates

In addition, in 2015 this brand’s rewards program contributed about 53% to occupancy in 2015 in North America and 62% of total revenue.

Even taking a hugely conservative estimate that 10% of the rewards bookings were diluted by the lower rate, this equates to a substantial amount of revenue lost by owners.

It further supports the comment in the Deutsche Bank report, “Hotel owners are grumbling that discounts for loyalty members are simply discounting bookings that would have previously paid full price.”**

It is also important to note that chasing a finite pool of potential brand loyalists requires large media and awareness campaigns that threaten to cause owner fees to rise further in the future.

And there is compelling evidence to show that OTAs are increasingly driving value greater than just a dollar and change over Keep reading to find out why…

During Expedia Inc.’s most recent earnings-related quarterly call with investors, CEO Dara Khosrowshahi said:

“We attract brand-agnostic travelers, as far as what hotel or chain they’re staying at. If you look at on a global basis, the biggest chains in the world get less than 0.5% of searches.

Of all the consumers searching, fewer than 0.5% are searching for specific large brands.”

This quote validates that OTA shoppers are more likely to be looking for options when considering where to stay in a destination.

Examining comScore data is even more eye-opening. ComScore looked at over half-a-million unique visitors to property pages of a major leading hotel brand on a leading global OTA and they found that more than 1/6th of those visitors later visited sites before completing their hotel booking.

More than 60% of this segment of shoppers later booked a hotel in the same month!

Clearly this indicates that consumers are utilizing OTAs as a primary research tool to guide them on where they might next go in their online shopping journey.

OTAs are delivering major amounts of free, highly qualified, downstream traffic to sites, which the latter seem incapable of converting except by using short term focused, owner-funded, loyalty discounts!

Clearly, despite brands’ self-serving claims, OTAs play a valuable role in our $1.4 trillion industry. Consumers are planning and self-organizing their travel much more intensively than ever before and find OTAs an invaluable resource to help them navigate the bewildering array of choices available today.

Ironically, consumers are not the only beneficiaries of OTA platforms.

Thus maintaining visibility in OTA search rankings creates a ton of value that both brands and owners cannot ignore. Many OTAs allow hotels to compete with one another for visibility to consumers visiting their sites.

OTAs want consumers to find offers that best meet their needs as efficiently as possible, so hotels that treat their consumers well will find themselves beating their competition for higher placement on these pages.

A recent analysis shows that 75% of customers buy from the top 15 hotels in their search results; 33% buy from the top 5 search results; and only 10% buy from page 2 and beyond.

Not only does lower visibility and search positioning mean less free, qualified referral traffic, but just when the hotel owner might have a need to fill rooms, they might also find themselves losing out to competitor hotels competing for the customer’s wallet. Consistently working with OTAs to find a win-win relationship is thus more necessary than ever before.

Misinformation and media speculation mean that hotel brands’ current ‘loyalty’ program based initiatives are being seen as highly positive for the industry, finally giving cash strapped hotels an effective means of combating the supposedly expensive OTAs.

In reality, whilst good for brands, as they artificially boost both loyalty club membership and booking percentages, both vital metrics when it comes to convincing hesitant owners to sign up for franchises or management agreements, these initiatives are, in effect, being financed by hotel owners who are receiving a lower net revenue per booking than they would receive through the supposedly hyper-expensive OTAs.

Of course this analysis only examines the situation at the transaction level but the longer term implications for owners are even more worrying.

Many major consulting companies use a multiple of room revenues as a key component of their asset valuation model, and thus the $1.37 net revenue difference, multiplied by thousands of transactions, could potentially have a dramatic effect on the real estate value of the hotel property.

And of course the increased power of the hotel brand, strengthened by higher loyalty club membership and better controlled distribution statistics means that franchise contract negotiations will be that bit more difficult.

Overall, despite how they are being presented by hotel brands, current loyalty club based initiatives are bad for the industry, artificially driving down room rates and demonstrating that hotel owners need to develop a far more comprehensive understanding of how exactly their property is being, and should be, distributed.

Without a thorough understanding of the real costs and benefits of using each alternative channel of distribution, they will continue to be shortchanged by brands pushing their own self-interests and leaving owners to pick up the rapidly growing tab!


  • Increasing brand related costs and new brand mandates are a sign that global hospitality brands are increasingly tone-deaf to their owners’ needs and concerns.
  • Historically touted as offering the lowest cost of distribution, recent brand initiatives mean that can no longer claim to be the superior channel for bookings.
  • New dynamics including loyalty price discrimination, new brand fees, and OTAs providing greater value for their transaction-based commissions than ever before have created a tipping point in the industry: for the first time ever, leading global OTAs are driving better room revenue than hotel chain Book Direct strategies.
  • OTA shoppers are not brand loyal but have appreciable potential to later become interested in a brand based on their OTA visit. In fact, there is significant evidence that OTAs drive a significant volume of free, qualified, referral traffic directly to

NB: This is a guest viewpoint from Peter O’Connor, professor of information systems and dean of academic programs, Essec Business School, Paris, and European online analyst at Phocuswright. He writes here in his own capacity.



Reservation Fees: $2.50 per guestroom/month. In addition, for reservations made using the central reservation system: $4.24 per guestroom reserved for non-resort hotels and $4.34 per guestroom reserved for resort hotels.
Transaction fee: $0.0895 per transaction (including each transaction that affects inventory at the hotel, such as creating a new reservation, canceling an existing reservation, or modifying an existing reservation to add or delete room nights, and each transaction that changes the rate).
Loyalty fee: 4.5% of the total guest folio, including an average room tax component, generated by guests earning rewards points or miles.
Large Global OTA Commission: Deutsche Bank Market Research: A look at Loyalty Pricing and RSS Conference Takeaways; 2Q16 Preview, Page 4, Paragraph 4, “The issue boils down to the fact that they are providing fairly steep discounts of up to 25% on a distribution channel that is as high as 25% of rooms, all in order to drive down their exposure to what is merely 11-13% take-rates for large chain hotels, who claim that OTAs make only ~10% of chain room nights.”
Commission Processing Fee: $0.16 per intermediary-sourced system transaction which supports development, enhancement, and ongoing support for the CTAC system, as well as postage and accounts payable processing costs associated with commission payments; and a processing fee of 2% of the total annual commissions paid by us on your behalf.
Paid Search Fee: Pass-through fee for brand direct bookings sourced from paid on-line market channels. Model assumes 35% of brand direct bookings include a Paid Search Fee.
ADR: Based on 2016 Franchise Disclosure Document.
Average Loyalty Discount: Deutsche Bank Market Research: A look at Loyalty Pricing and RSS Conference Takeaways; 2Q16 Preview, Page 8, Figure 4.


Deutsche Bank Market Research: A look at Loyalty Pricing and RSS Conference Takeaways; 2Q16 Preview, Page 4, Paragraph 3, “Hotel owners are grumbling that discounts for loyalty members are simply discounting bookings that would have previously paid full price. As we show in Figure 1, assuming hotels discount loyalty members at 10% on weekends and 2% during the week, for a blended 6.3% discount on 25% of bookings that come in through direct channels, they would need to see more than the entire OTA channel bookings switch over to cover the cost of providing discounts. This, of course, is impossible. To make the math work, hotels would have to see about 30% of bookings from all third parties including OTAs and offline travel agents carrying a blended 11% commission switch over and this unit economic analysis does not even include the cost of the awareness/TV ad campaigns.”

NB2 Illustration of a hotel room by BigStockPhoto

Share on FacebookTweet about this on TwitterShare on LinkedInEmail to someone

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.



Your email address will not be published. Required fields are marked *

  1. Lucienne

    Hi Peter,
    A very belated question. Do you think the brands are justified in charging a reservation and marketing fee on any OTA bookings (i.e. the double commission dilemma). Do you agree with me that these fees should only be charged on reservations that have been captured and sourced by the brand?

    Many thanks


    • Peter O'Connor

      A very interesting question. On the OTAs it’s clear that being a branded hotel does act in some way a a badge of quality, so therefore the brand is thus making a contribution and should be rewarded in some way (and thus it deserves its commission). Also most brands leverage their scale to negotiate cheaper commission levels, so the double commission effect is in some way cancelled out.

      Some hoteliers are becoming increasingly uncomfortable with brands taking their percentage off the top line, and as you suggest, would prefer that they are only rewarded when they can show that they in some way contributed to driving the booing.

      I now of at least one major chain that is actively considering whether to move to a model where they only charge properties for ‘controlled’ bookings – those that flow through its CRS product. This in effect would make them more like an OTA than a traditional hotel brand.

  2. Jing

    hi Peter,
    Another great topic to stir up some good discussions (sorry that I’m not reading your articles in a chronological order ^_*)
    Mind if I point out a few things…?
    1) ADR is already the average of all the materialized bookings, so that’s mix of BAR, Corp, Wholesalers, MICE, Disc (loyalty member discount often in this bucket) etc (depending on how each hotel/chain classifies their rates or market segments). So starting the whole run down of the cost analysis from ADR seems not very accurate… For the sake of this article, starting from BAR would be more appropriate, as that’s what & OTA sells online. But this should not numerically effect the outcome of the intended calculation at the end.
    2) Loyalty fees, hmmm, as far as I know, many chains have adopted a practice of only charging hotels basing on the so-called eligible revenue. And eligibility is often counted on the market segment (and channel). What I’ve seen is many chains won’t consider booking from OTAs as eligible rates anymore, that means no loyalty fees charged to the hotel for those bookings, i.e no points for the members (causing some unhappy members but that’s a way chains to sort of “strong arm” the guest to book direct!). I have no intention to say the DB research is wrong, I”m sure the above chart is stick to the exact terms from the management agreement, but just merely wanna point out this area along could largely affect the outcome of the analysis.
    3) Should the Management Fee be considered as well for this analysis? Maybe not applicable for Franchise hotels, but for a fully management hotel, chains charge at least some % of base management fees on the total revenue, corresponding to the Effective ADR line here. An mid-range 3% would make quite some difference for the end.
    Again thank you for pin this topic up on the wall! Loyalty Marketing at the end is a game of Loyalty Accounting, I’m saying it without any bias though… I think it still has its time for the industry but I feel some radical changes are much needed!
    Cheers and thanks again, great read!

    • Peter O'Connor

      Hi Jing,
      To my knowledge (although everything is both negotiable and in flux) brands charge all of their fees off the top, including the loyalty fee. So that the way I did it in my analysis.
      I would love to take it to the next step and try to do management contracts, but here the companies usually take a cut off the top AND the bottom line, and I had no objective way to estimate the latter.
      Suggestions welcome!

  3. Bruno Gianni

    Thank you Peter for a very interesting point. While it is now generally accepted that OTAs do have a valid value proposition vs. brand franchises at time (if used wisely and purposefully), and considering that those same OTAs have spent money acquiring management capabilities (Priceline in particular), I would know have the following question:
    Has anyone seen a franchisee break (or not renew) its franchise contract to go “all OTA” yet? This threat has been raised for year, but I would be very interested to hear / witness material facts about it?
    Thanks in advance for your thoughts

    • Peter O'Connor

      The former Hilton Arc de Triomphe, ow Hotel Le Collectionaire in Paris is an interesting case. Although I am sure that the issues were deeper than just distribution cost and contribution of the brand, the hotel broke it’s contract and went independent. Despite a rocky start, the hotel is performing well now, using a combination of OTA and direct driven business. They have to work harder, but surely see more results for their efforts.

  4. Ana Pedersen

    Great article Peter. Enjoy reading your work.

  5. Thomas Martensson

    Interesting topic & article, and maybe even more the answers, good discussion. However A lot of talks and comments about the OTA’s future business model, i think it would be in place to highlight the digital strategy that the Industry leaders, the Big Hotel groups have taken. More than 2000-5000 hotels, 20 brands in over 100 different countries – in ONE APP with an engagement of less than 3%, ( 3% of guests are downloading and around 1% actually using the app after first download – ) its a black whole and it not only costing the Groups/ owners around 1Billion a year ( combined spendings of top ten groups 2015 ) the lack of engagement on mobile/ digital will very soon put a lot at stake in the Industry. The ” top down ” model does not work, its time that the Groups, brands and owners do understand the real cost involved in this strategy .. If you look at the reversed model ” bottom up ” you can achieve over 80% plus engagement – Imagine if the top 30 hospitality CEO’s would agree on a mutual mobile strategy / platform and put there inventory around 100K properties- that would be a game changer for the whole Industry .. And the 100Billon USD market cap that the leading OTA’s have combined would be shared in a more balanced way..
    Thomas Martensson
    CEO and Co Founder Go Find it technologies

  6. Laurens

    Dear Peter
    You really got me worried with this article because i really believe(d) the Book Direct discount was a good thing…until i read the entire text and the cost and the data in figure 1. It doesn’t add up…
    If you zoom in on a customer who signs up for the first time because they get a discount for booking direct, i agree that there is no rate premium and that there will probably be a paid search fee. However, this article is NOT mentioning this anywhere. So most people are reading this thinking it applies to all loyalty member bookings in general. Luckily you added this info afterwards in the comments, but this is very poor editing by you or Tnooz to start with. I run a hotel for a very (very) large global hotel group. Our loyalty members pay a 9% ADR premium. They book direct via the hotel website or the app on their smartphone. No Paid Search Fees there. Then also…4.5% Loyalty Fee?? Wow… Are you sure you did not look at the line Royalty Fee? Just 1 letter difference.. If not, looks like there’s to many overpaid managers in the hospitality group you have been investigating. My P&L shows that my cost is just 1%. Third error: No credit card commissions calculated for the Merchant model. Last time i checked OTA’s are sending me a Single Use Credit card number so that i can collect my nett room rate. We process this at the hotel…and pay credit card commission on this too.
    So…you can make the calculation again if you want. But we already know the answer: Book Direct. It’s a win-win situation for the guest and the hotel. No question about it.

    • Peter O'Connor

      Hi Laurens,
      Thanks for your comments.
      Here I am looking at cost of customer acquisition so the question of when (if) they come back should not come into it. In any case, irrespective of whether they come via an OTA or a ‘loyalty’ discount, provided the hotel does a good job of meeting their expectations, they should come back anyway. And unless the hotel has really bad distribution, they should be booking directly as they now know the hotel. Thus I fully agree for the second and subsequent booking direct should be cheaper, although I’m not so sure about you comment about the search fee – there is still a high probability that they will start their booing process through Google, and thus in many cases this fee is still relevant!
      Re the Loyalty fee (Yes I am sure it’s not the Royalty fee), you might want to check your contract with your brand. Again here I have been conservative, looking at multiple Franchise documents and selecting one close to the cheapest. $%, %% and even 6% is common to help pay for both the program administration and the points that need to be ‘given’ to members.
      Lastly thanks for pointing out the omission of the credit card fee for the Merchant model, which should be included to keep things like with like. But the fact remains that the agency model, which seems to be the way the sector is moving, is still cheaper!

  7. Gianfranco

    Thanks for starting the debate. Apart from the maths, the article underlines how difficult it is nowadays to find relevant arguments to answer the question: what is the value of a brand in the time of OTAs? Economics, ownership of big data (and its strategic use), standards and know how all play a role. We can probably imagine that some brands may disappear in the medium term, and that smaller and weaker independent hotels will be absorbed. The others may be forced to look at the business in a different way. In 3 years the landscape will look completely different. Bets are accepted…

    • Peter O'Connor

      I think this process has already started.

      Many large international brands now have what they call ‘Collections’ – ways that you can profit from being a part of the brand without actually being a part of the brand. Autograph by Marriott, Curio by Hilton and Ascend by Choice Hotel International are all examples of collections that allow hotels to benefit from a major brand’s well developed distribution network without the cost, or hassle of flying a flag outside their doors,

      And of course Accorhotels have gone a step further, allowing carefully selected independent properties to be distributed through their website and mobile presence in return for a commission. And, through BookingSuite, will provide a property with a ‘direct’ website as well as technology based systems to help them better manage their room inventory, both traditionally the role of a hotel brand.

      Right now it seems that despite their supposedly conflictual relationship, major hotel brands and OTAs are looking increasingly similar, with their primary contribution both focusing on distribution.



  8. Kris White

    Great insight! I love the discussion in the comments. Although this sheds some light on the situation, I suspect there’s much more that goes into the equation than is shown in the given statistics. The point I find most compelling, however, is the suggestion that many guests who take advantage of discounted loyalty rates would have booked directly on the brand website either way, regardless of loyalty program incentives. That definitely deserves further inquiry.

  9. Dean Schmit

    Great discussions here!
    Taking this at face value, what the math really seems to suggest is that this is a good time to be an Independent hotel, LOL!
    Ok, that aside, I’m glad you included the importance of owning the guest as a part of the equation that we cannot place a specific value on. However, something that was not covered (unless I missed it) was the SEO value resulting from the increased inbound traffic, especially when we consider metasearch. Owning your branded search terms is a fundamental premise of all digital marketing, yet this often gets left exposed to OTAs on (for example) Google Hotel Ads. What about TripAdvisor? Why would you spend time & money managing your reputation and not capitalize on the point of sale metasearch links on the same page?
    The other solution – stop calling them loyalty rates and just offer them to everyone for booking direct. Would that negate the $6.63 loyalty fee?

    • Peter O'Connor

      Hi Dean,

      The SEO value point is quite interesting but I would have difficulty quantifying the exact value. For me the big question is whether OTAs will eventually have to change their business model?

      With customers shopping around and looking at multiple sites, at present there is no guarantee that an OTA will get compensated for influencing the customer and sending them to a website, where they subsequently book. Personally I can see some sort of hybrid OTA / Meta Search model developing, with lower commission on OTA bookings but the OTAs getting compensated as well for direct bookings that were influenced by them at some point along the customer journey.

      The technology to do this already exists – all it will take is a change of mindset so that all parties are adequately rewarded for their part in driving a (direct or indirect) booking.



      • Dean Schmit

        Thanks Peter!
        While I agree with you, that is indeed a very difficult mindset to change! In the bigger picture, we have to consider every part of the consumer’s booking process as a contributing factor. Instead, current attribution models tend to give all the credit to whoever had the last touch. Does that mean none of the touch points prior to this mattered? Certainly not, but it can be difficult to say who should take the most credit. Was it the first, the last, or one of the points in between? The best answer is all of the above.

        • Peter O'Connor

          Great point and I completely agree with you. Last touch attribution is no longer sufficient, ad we in the hotel industry need to get much more sophisticated in tracking (and rewarding) those that contribute to the generation of a (particularly transient) booking. Luckily we have the opportunity to learn from other sectors, where the approach is generally much better.

      • Niels

        Yes OTA should be rewarded and new model should develop… Unless google will simply provide those services too and then we don’t need to change model and reward them right… But that will not happen until OTAs stop supporting Google.

  10. David Chambat

    Good debate indeed; I find also this research misses quite a few cost and revenue components in order to come to any sort of conclusion ; for example , to push , a hotel needs a decent online marketing manager (or a digital agency) – this can consume up to 2% of the revenue for a small independent hotel.

    • Peter O'Connor

      Hi David,
      Hi David- You are absolutely correct. There are many costs of having a good digital strategy for an independent hotel and those become even more onerous for the small independent hotel. In today’s ever transparent and connected world, consumers have a dizzying array of choices of where to book and where to stay. However in writing this article I was focusing on branded, not independent, properties.
      Both brands and OTAs are both really efficient distribution machines and drive the life blood of any hotel- a steady stream of guests that drive RevPAR. In the analysis above, the hotel is paying both a 1% marketing fee and 9% paid search fee for bookings originating from a paid search channel (based on experience I assumed this to be approximately 35% of a hotel’s direct bookings) to the brand. And most hotel brands actively prohibit their member properties from engaging in SEO activity (as it would interfere with, and decrease the effectiveness of, their own efforts.

      Whether it’s online or offline, marketing is a critical but expensive function to driving guests to your hotel, regardless of who does it. But based on my neutral and objective analysis of the data that I can find publicly available, my take is that OTAs, with their declining commission costs, are nowhere near as expensive as certain hotel brands would like hotel owners to believe.

  11. Timothy O'Neil-Dunne

    A great debate starter!
    What the article actually misses in its deep analysis are two fundamental factors. Today, hotel prices (unlike airline prices) are elastic. Thus rates are highly variable and the data capture of the use of those rates are flawed. I would suspect that there is a high margin of error in the numbers. The second factor is the continued pressure by the major OTAs to PREVENT the consumer from contacting the hotel once the initial purchase has been made. This creates a significant barrier to the higher cost of service post booking amongst other issues that must be born by the hotel/brand.
    With the huge power of the two dominant OTAs in the non-China markets, what we see is an upward pressure on rates but the surplus of supply creates the downward pressure of the hotel brands to fight harder for the brand neutral consumer. In the USA where the vast majority of hotels are branded this is the obvious case. In the rest of the world where brands do not have such dominance in the hotel room market the situation is very different. The two OTAs do not command such strength and commissions are likely to be moderated (no large scale data to back up my claim though). The massive growth of AirBnB and their ilk has also deprived the Hotel marketplace of supply power like their airline brethren. I left the article thinking that while there could have been a lot more insight here – the focus seems to be on defending the OTAs. Personally I dont think they deserve this kind of defense. The commentary below clearly pokes holes in the argument. I would say that Expedia’s average commission rate is way north of the quoted number here.
    All that said – this is good for a further piece of transparency into the very murky world of hotel profitability.
    Please keep these sorts of articles (and the ensuing debate) coming.


    • versoisien

      , hotel prices (unlike airline prices) are elastic

      airline prices not elastic??!! I assume you mean that demand for air tickets is not elastic. Are you living in cave?

      • Timothy O'Neil-Dunne

        I suggest that the bat cave dweller is not me. When demand is at the level it currently is – the pricing is not elastic. It is clearly constrained. Go back 5 years (when there was real competition) and you will observe elastic pricing. That same market scenario does not exist today.

        • versoisien

          To begin with pricing is not elastic. Demand and supply can be elastic or not. You are trying to tell me that airlines don’t vary their prices according to demand? Just take a look at easyjet or Ryanair. Think again!

    • versoisien

      “The two OTAs do not command such strength and commissions are likely to be moderated (no large scale data to back up my claim though”
      Expedia’s financials clearly show that commissions are coming down for them, especially since entered the North American market.

    • Peter O'Connor

      Hi Timothy,
      I full agree that rates vary, both over time and across channels. However to do an analysis like this I needed to compare apples with apples – and this I decided to keep the rate the same so I could evaluate the cost.
      There are people who claim that the room rate achieved on direct channels is higher (i have yet to find objective, publicly available data to support this claim) and also others who claim that incidental spend of direct booking guests is higher (again I have yet to find the evidence to support this claim).
      Even if one and / or both is true, the difference would have to be substantial to make up the difference, as teh brand fees detailed in the article would still eat up a substantial portion of any excess.

  12. Chris

    All of the presented models have a place in the market, shoppers do visit many sites prior to making the final purchase. Just like a retirement plan, stay with a diversified strategy. If the hotels did a better job of converting the OTA customers and offered a full suite of products, similar to an OTA, maybe that would give the consumer additional reasons to book direct.

    • Kris White

      I completely agree. The responsibility lies with the hotels to do a better job of optimizing conversion at the point of contact. OTAs are great at what they do. There’s no use getting upset about that. Hotels need to leverage the online exposure they gain from OTAs and develop a strategy that can adapt to the ever-changing online ecosystem.

    • Peter O'Connor

      Hi Chris,

      Thanks for your comment! You are of course correct – a hotel must vigorously vet each distribution channel they work with but ultimately cost and value go hand-in-hand.

      OTAs have historically been demonized but my analysis shows that their costs appear to be at least in-line and often better value than brand-direct bookings as a result of the outlandish discounts that some are offering to tempt direct bookings. In fact in my analysis I have been quite conservative as many brands now offer substantial discounts to get people to sign on the dotted line, surrender their contact details and join their loyalty scheme. In my model I used 4% but I have seen some (admittedly smaller) chains offering 10% or even more to drive that direct booking. Just think about the effect on net revenue and return to the owner!



  13. Tom

    So much is wrong here. Most medium to large brands don’t have a13% commission. It is in the 15%-18% range, so add another $3.08-$7.67 to the costs. That alone blows the math. Also, merchant rates are a very small piece of the pie and those are the only rates you show as more profitable. Even that is incorrect as they are either paid by CC or via direct bill. Both have costs of around 2.0% for discount fees or bad debt. Lastly, has a higher starting ADR due to room types and upsells. That is not accounted for in the analysis. It is all pretty easy to refute. So yes, after accounting for everything correctly, if you have OTA commission rates of 10% or less, this starts to not make sense. Other than that, it looks like hotels are better off.

    • Peter O'Connor

      Thanks Tom for your feedback.

      As commission rates paid are highly secret, in my model I used the high end of the range from the Deutsche Bank report for large Tier 1 brands – a source which is widely believed by the investment community to be valid and reliable. From personal experience, I also know that the blended rates being paid by the big hotel brands (which, let’s face it, are the ones really waging the loyalty wars at present) are in the range I used. Frankly, if you are a major player and still paying 18% you need to do some serious renegotiation of your contracts!

      I also believe the merchant model is still a significant business model in the industry (particularly in the US market where most of the big brands are based) and potentially brings some meaningful efficiencies to hoteliers as well.

      As I point out in another comment, you are correct that true loyalty customers may have a higher ADR but the analysis I was specifically looking at is the customer who signs up for the loyalty program just because they are enticed by a discount. I believe this group to be price hunters and they will bring a lower ADR, especially after the loyalty discount is factored in.

      But it’s great that the article has prompted some debate. Additional research and clarity is clearly needed and I would be glad to help further facilitate this highly valuable discussion!


  14. Charlie

    How does a 9% paid search fee come to $4.64 for in figure 1?

    • Sean O'Neill

      Sean O'Neill

      The author is traveling and out of reach temporarily but have asked for a response.

    • Tom

      I looked at that too. The only thing I can figure is that around 2/3rds of the business comes directly to the URL. The remaining 1/3 would therefore be subject to a paid search fee from Google or meta. If that assumption is correct, it lines up with an 8-10% cost for a paid search fee on bookings generated that way. The booking that go to the URL should be free.

    • Peter O'Connor

      Hi Charlie,

      Sorry, my explanatory footnotes got deleted in the Tnooz publication process and aI had explained this there.
      I assumed that 35% of the hotels’ traffic would originate from a paid search channel and took a conservative haircut on that fee line item. I hope this clarifies?


  15. David

    The above example does not take into account the credit card fee charged by the OTA under the merchant model – nor the impact of not receiving the payment for several weeks after the stay is complete.

    • Peter O'Connor

      Hi David,
      You are correct that I did not factor in a 30 day float for the merchant model. This is a good suggestion but relatively negligible in the current interest rate environment, and also really difficult to objectively quantify.
      I hope it does not detract from the debate. While OTAs might not be cheap, my point is that they deliver a lot of value for hotels. Brands continue to drive the lion’s share of profits for their hotels but from current trends, unless they pull sharply on the reins, it looks like it’s going to start costing owners a lot more money than before.

  16. Paul

    An opportunity of loyalty discounting can lie in the placements on metasearch.


Newsletter Subscription

Please subscribe now to Tnooz’s FREE daily newsletter.

This lively package of news and information from Tnooz’s web site provides a convenient digest of what’s happening in technology that drives the global travel, tourism and hospitality market.

  • Cancel