booking hotel travel traveler search business reservation holiday book research plan tourism concept - stock image
3 weeks ago
 

Why OTA commissions are actually a steal of a deal

In the past six months I’ve written about increasing hotel brand fees (Hotel Loyalty Rate Analysis) and increasing loyalty fees (The Great Loyalty Rate Debate).

Both articles prompted some very interesting and much needed industry debate about how best to proactively manage hotel online distribution.

In what was a sea of negative OTA sentiment, I opted to take a deep dive into the issue and explore some of the lesser seen and even lesser understood facets of the hotel online distribution conundrum, in particular, the notion that direct bookings are always cheaper.

NB: This is an analysis by Peter O’Connor, professor of information systems at Essec Business School in Paris, and European online analyst for Phocuswright.

Thankfully in more recent times OTA disdain has been waning and my feeling is that it will continue to diminish over the next few years for several reasons.

Firstly, Airbnb seems to be emerging as the hotel industry’s next big disruptor, making it a convenient target for the sector’s woes.

Consumer adoption is accelerating, with one-in-five travelers already using peer-to-peer sites for business travel, and nearly half of those surveyed indicated that they have substituted what would previously probably have been a hotel stay with a homestay.

With such a large threat looming on the horizon, and a new potentially potent enemy to battle, the sector’s prior gripes about unfair OTA competition look likely to pale into insignificance.

In fact, facing a common enemy, OTAs and hotel brands are increasingly working together to unlock new potential and keep the hotel industry competitive against alternative accommodations.

OTAs are also starting to provide value in some interesting ways that the industry is not seeing from search engines, meta sites, or even chain brands. For example, Booking.com’s BookingSuite is powering brand direct sites, and thus in effect competing against itself.

Expedia’s Rev+ is making big data consumable for hoteliers, helping make revenue management practices smarter and more efficient than they’ve ever been before.

Now hoteliers have free tools to drive rate when the market supports it or occupancy with promotions and discounts when they need it most. Expedia is also signing up its customers into chain loyalty programs as well as sending qualified travelers directly to book direct channels.

And perhaps most interesting, after being an initial proponent of the anti-OTA book direct campaigns, Marriott International is itself now leveraging Expedia’s packaging technology to provide additional functionality and drive a totally new customer to their portfolio of brand.com sites.

It seems that when the chips are down, the enemy of my enemy is actually my friend.

Incremental customers?

Supporting this shift in sentiment is the fact that OTAs are typically an incremental source of customers for the travel industry.

According to Expedia, less than 0.5% of their customers search for a particular hotel brand when performing a hotel search.

A recent BDRC survey of US lodging loyalty members indicates that OTA loyalty programs have a 71% higher proportion of millennial leisure travelers and a 44% higher proportion of millennial business travelers than chain loyalty programs.

OTA program members also have a higher proportion of international travelers and frequent travelers (11+ nights per year) than hotel loyalty members. Despite hotel chain’s efforts, these customers are displaying loyalty to the OTA, not the hotel brand, but can be exploited by hotels smart enough to build synergistic relationships with their OTA partners.

With such renewed cooperation, perhaps it’s time to put another age-old fallacy to bed, that OTAs are making vast profits on the sale of hotel rooms off the back of hardworking hoteliers!

What drives OTA commissions?

First let’s take a look at Expedia’s recent income statement:

expedia ota financials

Expedia earned $8.77Bn in revenue last year. From its annual report, it can be seen that the company primarily makes money in three ways:

  • Leveraging the difference between the selling price of a travel product and the net rate at which it was provided.
  • Through commissions from various travel partners.
  • And through advertising revenue.

After costs and expenses, Expedia keeps $461.7MM, or about 5.3% of revenue. Expedia’s gross bookings volume (GBV) – in other words the total amount of money it collected from customers – for 2016 was $72.4Bn.

Thus, operating Income as a percentage of GBV is a paltry 0.64%. That means that for every $100 a travel product sells for on Expedia, the company is profiting by just 64 cents (down from 68 cents in 2015).

And Priceline, Inc. earned only 4.33% of GBV.

In effect, despite the widely-held perception that OTAs are making supernormal profits by scalping hotels, in reality the majority of revenues are being reinvested back into generating higher sales for the sector as a whole.

So where does commission go?

As can be seen from Expedia’s income statement, the bulk of its revenues feed the marketing expenses that ultimately end up driving demand to its hotel partners. With Expedia spending $4.4Bn per year on sales and marketing alone, that calculates to $17.75 per room night sold or $35.50 per booking assuming an average length of stay of 2 nights.

It is important to note that in the previous calculation, I am assuming the entire expense is allocated to driving lodging bookings. Although some of this amount is certainly being used to advertise airline, car rental, and destination based products, I assume these are comparatively negligible and does not detract from the overarching point I’m trying to make.

Priceline also spends more than $4Bn on performance advertising, brand advertising, and sales and marketing expenses. Such figures may seem high, but they in fact include the marketing efficiencies that OTAs get as result of their conversion expertise and economies of scale.

Trying to replicate this effort, even on a smaller scale, would quickly erode a hotel’s profits, especially as many online marketing activities have costs associated with them irrespective of whether or not they ultimately result in a converted booking.

Expedia’s financial results also reveal the extent of its technology expenditures. The company spent more than a billion dollars in technology alone in 2016, in contrast to the biggest hotel chains who don’t even break out their technology spending on their income statements.

If chains want to catch up here, they will have to either continue consolidating or increase franchise fees to support new investments, as they’ve done recently on the performance marketing side through new fee revenues.

OTA scale comes back into play here as they have millions of shoppers and customers, and every click is valuable data that allows them to optimize their traffic generation and conversion machine.

Spending on this type of innovation is what delivers hotels that far-flung guest who speaks another language, transacts in a different currency, and pays with payment methods with which they’re not familiar. And we all know that such guests stay longer, spend more and would be near impossible to attract otherwise.

Thus, in my opinion, the supposedly scandalous rates hotels pay in OTA commission are well worth it, not just because individual properties (or even most hotel chains) could not possibly replicate the efficiency of this global, multi-sector demand generation engine, but because with commissions gradually and consistently coming down, there simply isn’t a lot of profit left over.

If Expedia or Booking.com didn’t exist, there would be other companies in their place as travel facilitation has always been highly competitive and will remain so in the future.

If the entire OTA segment didn’t exist, hotels would have to rely on traditional marketing and distribution channels, which as we have discussed previously are anything but free, and in most cases, without the marketing efficiencies offered by the OTAs, often result in extremely high customer acquisition costs, limiting profitability.

With such low margins, the OTA business model only works at scale.  And over the past decade we’ve seen many examples of OTAs around the world that never reached sufficient size and thus couldn’t generate the level of revenues needed to survive as a stand-alone entity in a highly competitive industry.

Even industry giant TripAdvisor’s comparatively recent move to a transactional business model with low(er) commissions has left its investors bruised, having lost about 60% of its’ peak equity value since it attempted to become an OTA.

And many others have tried, promising innovative low cost, ‘hotel-friendly’ business models with much fanfare, but all have fallen by the wayside once their initial funding ran out.

Thus, while OTA costs might to some appear high, those who really understand the realities of the hotel distribution and online marketing game are increasingly realizing that, comparatively speaking, they in fact represent outstandingly good value for the money.

By leveraging their economies of scale and global reach, they provide hotels with a cost-effective way to generate incremental bookings in a highly competitive market, all on a pay-per-performance basis.

So when are we going to stop kidding ourselves that focusing solely on direct booking is a better strategy for the hotel industry?

NB: This is an analysis by Peter O’Connor, professor of information systems at Essec Business School in Paris, and European online analyst for Phocuswright.

NB2: Hotel booking image via BigStock.

Share on FacebookTweet about this on TwitterShare on LinkedInEmail to someone
 
 
Special Nodes

About the Writer :: Special Nodes

Special Nodes is the byline under which Tnooz publishes articles by guest authors from around the industry.

 

Comments

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

  1. Neil Valentine

    Within the United States, the FTC has been very clear that restricting competition within keyword auctions IS bid rigging AND illegal. Their active suit against 1-800 contacts is current evidence to this fact: https://www.ftc.gov/news-events/press-releases/2016/08/ftc-sues-1-800-contacts-charging-it-harms-competition-online

     
  2. Mergim K.

    I believe that the elephant in the room here is Google reaping nearly all of the benefits in the current eco-system from both sides of the market and maintaining a very Switzerland-like position with essentially no competitive threat on the horizon. Let me put a scenario out there as a future prediction. Let’s imagine that Amazon builds/buys an OTA and starts selling travel at a 3% commission. How long would it be before they begin to take a substantial market share from the OTAs? Would Amazon need to spend $5B year on AdWords and bid on hotel keywords to maintain growth?

    AirBNB, Amazon, Spotify, Netflix, etc all have something in common: Brand Loyalty. While the OTAs have some brand loyalty, they are buying most of it. It’s worked well for the last few decades only because hotels are essentially inept online marketers when compared to the OTAs. However, this is not a sustainable model in the world we currently live in. You have to do more than simply buy your users and pass the cost onto your supplier.

    I predict that you will soon see major known brands emerging that will disrupt the current travel space by creating incredible value for both suppliers and their users. These brand won’t be standing on the shoulders of search engines for demand or intercept a potential hotel direct customer. They will already have demand and the loyalty of consumers + the best prices available since hotels will gladly participate at 3%. The search results can’t be bought and will be completely curated and relevant to the user because the brand doesn’t really need to make money on the transaction. They have other ways for which to extract revenue from their users (ie Amazon Prime), travel is simply an added mechanism of keeping them loyal.

    I predict that in 10 years, the OTAs you know of today will disappear in place of either A) A new brand creating a two-sided mutually beneficial un-biased marketplace highlighted above B.) An existing brand taking over market share with their loyalty. It’s possible that the current OTAs can adapt, but I don’t think their business models will allow for such a drastic shift in thinking.

     
  3. Richard Vaughton

    The PPC brand spend by Booking is well known, HomeAway/Expedia have been doing it in rentals too, probably with much less success. It is sure fire way for two companies to monetise: Google and OTA.

    Anybody thinking of starting up or rebranding, spend some money on a trademark and start to protect it. A few hundred $’s and smart brand approach. Hard for generic terms of course, but some may see benefits. The big guns are all protected.

     
    • Peter O'Connor

      Hi Richard,
      I fully agree that you should protect your trade name. But re PPC brand spend, do you know of any credible sources that break down what is being spent between branded and generic terms. Since I have started working on this area, I have started to question things that are “well know”! Perhaps that should be the next thing that I look at?
      P

       
      • Richard Vaughton

        Hi Peter,

        I’m not aware of any tools that group spend by generic or brand focus. It would be very helpful for sure. We live in a rental world and this seems to be moving to obfuscation of the property name/brand and hence in this sector it has to be generic bidding. Hotels seem to accept that their names will be bid on, but have little recourse and the look to book journey is slick on an OTA and the guest really has little knowledge of the underlying metrics. AI may well interfere with this in years to come!

         
  4. Pedro Colaco

    I wonder how many bookings come from “Hotel XYZ” vs. “Hotel in location ABC”. The difference is that “Hotel in location ABC” is helping generate demand, so truly additive to native business hotels can generate online.

    However, by advertising on “Hotel XYZ”, Priceline and Expedia are actually redirecting people away from a Hotel brand they had already somewhat pre-selected. This is called “brand hijacking” and certainly not a fair practice for the hoteliers, who believe they cannot compete with the advertising prowess of the two big OTAs.

    If someone is searching for Hotel XYZ, and if Expedia and Priceline were not advertisign for that keyword, the hotel would have a much better chance of spending a lot less than pay in commissions to get it (we have thousands of hotels that are able to do this). This is the reason why contracts with Choice Hotels, Marriott, etc. do not allow OTAs to advertise on their brands…

     
    • Peter O'Connor

      Hi Pedro,
      See my response to Colin below. Anyone, with admittedly some work and some difficult choices, can prevent others (including OTAs) from bidding on the trade name. However it doesn’t happening automatically and (unlike what some people posting below seem to think) happen for free!
      Thanks for the comments.
      P

       
      • Colin J Brownlee

        Peter, for an “independent writer” you seem awfully defensive when people challenge your assumptions and point out glaring omissions regarding the relationships between hotels and OTAs. In fact, I now have begun to even wonder about the credibility of Phocuswright.

        Your comments about the hotel having the ability to bid on their own trade name seems to imply many of are ignorant of the obvious. In case it needs pointing out, I and many others are very conscious of protecting our direct customers by all means possible to prevent OTAs from trading on your brand.

        Again.. This is all old news and something we are aware of and deal with all the time, but back to the orginal understood premise of the your article, many of us do not see OTA relationships as healthy as you seem to imply (hence the headline “Steal of a Deal”.

        No big deal. I just am sad to see that a writer who is supposed to be independent and working for an organization that I understood was also independent, seems so intent on undermining or neglecting glaring concerns we have as an industry.

        I will still look forward to the day that a truly independent writer, organization, news source (if such a thing exists anymore), will do an indepth analysis of “Brand Hijacking” with OTA industry and what role that plays in the industry in regards to brand loyalty, loss of business, added commissions, increased room rates, and over all foundation of OTA business practices and strategy to secure current market share.

        Like going to a doctor. Not comfortable with what you hear? Ask for a second opinion.

         
  5. Yannis Moati

    I wonder what the Customer Acquisition Cost (CAC) would result in a world with no OTAs…. I suspect that CAC will be higher, the room supply would be lower, the rates to consumer would shot up, and the whole industry would be shadow of it’s today self. Very few sectors would work on 15%, and do such an amazing job on delivering sizable traffic. And last point about the ‘brand-hijacking’ : you know the comp-set would be all over your brand bidding if you had traffic. Hence, fighting 100 hotels for your branded keywords, versus fighting 2 oligarchies would costs the hotel a lot more money than current levels. Mr. O’Connor, thank you for your balanced view that OTAs are not the ennemy.

     
  6. Glenn Wallace

    Interesting discussion. Two items buried in the numbers above are the costs the OTA cover as part of their distribution fees: 1) cost of customer support and 2) in the case of merchant hotels, the cost of credit card fees (this is mainly Expedia not Booking).

    Hotels have many tools to drive retention and brand loyalty, and also to drive direct business. But if the chains are able to go it alone on distribution at their scale, then the supply side is surely too fragmented for any real traction.

    I think there’s two ways to look at this: a fight for the transaction, a fight for the customer, or the workings of a marketplace and running efficient channels.

    If I were a chain I’d look at partnering with other chains on res platforms, marketing technology etc. (and I mean on a more fundamental technology level than RoomKey) Is there really a competitive advantage in having your own platform? Or is it better to work together to build a great hotel PMS/CRS/GDS?

    Another topic missing from the discussion: Google and the blurring of the search/metasearch funnel.

     
  7. Peter K

    The article just goes to show that most hoteliers do not have a good handle on distribution strategy and the relative cost and benefit of each channel.

    OTAs are an important part of the distribution channel mix.

    Whilst there may be crossover or distribution conflict at the edges, to be preoccupied with this is to lose the plot.

    The OTAS provide access to many markets and consumers that they (hotels) could otherwise not get to.

    What has happened though is that power and advantage of the big chain brands has been diminished. The Internet in general (including the OTAs) has massively benefited smaller operators and independent brands. Both (with unbundling of air and ground) have also massively reduced the power of the big tour operators. And to hotels, tour operators are in general by far their highest cost of sale (or source of rate/revenue dilution).

    And the way that many hotels measure cost of sale versus rate/revenue dilution is also a cause for concern. They measure tour operator business in net revenue (special negotiated net rates) and other business at market rates (much higher) with a commission cost of sale. And place no commission costs their tour operator/wholesaler source of business and thus get a very false picture of their true net revenue by source of sale.

    But, bottom line is that there will always be differences in net yield from various sources of sale. Of course you may have a preference for the lowest cost channel and highest net yield, but reality is that you need all of the available channels to generate your sales and keep your occupancy high year round. It is matter of managing the mix.

    Exactly same applies to airlines.

     
    • Peter O'Connor

      Great point Peter – ‘manage the mix’, and the mix will be different for everyone.

       
  8. Horváth János

    This is a very flawed analysis. Marketing will only drive new sales to a part. The majority of the marketing efforts are to drive away customers from hotels. Just search for any city and hotel and you will see that the OTAs are using the commission to outadvertise those who pay the commission.

     
  9. Ginger Sullo

    I agree with Kristian N…though another dimension to strongly review/discuss…is travel (in particular leisure demand’s) reliance on U.S. GDP’s personal consumption expenditure index, inflation rate, sentiment ..since from overall standpoint our economic growth remains at glacial pace of approx. 2%/annual growth for years, and credibly forecasted for 2017/’18 to remain at 2% average…my point is its direct correlation with:

    1) hotel demand’s slowing U.S. growth/2017 with high supply growth, e.g. 2%/U.S. ,2) high customer acq. costs…e.g. avg. 18% to 20% of room revenues 3) more hoteliers emphasis on net margins, and not just gross/top line revenues e.g. ADR’s, and of course, the digital fickleness of U.S. travelers….

    Considering mammoth campaign outlays of OTA’s and where they are, which I understand through Google, have reduced margins on their google ad spend (2016) because its getting more fierce then ever…without the loyalty….its just a dimension of where the broader implications lie, from the overall topic of Peter’s article.

     
  10. Jing

    Hi Peter,
    I think the article is great, will surely trigger some more thoughts on what it takes for each hotel to do its own distribution… Putting everything aside, I often ask hoteliers to think hard what is their real cost for direct channel, which is largely underestimated in my opinion. Hotel often simply takes whatever applied cost of brand.com booking engine (often transactional), and forgets about all the rest cost comes around it, i.e the money spent on brand.com design, hosting, images/videos, CMS, SEO/SEM, Goolge AdWords, meta search bidding, TripAdvisor Business listing, social media campaigns, or even print ads with brand.com on the page etc etc, not to mention all the time/resources invested in all of this. I’m a devoted marketer for brand.com, but I think there are much mislead voice/noise in the market saying “direct channel is cheaper and OTAs are expensive…” Distribution has two end games, first is to SELL, and last is AT WHAT COST. After all, every hotelier’s ultimate goal is the profitability of the business.
    Thanks again for the great article!
    Jing

     
    • Peter O'Connor

      Jing – this is exactly what I have been trying to say! Customer acquisition (through ANY channel) is expensive – there is no truly free demand channels anymore in the hotel industry. As I have shown here, OTAs are frequently criticised for scalping but both Expedia and Priceline are actually only keeping a small fraction as profit.

       
      • Jing

        “keeping a small fraction as profit”, hmmm true but not by choice, in my opinion. I”m sure each of the OTAs would love to see their net profit goes up, but they are stuck in two hard rocks as well!

        If they cut down their marketing/advertising expenses which is the biggest ticket in their expenses (a dazzling number indeed!), they’ll loose site traffic >> immediately less bookings >> less power over the hotels. It’s very practical for hotels, “you don’t bring me production, you don’t have a say”.

        If they cut down tech/content, another big ticket on their expenses, that’ll be unwise either. After all, tech & content is their true bread & butter of making their business. Maybe not to threw them immediately into a grave yard, but making their site with better user experiences in every aspect (better than brand.com) was what made OTAs successful at the first place.

        So OTAs will continue spend as much as they can to be ahead of brand.com on just about everything! Ultimately, their distribution power is not to be undermined. Cause every OTA Market Manager will die to guard their magical sales script: “I can bring you more room nights”.

        Am I being defending the OTAs? No!
        Many terms in OTAs’ contract, and their practices in real life are just utterly disturbing. That’s what provoked all the hatred shared among many hoteliers. That would be another ever-ending topic…

         
  11. Maeve Walls

    Hi Peter,
    really interesting read!

    I agreed with your point that OTA’s have huge technological advantages over hotels and reach a wide audience, and it would be foolish for hotels to discount that. However, when the direct experience is ignored, hotels lose out on the chance to encourage loyalty and brand recognition in their own guests, and risk losing control of their pricing and profits to a third party.
    That’s why we firmly believe that while OTA’s hold obvious value, they need to be managed. This also allows hotels to drive bookings at what, properly handled, is a lower cost per acquisition than they can get with most OTA fees.

    With your comments on Airbnb, from our client feedback and what I’ve seen and my own experience in the industry, I have to say I think your statement – that Airbnb is a looming Goliath that requires us to unite unreservedly with OTA’s when “the chips are down” – jars with most hotel’s strategic goals and the experiences they will learnt from dealing with third party platforms. We’d encourage hotels to see them in the same light they see OTAs: as challenges to be met, learned from, worked with, and managed as suits the individual hotel, rather than as looming threats.

    On the claim that the Book Direct movement is about “focusing solely on direct booking”, when actually it’s about taking a more balanced approach to online distribution through proactive action on all channels.

    On your numbers, I think Charlie has hit some excellent points above, so I won’t go into too much detail there! I’d just like to point out that hotels focusing on promoting direct bookings is about bringing balance to a set of scales that has tipped far in the OTA’s direction for far too long, and let them successfully inflate costs of getting business that may or may not be incremental – it’s difficult for most hotels to know, so they tend to take the OTA’s word for it, often to their detriment.

     
    • Peter K

      Direct bookings is a natural focus of any supplier, whether it be a hotel or an airline. It will generally be the lowest cost channel. No dispute about that. But you cannot rely simply on this channel.

      You need need a website anyway, so why not leverage it to the max. It is only incremental technology cost beyond what you need for marketing your product and services to make it a transactional site. So only a portion of the the technology cost should be added to the cost of sale of a direct booking. But also recognise that it is not a free ride. There is a real cost here. All costs should be included to get a true comparative picture of net yield by channel/source of sale.

      The key is not to get preoccupied with it to the detriment of maximum sales overall.

      So that means focussing on your distribution mix and managing it appropriately and not deluding yourself about any of them. The good thing is, if you are smart, you can control this.

      For sure all business from OTAs will not be incremental. But some of it will.

      And there is the stark reality that the big OTAs exist and command a lot of consumer support and they will hence always play a big part in your distribution. Their power is just too big to ignore. Wishful thinking, annoyance, avoidance, will not make them go away. You have the danger of scoring an ‘own goal’ if you do this.

      Would any hotel these days not want to optimise consumer awareness of its existence.

      Question: Would any hotel (including I might add the big branded hotel chains) not want to be displayed on the monster mega-aggregator Booking.com? Very few, I would surmise. Lucky you if you do not need them.

      And if you are relying on big tour operators to fill your hotel property, you are indeed very vulnerable and subject to rate/yield dilution if highly dependent.

      There will always be intermediaries in prime positions.

      The ones that are going to be the largest and stand in between the consumer and suppliers AND CONSUMERS AND OTAs are the META-SEARCH ENGINES. They will grow and grow. Their influence will become stronger and stronger.

      They are going to be the primary online travel sites that consumers go to to get content and sort out the maze of options.

      For example, on a meta-search site you get access to airlines that do not distribute via GDS systems as well as those that do. And most OTAs do not have access to full airline content as they primarily rely on GDS distribution and hence the more limited airline content of the GDS. Consumers are only just becoming aware of this.

      And the good thing for hotels (and airlines) is that the customers are very likely going to be referred to you by the meta-search engine as direct bookings. But for a fee. And the biggest referral fees will be levied on the OTAs that will come to increasingly rely on the meta-search engines to get to the customer. So OTA costs will increase. And consumers will have more decision making power as to where they go to fulfill their booking requirement.

      And it will be a huge leveller as the smaller OTAs will be able to gain consumer visibility. But at a price. But at a fraction of what it costs the big brand OTAs to have their brands remain top of mind for consumers.

      BUT THERE IS ONE THING ALL BRANDS, IN ALL PRODUCTS OR SERVICES , SHOULD BE JUMPING UP AND DOWN AGAINST. “BRAND HIJACKING”.

      THAT IS THE PRACTICE OF SEARCH ENGINES ALLOWING ORGANISATIONS TO PURCHASE OTHER COMPANY “BRAND” SEARCH TERMS AND ALLOW THESE ORGANISATIONS WEBSITE OPTIONS TO APPEAR/DISPLAY ABOVE A “NATURAL SEARCH” RESPONSE OF THE BRAND REQUESTED BY THE CONSUMER. THIS SHOULD BE ILLEGAL.

      Let them perhaps appear, but NEVER above the website response for the actual brand that the consumer was asking for.

      This is blatant brand highjacking. It verges on fraud. It is “misleading and deceptive conduct”. Competition Authorities in every country should address this. All airline and hotel representative organisations globally should gather together to form a strong lobby block to stop this. Other big brands of other industries I am confident would also join in this chorus.

      Airbnb and the like are not the real enemy although they certainly have been and will continue to be a disruptor and competitor. It is evolution and part of “the Internet of things” Besides, big mega accommodation aggregators like Booking.com will soon also play in their patch.

      Concentrate on what is a true cancer and a major immediate threat. BRAND HIGHJACKING.

       
  12. Kristian Nenchev

    As people mentioned below, this post reeks of illogical and incorrect deductions. I would also not call this analysis (except for the commission breakdown of Expedia which I liked).

    “If the entire OTA segment didn’t exist, hotels would have to rely on traditional marketing and distribution channels, which as we have discussed previously are anything but free, and in most cases, without the marketing efficiencies offered by the OTAs, often result in extremely high customer acquisition costs, limiting profitability.” – Opinion, not a fact. Don’t call this analysis if you can’t back these statements up.

    “Trying to replicate this effort, even on a smaller scale, would quickly erode a hotel’s profits, especially as many online marketing activities have costs associated with them irrespective of whether or not they ultimately result in a converted booking.” Opinion, not a fact. Do some research on how much the technology of B.com / Priceline cost originally, and how much it costs now (hint: a fraction)

    “Supporting this shift in sentiment is the fact that OTAs are typically an incremental source of customers for the travel industry.” – Do you actually believe that the existence of OTA websites directly precipitates people to travel and without them people would travel less?

    Quoting AH&LA and STR here: “The hotel market at the comp set level operates as a near zero-sum game. The fact that there has been limited hotel demand growth means that any claim that a channel vendor will create substantial new industry level demand is unrealistic. Channel vendors may be very effective in helping a hotel shift share, from one hotel to another, or one time period to another.”

    Where there might be a marginal “creation” of demand is those people that would actually fall for those ad/banners on their facebook page / email spam and suddenly decide to binge. We both know, however, that there is not enough of this in order to be considered as incremental demand.

     
    • Peter O'Connor

      @Kristian – thank you for YOUR opinions. However if you bothered to read the prior article, you would clearly see, documented using publicly available data, that the current direct marketing efforts being used by certain hotel chains result in higher distribution costs for hotel owners. And my comments re incremental bookings refer NOT to the industry as a whole but to the individual properties. Can you deny that working with the appropriate set of OTAs results in a hotel getting more business?

       
  13. Patrick Landman

    Patrick @ Xotels

    Peter,

    Great analysis. And indeed OTA’s provide a very necesary and effective service to hotels they would not be able to fulfill on their own.

    Global distribution is key to the success of your hotel.

    The cost of distribution I also find acceptable, it is actually cheaper than the GDS which hotels solely depended on in the pre-OTA-era.

    I can also agree with you that the commissions the OTA charge are needed to cover the costs of their infrastructure and marketing efforts. The cost an investment in this business are high.

    One of the main reasons many hoteliers have come to dislike OTA’s is because of pressuring approaches:
    – no lower rates anywhere else / stringent contract clauses
    – bidding on hotel name / brand hijacking

    The chains have been able to gain more control over OTA in this area. Independents are struggling still.

    Accepting the cost of distribution and need for global reach via OTA does not mean however hotels should not implement a strategy to contain distribution costs via 3rd parties and stimulate direct sales.

    It should be core to a hotels strategy to have a smart comprehensive distribution and marketing strategy including direct sales efforts and OTA.

    Here some articles I recently published here on Tnooz to cover this topic:

    https://www.tnooz.com/article/the-complete-guide-to-hotel-marketing-and-strategy-for-independent-hotels-part-one/

    https://www.tnooz.com/article/guide-hotel-marketing-strategy-independent-hotels-part-two/

    Cheers,

    Patrick Landman @ Xotels

     
    • Oz Har Adir

      Patrick, I’d take this one into a bit of a more holistic view.
      OTA’s are the most efficient distribution players around (their profit margins and valuations are a clear indication of that). At the same time, they are near monopolies. Hard to measure/control monopolies, but monopolies nonetheless.
      The reason that they are monopolies is partially because of their great execution, and partially because other players in the grand accommodation industry have not managed to cooperate and build strong enough alternatives. There are only 2 major OTA’s but there is not a single large (or even ‘good’) ‘hotel reservation system’ -> this results in hotels not having APIs that connect them to metas, and not having good conversion rates (aka customer satisfaction), and usually not being able to manage traffic acquisition to their website in any effective way, which is true for both chains and independents.

      Hotels also didn’t manage to accommodate any model beyond ‘direct website’ and ‘OTA’ to fill their rooms. Hence, they are left with only these choices. And not because of lack of ambition from travel startups, as much as it is lack of urgency/experimental mindset from hotels (As an industry).

      The only exception I see in recent years is Accor, and even that didn’t yet translate to a performant enough website, for instance, or any meaningful link between its technological assets and its brands web presence.

      To cut a long story short -> Booking & Expedia would continue doing their job as that’s whats expected of them. Here and there a regulatory authority would interfere and remove a practice, but it will be much after the damage has been done. The only chance for hotels to survive beyond being pins inside Booking, Expedia or Airbnb is to accommodate more distribution methods beyond OTA and to significantly up the game of their direct presence (as opposed to blocking the web presence of the OTA as you propose)…

       
      • Daniele Beccari

        Cough cough.
        “Hotels also didn’t manage to accommodate any model beyond ‘direct website’ and ‘OTA’ to fill their rooms.”
        ??
        Ever heard of meetings and incentives, groups (tour operators, sport clubs, weddings), show packages hotel + concert/tickets, gift boxes, DMOs, call center and walk-in bookings?
        The real problem (again) is dependency on any single channel, not the channel itself.

         
    • Peter O'Connor

      Hi Patrick, Thanks for the balanced and well though out comments and feedback. Totally agree with you – hotels need to strike a balance between direct and indirect and that mix will be different for everyone.
      But to do that we need to get out of the mindset that we are competing with OTAs – coopetition is a better word and approach.

       
      • Colin Brownlee

        If you actually read Patrick’s post, he made it clear OTAs “hijack” brand names, which result in taking many direct customers and redirecting them to booking through an OTA. It’s very obvious Peter, you seem to have some sort of agenda that wants to make the OTAs out to be good business partners, but the only “steal of a deal” many of us see is the obvious one you seem to want to not mention or minimize.

        How about Tnooz having a very independent writer do an indent look at brand hacking and what it means to hotels and OTAs. Or is that the “subject” that dare not speak it’s name?

         
        • Peter O'Connor

          Hi Colin,
          Last time I looked I was an independent writer. Just because I have an opinion different to yours does not mean that I have an agenda. In fact my clients are hotels and hotel chain – ones that have managed to put aside preconceptions, measure objectively what works and move forward rather than dwelling on the past.
          Re brand hijacking, other companies, be they OTAs or competitors, cannot use your brand name in search without your permission. If they do, then they are infringing on your trade name which is illegal. But to protect yourself you need to take certain minimal steps, including registering your trade name (which is different in different parts of the world) and informing anyone who bids on it to ‘cease and desist’. This is one of the first steps that the major chains have done in securing their part towards more direct bookings, but it is frequently overlooked by independents.
          And remember that often (unless you get the clause removed) you expressly give most OTAs permission to market you (including online) when you sign your distribution contract. So they are doing exactly what you have asked them to do.
          What would be interesting to see of what percentage of OTA search spend is hotel brand focused and what is more genera?. I do not know the answer to this but I’ve seen a lot of discussion saying that it is not the majority, which tends to focus mor eon teh top of teh funnel.
          P

           
  14. Stuart Udy

    Peter, what a breath of fresh air. Finally a balanced, educated view of the value OTA’s offer and the real cost involved. Another comment, Expedia also have an extensive Travel Agency program which shares commission with retail travel agents. A much cheaper retail distribution option for Hotels when compared to traditional wholesale and in many cases cheaper than GDS.

     
  15. Charlie Osmond

    Hi Peter, positing another contentious viewpoint. Good stuff!

    A few comments:
    You suggest that Marriott was an initial proponent of direct bookings, but now less so. I think that’s quite wrong. Not only the commissions but also the ability to deliver a better service to direct bookers and grow their loyalty scheme are keeping Marriott heavily engaged in the push for direct bookings. The Expedia packages deal was for different ends focussed on a specific segment of guests.

    You suggest the OTA bookings are largely incremental. Where they are incremental, I agree a 15% commission rate is appropriate. But our data from tracking searches and bookings of millions of guests on hotel websites, makes it clear that a high proportion of OTA bookers visit a hotel website, decide to stay but then leave to transact on an OTA (mostly because they assume it will be cheaper). Many of these guests were not ‘generated’ by the OTAs but the hotels are certainly paying commissions for them today.

    Sure the OTAs are paying a lot on advertising. They have successfully inflated the cost of online advertising for the hotel industry having spent years bidding on brand terms and fighting between each other to bid ever higher CPAs.

    Given the issue with flights, I think the Priceline GBV is closer to reality for hotels. You mention a Priceline GBV of 4%. That does not sound like much. But is it high or low? should we focus on the 4% or the 15% commission?

    Credit Suisse research showed that the OTAs are earning $6 per room filled vs. hotels earning $2.80 per room filled. I think the comparison is illuminating. The costs associated with the real estate, the staff and running the hotel are the investments the hotel is making whilst Expedia is spending their $1bn on tech. But the OTAs are managing to capture more of the profits/room because of their oligopolistic power and (from some of them) sharp tactics that mistreat their hotel partners.

     
    • Peter O'Connor

      Hi Charlie and thanks for your comments.
      Needless to say I do not totally agree! In fact you highlight one of the biggest problems that the industry faces today – vested interests with ‘internal’ data that tells them things that they present as gospel truth, especially when it suits their position. Here you say you have “data from millions of guests on hotel websites” that show that customers go from hotel websites to OTAs to book (likewise, to be balanced, OTAs have similar data on the supposed billboard effect that shows the opposite). The trouble is such data is not just hidden and thus cannot be independently validated, but in all likelihood is not objective and representative.

      Those of us without the benefit of large data sources have to go with what is available in the public domain and regarded as being objective. Again and again this shows that OTAs are an important part of the customer journey and that bookings flow both ways. For example you might have a look at the following, published quite recently: http://scholarship.sha.cornell.edu/chrpubs/245/
      And it goes without saying, assuming that you data is true, it clearly demonstrates that such hotel websites are below par – they have the customer on the site but for some reason (probably down to lack of investment in content, user interface, bookings engine or whatever – they fail to convert. When someone chooses to go to a third party website to complete the purchase instead of doing so on the site they are currently on, there is clearly a problem.
      Regards,

       
  16. Colin Brownlee

    This has to. E one the strangest articles I have seen on Tnooz. I know the world of media has entered a whole new landscape, but it’s hard to understand where this author is coming from.

    I just received a reply from Peter that tells me that “travel customers don’t really search on hotel brand names”. That is totally bizarre claim given that Priceline spends over 3Billion $$$$ a year on Google paid search. They buy every possible hotel brand name they can. They obviously do this because it is profitable. However, when a client types your hotel brand name into a search engine, that is YOUR customer. If you are comfortable with OTAs having the privilege of processing their reservation for 15-25% of the total cost, they love you and “you are their best friend”. In fact, you can even process the sale and pay the credit card fees because they love us so much.

    Paying a commission is not the biggest problem. At least you get something. Right? Ask yourself how many customers you loose because they were distracted by a competing offer once OTAs sucked them into their vortex by bidding on your brand name.

    Another interesting story that I pitched to Tnooz along time ago that was ignored that I felt was very telling about OTAs and your brand name. I was a customer of Buteeq which was a booking engine, channel manager and website solution for hotels. It was bought by Priceline and became Booking Suite. Buteeq used to publish helpful blog posts about getting direct bookings. One of these articles was all about bidding in Adwords on your own brand name. It was very insightful and showed people exactly what they are potentially loosing. So, Priceline buys Buteeq… and guess what? Before they even changed the name or branding, the article on this subject of bidding on your brand name disappeared. I asked Buteeq about it, given they assured me it would be “status quo” with the new owners and they just “shrugged” and did not ( or pretended not) like there was nothing particularly unusual about their action. I informed Tnooz with a copy of the article and no one seemed interested.

    So, I fully realize that OTAs are an important part of the industry and they play very well by the rules of the internet “Who ever builds the best mousetrap wins”. But if you think I am going to see these types of businesses as a”partner”, … no. Just does not my idea of a healthy long term relationship. However, I open to the idea that maybe I am the fool. It is clear that the majority of hotels are comfortable with the fact that OTAs are stealing their customers right at the front gate. Maybe I am missing something? At this point, the only thing I can see missing is 15-25%.

     
  17. Daniele Beccari

    Peter,
    good post.

    I would just add that the amount of OTA commission per se is not the issue.

    The issue is when an independent hotel relies for 90% of nights on OTAs, and they see bookings drop because they move to page 3 or 4 – and they need to increase commission to stay on top. You are correct that the hotelier will never be able to build any serious online distribution alone, but you can understand their frustration.

     
  18. Oz Har Adir

    While OTA’s and any other type of mediators add quite some value, there are many inaccurate or illogical deductions in your reasoning. To name a few:
    1. Most of Expedia’s revenue isn’t hotels but flights, so using its GBV without breaking these to accommodation is an ineffective comparison.
    2. Priceline’s commission rates are 12-20%, and again you are mixing up some flights revenue in there. If 4.3% of an average of 15% is ‘too much’ or not is an irrelevant question in economy. Priceline charges as much as they can and its hotels choice if its a positive ROI or not (which is also why there are two commission classes within Booking – preferred and ‘regular’ for most hotels to choose between)
    3. The fact that Booking and Expedia offer hotel website or revenue management tools does not make their pure OTA offering any better. A specialized provider selling only these features could offer the same value with a completely different pricing.
    4. Marketing spend doesn’t necessarily improve the efficiency of the market as a whole. It does benefit the larger operators as they are more efficient in this spend, which is what we see in other verticals such as car hailing or food delivery.
    5. I’d like to challenge Expedia to repeat their ‘0.5% of customers searching an individual hotel’ in a broader scheme: how many came through hotel name search marketing? how many came through meta?
    But again, it doesn’t really matter -> if customers were happy with the hotel website offering they’d go there. They’re not, hence they go to the OTA, meta etc. That’s why OTA’s and meta exist.

     
    • Colin J Brownlee

      Thanks for putting some reality into this post. I too laughed my head off when they were talking about “brand name search being .5%”. Booking, Expedia and others whole business model was built on trading on brand names. LOL.

       
      • Peter O'Connor

        @Colin – have a look at the independent data from Google about hotel search. Despite what hotels think, customers search for solutions rather than brands. It’s really only in the US and with the top 5 global hotel brands that customer search for “Hilton San Francisco” or the like.

         
        • Patrick Landman

          Patrick @ Xotels

          Peter,

          Sorry but OTA’s thrive by hotel brand name hijacking practices. This is why many hoteliers have a negative view. It is something especially independents need to battle as it has a tremendous impact on the profitability of a hotel business.

           
    • Mark H

      Some interesting points, but there’s absolutely no way a majority of OTA revenue comes from flights. They’re getting a transactional fee of $3-7.

       
    • Peter O'Connor

      Great points Oz and to a certain degree I agree with you. Airline revenues are certainly in there, but it doesn’t detract from the main point that for the travel sector as a whole the OTAs are highly effective demand collection systems. I remember reading a post recently where the CEO of Expedia was quoted as saying that what they were great at was delivering the customer to the hotel the first time. Where hotels (and hotel brands) are failing (and don’t get me wrong, this is a great pity) is that they once again book through the OTA for the second and subsequent bookings…..

       
      • Animesh Pandey

        Hi Peter, like always the article brings out distinctive points and evoks great responses too. I fully agree to CEO Expedia’s comments but the reason for hotels failing to get the guests booking directly even a second time is that OTAs do not share the guest email database with the Hotels. Latter having a limited opportunity to request guest emails at the time of check-in and guest’s psychological barrier to even provide an active email address, fearing a string if surveys and offers: players like Revinate and others seem poised to play a bigger role with their ability to share the emails address of OTA bookings in case of Expedia. Also, one point I would like to highlight in the favor if your article is tremendous improvement in the hotels standards due to a sort of unbiased third party review mechanism which attracts an average traveler more towards them.

         
    • Scott Harrington

      Spot On!

       
  19. Richard Vaughton

    That’s a really interesting article and highlights the extreme volume nature of the business and overheads associated with it’s success. The hotels of course recognise this power and cannot afford in general to bypass the marketing outlet.

    My question would be related to the price of technology and the future hospitality data handling systems. Combined this with AI this may one day simply push direct to a hotel seamlessly and use OTA’s as part of a research tool. Meta search engines are offering direct pricing now and AI can remove the boring headaches and search hassle. It could also observe your likes, dislikes, habits and preferences which OTA’s cannot hope to display in detail on their systems but individual sites and systems can.

    The other question relates to price points. At what value do people start to think about saving money! A guest doesn’t often see a saving on Booking.com for example as the fee is hidden and most people don’t care or don’t know. It’s easy to use, it’s a small saving for that extra work,

    Airbnb fee is smaller by 10% or more to the inventory manager, but up to 12% on a booking as a fee to a guest is “noticeable” especially for a family type week away abroad or a three night stay in an expensive London apartment.

    Interesting times and technology may well make this playing field a different shape in years to come.

     
    • Shri Lildharrie

      Over 50% of online travel bookings originated from search and end up booking through various channels included OTAs. Hotels are getting smarter. Website technology, data marketing, CRM and book direct strategies are leveling the playing field for hotels. The reason OTAs are so successful is because hotels are not traditionally digital marketers and they are using dated technologies and bad websites design expecting high conversion rates on their websites. Consumers go to hotel sites and leave booking through high cost of sales channels like OTAs. My clients are seeing 4.5% and under cost of sale and dependency on OTAs decreased by over 25%. It’s is doable for hotels to succeed in their own online, hotels will get there sooner than expected. OTAs are important, but not if hotels are over 80% dependent on their distribution to sustain. This is not a sustainable business model for hotels.

       
  20. Valentin Dombrovsky

    I see angry hoteliers fleeing into the comments of the piece. 🙂

     
 
 

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