The following is an excerpt from Max Starkov’s latest contribution to the “Successful eMarketing” blog on HOTELS magazine’s website.
Since 2008, OTAs have increased their market share in hotel distribution by nearly 45%. This is a serious setback for the hospitality industry and a return to the bad practices of the post 9/11 era. In the midst of improving economic climate and rising travel demand, can hoteliers reverse this negative trend and take back control of the online distribution channel?
There is no doubt that hotel distribution has changed dramatically over the past 16 years since the advent of the “commercial” Internet. Online distribution, social media and the mobile Web have all changed how we connect with, engage and ultimately convert customers. But the fundamental principles of hotel distribution have not changed that much. Hoteliers need to focus on distribution channels that “pass the litmus test” i.e.:
- Are cost-effective
- Generate the most bookings
- Protect rate parity and price integrity
- Reach the targeted customer segments
In other words, the main focus and priority for any hotelier should be to sell as much inventory via the most cost-effective distribution channels that can potentially generate the most bookings, while preserving rate parity and price erosion.
Based on the above fundamental principles, which of the following main distribution channels should be the main focus for hoteliers in 2011?
| Distribution Channel | Cost per Booking - Major Hotel Brands | Cost per Booking - Independent Hotels & Resorts |
Channel A | $40 – $120 | $75-$150 |
Channel B | $24.50 – $66 | $42.85 – $74.50 |
Channel C | $2 – $5 | $8.50 – $12.50 |
Note: Major Hotel Brands: Based on LOS of two nights and ADRs ranging from $100 – $300/night. Independent Hotels & Resorts: $75 – $150 per booking. Based on LOS of 2 nights and ADRs ranging from $150 – $300/night.
It’s obvious, isn’t it? Channel C is by far the most cost-effective distribution channel: it is 10-15 times cheaper than Channel A and 4-10 times cheaper than Channel B.
Channel C is obviously the only main distribution channel in the above table that deserves to be the main focus in 2011, especially in this new and optimistic economic environment of growth in travel demand, occupancy rates, ADRs and RevPARs.
Are you curious which channel represents what in the above professional quiz? Here are the correct answers:
- Channel A: Indirect Online Channel/OTAs
- Channel B: GDS Travel Agent
- Channel C: Direct Online Channel (Hotel Brand Website)
Having completed the above cost analysis, you would think that the direct online channel would be the main focus for hoteliers and they would be investing heavily in this channel and trying to shift market share from the OTAs and GDS Travel Agent channels. Wrong!
In just three short years since 2008, hoteliers’ direct online channel lost significant market share to the Online Travel Agencies (OTAs), who increased their booking contributions by a staggering 45%!
OTAs Enjoyed a Market Share Increase of 45% in 2010
Here are some disturbing stats from the Top 30 Hotel Brands:
- In 2010, only 67.3% of the online bookings for the top 30 hotel brands came from the direct online channel (i.e. the major hotel brands own websites: Marriott.com, Hilton.com, etc.), while 32.7% came from the indirect online channel (the Online Travel Agencies—OTAs) (eTRAK Report).
- In comparison, in 2008, 75.2% of all CRS online bookings came from the brand website, while 24.8% came from the OTAs (eTRAK).
- In other words, OTA contribution increased from 11.80% of total CRS bookings in 2008 to 17.10% in 2010 i.e. OTAs saw an increase of nearly 45% (HeBS Digital Research).
- This constitutes a significant increase of OTA contribution, compared to 2007, when 75.9% of all CRS online bookings came from the brand website and only 24.1% of the online bookings came from the indirect online channel (OTAs).
Here are the reservation sources for Major Hotel Brands in 2010 vs. 2008 (eTRAK Report)
| Top Hotel Brands’ CRS Hotel Bookings | Share of CRS Reservations – 2010 | Share of CRS Reservations -2008 |
| Internet (Online Channel) | 52.3% | 47.6% |
Including: | ||
Direct: Brand Website | 67.3% | 75.2% |
Indirect: OTAs | 32.7% | 24.8% |
| GDS Travel Agent | 22.1% | 27.3% |
| Voice | 25.6% | 25.1% |
| Total for CRSs | 100% | 100% |
Overall for the industry, in 2010 the indirect online channel (OTA) contribution to hotel online bookings was 40% (PhoCusWright).
As a result of this market share gain by the OTAs, revenue leaked from hotels to the OTAs in the form of abnormally high merchant commissions reached $5.4 billion in 2010 alone (HeBS Research).
Why Aren’t Hoteliers Investing More in the Direct Online Channel?
In addition to the obvious reason that selling your hotel via the OTAs is the “lazy man’s approach” to distribution, there are a few more reasons for that, including the assumption that selling through the OTAs is “free.”
- Many hotel companies (including a number of major hotel brands) exhibited a typical “knee-jerk” reaction to the deteriorating economic environment in 2008-2010, and “succumbed to the devil” by embracing the indirect online channel (OTAs) to compensate for decreased business.
- Many hotels had been accommodating the OTAs with bigger discounts, unique promotions (e.g. 24-hour sales) etc., thus jeopardizing their direct online channel and destroying years worth of achievements such as rate parity, best rate guarantees, and travel consumer perceptions that it is better to deal with the supplier directly.
- Independent hotels are overwhelmed by this rapid shift from offline to online distribution and often fail to compete for their fair share of the market. The main reason is the lack of understanding that Internet marketing is not an expense, but an investment with immediate returns at very high ROIs. Another reason is the perception that cutting-edge Internet marketing services and technologies are out of reach and accessible only to large hotel chains.
- Franchised properties believe that the major hotel brands “take care of the Internet” for them, thus they miss serious local revenue-generating opportunities.
Naturally, we do not envision a scenario where 100% of Internet bookings are made via the direct online channel. The OTAs and other intermediaries in the indirect online channel do play a needed role in certain areas of the travel planning and purchasing process e.g. dynamic packaging (air+hotel, air+hotel+car, etc.) for leisure destinations. Even in pre-Internet years, approximately 25% of all hotel bookings in the U.S. came via the indirect channel (travel agents, tour operators, and wholesalers).
So what should the OTA fair share be? Now, 16 years after the advent of the Internet distribution channel, the most cost-efficient distribution and marketing channel ever, the OTA contribution should not be higher than 25% from all Internet bookings. What we should not be seeing is the current industry average of 40% OTA contribution.
On the contrary, due to dramatic changes in travel consumer behavior, and the inherent demand to deal with the “manufacturer” of hotel and travel products (i.e. travel suppliers like hotels, airlines, car rental companies, etc.), we should be witnessing a decline in the indirect channel contribution.
Just imagine the cost savings if 5%, 10%, 15%, 20% or more bookings are shifted from the indirect to the direct online channel!
Here are some additional findings by HeBS Digital, based on the latest eTRAK benchmark report, surveys and industry data from PhoCusWright, ARC and HeBS Digital’s own research.
The Shift from Offline/Traditional Channel to Online Channel is Permanent:
- 52.3% of overall CRS bookings for the top 30 hotel brands come from the online channel, which is an increase of nearly 10% compared to 2008 when online channel contribution was 47.6%.
- As a reminder, in 2006 the online channel share was 37.6% (eTRAK Report).
- For the industry as a whole, over 45% of all hotel bookings in 2011 (leisure, unmanaged and managed corporate travel) will be via the Internet (direct + indirect online channels) (HeBS Digital Research).
GDS Channel Share is in Steady Decline:
- GDS Travel Agent contribution to the total CRS bookings of the top 30 hotel brands declined to 22.1% in 2010 from 27.3% in 2008 (eTRAK).
- In retrospect, back in 2006, GDS CRS reservations constituted 31.3% of total CRS bookings for the top 30 brands (eTRAK, industry data).
- Travel Agency Share from Total Travel Market in the U.S. dropped from 41% in 2006 to less than 33% in 2010 (PhoCusWright).
- U.S. Travel Agency Locations have been decreasing at an average rate of 4% every year and their number has declined from over 35,000 in 1995 to less than 14,603 in March 2011 (ARC, HeBS Digital).
The Voice Channel Contribution is Flat at Best:
- In 2010, voice channel contribution to the total CRS reservations of the top 30 hotel brands amounted to 25.6% of total brand CRS bookings (eTRAK).
- A significant portion of the voice channel bookings are actually bookings directly referred to from the direct online channel and the mobile channel.
- Despite this boost from the direct online and mobile channels, the Voice Channel has been in relative decline for 7th consecutive year (HeBS). Back in 2006, the voice reservations constituted 31.3% of total CRS bookings for the top 30 brands (eTRAK).
The Mobile Channel is a Reality!
Over the past two years, the mobile channel has become an important travel planning and transaction channel in the U.S. and worldwide. Hotel guests and travel consumers in general are already mobile-ready, and hoteliers and travel suppliers have to respond adequately to this growing demand for mobile travel services.
HeBS’ own research and other industry sources show that in 2010 between 1.5% – 2.5% of visitors to hotel websites came from consumers accessing the hotel site via mobile devices. Last year travel suppliers and OTAs reported a 3-5 times increase in mobile bookings and Google reported 3,000% increase in hotel mobile searches compared to 2009.
By 2014, mobile Internet users will surpass the number of desktop Internet users. The most important statistic though is the number of smartphone users. Smartphones are changing how we do business in hospitality, how we market, how we service customers. There are nearly 75 million smartphone users in the U.S. alone; their number will exceed 100 million by 2014.
In 2011, independent or franchised hotels and resorts, as well as small and mid-size hotel chains and multi-property hotel companies, should focus on building and enhancing their mobile websites. The main focus should be:
- Creating mobile-friendly textual and visual content that presents the hotel product well.
- Enhancing the mobile user-experience via well-developed mobile site navigation, a mobile booking engine widget, mobile calendar of events, etc.
- Increasing website “discoverability” via mobile SEO and mobile SEM (e.g. Google mobile AdWords) and online media initiatives.
- Making the mobile website more interactive via mobile-social media initiatives, interactive sweepstakes and contests.
- Soliciting sign-ups to the mobile opt-in list via the traditional hotel website and the mobile website, via hotel email marketing campaigns and various sweepstakes and contests, such as interactive scavenger hunts, QR Code promotions, etc.
- Tracking conversions and user behavior via mobile analytics (e.g. Omniture) and special tracking phone functionality.
The Bottom Line for Hoteliers: Focus on the Direct Online Channel
Hoteliers do not have many options when considering other non-OTA distribution channels. As mentioned above, the GDS Travel Agent and Voice Channels are in steady decline over the past years. In our view, the only viable option to drastically reduce reliance on the OTA channel is for the industry to embrace the Direct Online Channel.
There is no doubt that hoteliers need to invest in the direct online channel. Hoteliers need a robust direct online channel strategy accompanied by adequate marketing funds to be able to take advantage of the steady growth in the Internet channel and the shift from offline to online bookings in hospitality due to declining GDS and voice channels. Hoteliers must carefully employ ROI-centric initiatives including website redesign, website optimization and SEO, SEM, email marketing, online media and sponsorships, mobile marketing and proven social media initiatives.
Furthermore, due to the fact that today’s travel consumers live in a perpetual “digital information cloud,” hoteliers need to employ multi-channel marketing and distribution strategies. Multi-channel marketing has already become the norm and is the foundation for a smart direct online channel strategy. In this environment, the hotel website, SEM campaigns, email marketing, social media presence, mobile, etc. have a symbiotic relationship. Unleashing a marketing promotional campaign simultaneously across all available marketing channels produces a compounded effect and far greater returns than each individual marketing format.
Click here to read the blog article on HOTELS Magazine website.
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I am sorry to say this regarding the cost analysis at the very beginning of this article, but the costs you are attesting to are inaccurate at best. Major Hotel Brands are NOT incurring a 40% cost for OTA transactions, and Brand channel costs are much more than you claim. While I do agree with you regarding the need to focus on direct online transactions/bookings, accurate statistics are needed for a more reliant analysis. Also, as branded hoteliers have a secondary independent website that directs consumers to the brand booking engine and in which they are investing PPC/SEO expenses to reach consumers that the brand may not, the Brands need to allow the hotel operator more ability to track the entire booking process in order for that hotelier to substantiate their expenses.
Max-Obvisouly based on the numbers in your report – no one is listening to you. This same rhetoric over and over and over. What about the millions of dollars OTA’s spend in marketing both here domestically as well as Internationally to allow a small independant hotel in say, New Hampshire to have GLOBAL distribution when someone in Asia or Germany is searching for a place to stay.
Moreover as pointed out in the recent Cornell University study- Hotels displayed on an OTA saw a significantly higher percentage of DIRECT bookings because they were found on an OTA. So how much did the hotel pay for that–yes, ZERO! You need to factor in the view through direct booking metric to make your stated position credible.
I work in the insurance industry and it seems that the hotel industry is suffering a similar crisis to this one. There are too many companies with too many prices for the same commodity. The wise consumer now has access to instant information on who has the lower price and uses that to determine where to shop. Once they see consistent price variance between the Company and the alternate provider, it will not take long for them to stop looking at the companies offerings altogether. The only way to fix that is for a company to become their own OTA. Spend the money to sell your own offerings at a lower price reserving that income for the company. I did not say it was feesible, but it seems to be that or pay the OTA.
Fantastic post guys, as usual. I am simply dropping in to note that the loss of power, control, inventory, and rate that happened with the OTA’s is PRECISELY what is happening with coupon clone sites like Groupon, etc. The OTA debacle already happened.
We can stop the coupon craze from destroying brands and watering down perceived value: http://www.hrabaconsulting.com/blog/2011/04/26/yes-groupon-coupon-publisher-sites-are-destroying-your-business/
Take a moment and read it. It’s important…. let’s stop another disaster before it’s too late.
Thank you for your comments. Since this blog post, we have published an article on the subject “The OTA Billboard Effect or the Lazy Man’s Approach to Hotel Distribution” – you can find it here http://www.hebsdigital.com/blog/the-ota-billboard-effect-or-the-lazy-man%E2%80%99s-approach-to-hotel-distribution/
In this article we argue that the Cornell Hospitality Report is a one-sided research project, very proactively supported by Expedia, similar to the first report on the billboard effect published in 2009. Cornell, the finest hospitality institution in the U.S., should know better than to come up with this half-baked “scientific” research, which does not account for the complexities of hotel distribution as well as the “digital information cloud” we all live in and the resulting marketing and distribution channel convergence which directly affects the purchasing habits of today’s hyper-interactive travel consumers.
This report makes conclusions that do not take into account, among many other things, the following:
Complex Travel Planning Patterns in Hospitality
Many surveys show that people are shopping around on a number of hotel and travel websites before narrowing down their search. Typically in hospitality, these sites include a hotel search on a search engine e.g. Google (65% market share), an OTA website, TripAdvisor, the hotel’s own website, etc. Therefore jumping from an OTA website to a hotel branded website and vice versa is at least partially due to particular travel research patterns unique to the users and not due to the so-called billboard effect:
Step 1: “I always search on Google first where I identify a property I like”
Step 2: “I go to Expedia and see what the rate for this property is”
Step 3: “I visit TripAdvisor to read my peer reviews for this hotel”
Step 4: “I visit the hotel website and book if I like the location, rate and what I have read and seen about this hotel”
The Rate Parity Effect
Typically, and Internet users already know this well, Expedia places a hotel on the first search results page when it has a particularly good rate for this property e.g. a special rate, a 24-hour or a 72-hour sale. In this day and age of strict rate parity, particularly in the case of branded hotels as in the new Cornell study, the hotel has, due to mandated rate parity, the same special rate or the same 24-hour or 72-hour promotion on its own website. So the fact that there is a natural uptick in bookings on the hotel website during the exact same time the hotel is on Expedia’s first search results page is at least partially due to the rate promotion, and not due to the so-called billboard effect.
Let’s Examine Expedia’s Billboard Effect
So how big is the exposure for an average property on Expedia.com? In June 2011, Expedia.com had 19,066,141 unique visitors (Compete.com). In the same time, Expedia featured 135,000 hotels on its website, i.e. 141 unique visitors per hotel per month. In other words, on average, the customer engagements any hotel can get on Expedia.com is with 141 unique visitors.
Naturally, Expedia.com’s users are not evenly spread among the 135,000 hotels featured on the site. Some hotels get more visits based on property location, brand recognition, rate, or some users visit multiple property listings on the site. Whatever the case is, even if you believe that your hotel gets double and triple and quadruple attention by Expedia users, this number pales in comparison to the potential customer engagements you could achieve via the direct online channel.
We believe the billboard effect from a property’s exposure on Expedia.com is limited in scope, and has a far smaller effect on the hotel revenues than the property’s paid and SEO initiatives on Google, email marketing, mobile marketing, website optimizations, etc.
Let’s Examine the Billboard Effect from the Direct Online Channel
By utilizing the direct online channel and multi-channel marketing initiatives, any 100- to 150-room independent or branded hotel on average:
* Should have a minimum of 6,000-10,000 visitors to the hotel website/month
* Should send out a monthly email marketing piece to the hotel opt-in list of min 5,000-10,000 email recipients
* Should get an exposure via paid search: min 1,500-2,000 visits from PPC ($1,250-$1,500 monthly budget)
over 100,000 -133,000 free impressions (people who have seen the PPC listing) at 1.5% CTR
* Should get at least 500,000 impressions from its Google Re-Marketing/Re-Targeting campaign
* Should communicate at least 3-4 times/week with its 1,000-1,500 Twitter followers
* Should communicate at least 3-4 times a week with its 750-1,250 fans on Facebook
* Should get at least 1000 mobile visitors and generate a significant amount of reservation calls from its mobile website
In other words, by unleashing a marketing promotional campaign simultaneously across all available marketing channels, thus producing a compounded effect and far greater returns than each individual marketing initiative, the hotel could realize over 650,000 customer engagements/per month. Many of these will be realized repeatedly with potential customers across different marketing channels, which is the best recipe for customer conversion.
Compare this Direct Online Channel billboard effect with the one via Expedia!
I always suggest hoteliers use a range of online agents to see which works for them. Not all OTAs ask for such a high commission rate, so it is good to shop around. You wouldn’t give 20% of our revenue to your other essential business partners e.g. accountant, laundry provider or electrician, so why give such a high percentage to your OTA.