Revenue Leaked from Hotels to the OTAs in the Form of Abnormally High Merchant Commissions Will Reach $5.4 billion in 2010
By Max Starkov
Background:
Back in December 2003, Smith Travel Research published a much discussed article titled, “The Billion Dollar Leak – The Impact of The Merchant Model on US Hotel Profits.” In this article the authors attempted to quantify the financial impact of third party sites on U.S. hotel industry room revenues and profits. To describe this loss, they coined the term “leakage”: i.e. revenue “leaked” from the hotel industry to third party sites in the form of abnormally high merchant commissions of 25% and higher.
Smith Travel Research estimated that the leakage would hit $1 billion back in 2003, and grow to reach $1.3 billion in 2004.
Estimated Total Merchant Model Leakage:
| Year (in Millions of U.S. Dollars) |
2001 |
2002 |
2003E |
2004E |
| Gross Merchant Model Sales | $917 | $2,315 | $3,375 | $4,875 |
| Total Leakage from the Merchant Model | $296 | $676 | $1,013 | $1,314 |
Source: Smith Travel Research
As we will prove below, this billion dollar leak turned into a multi-billion dollar drain reaching a staggering $5.4 billion in 2010!
Why did the hospitality industry, in these turbulent post 9/11 times, allow the third party sites (today known as Online Travel Agencies-OTAs) to earn billions of dollars in the form of merchant commissions? There are many reasons for that; here are just a few of them:
- At the time (2001-2003) hoteliers still treated OTAs as wholesalers and typically gave OTAs wholesale/group rates, similar to the rates given to traditional tour operators. These discounted rates instantly became public across the Web, thus undermining the hotel’s other distribution channels and leading to serious price and brand erosion.
Case in point: back in early 2003 we conducted a Top 10 Market Comp Analysis Study for a major hotel brand. The results? In all markets, this hotel brand properties’ rates were consistently $150-$200 per night lower (no kidding!) on OTA sites like hotels.com than on the brand own website.
- As pure-bred Internet players, the OTAs were much smarter eMarketers, compared to most hoteliers at the time.
- The Best Rate Guarantee was not adopted by the major hotel brands until May of 2002 (IHG), followed by the rest of the brands in 2003. In contrast, OTAs have had best rate guarantees since 1995 (e.g. HotelDiscounts.com, today known as Hotels.com).
- Rate Parity across all distribution channels was a very novel term back in 2002 and 2003.
- The OTAs had a “field day” dealing directly with the franchised hotels without the scrutiny of the major brands.
- The Independent hotels were literally at the mercy of the OTAs.
2004 – 2007: The “Golden Years”, or When the Industry Came Back to Its Senses
With the establishment of the Internet as a serious online marketing and distribution channel, hoteliers began to understand that overdependence on the indirect online channel (OTAs) hurts the bottom line and leads to brand erosion and loss of customer loyalty. All major hotel brands and many smart independent hotel companies undertook a series of measures to limit the impact of the OTAs and steer customers to book via the direct online channel i.e. via the hotel’s own website.
Some of the best practices implemented during this period led to a complete reversal of the distribution landscape at the expense of the OTAs:
- Best Rate Guarantees became common practice in the industry.
- Rate Parity across all distribution channels became the industry norm.
- All major hotel brands, boutique, and luxury hotel and resort brands negotiated corporate agreements with the OTAs, thus exploiting “collective bargaining” to negotiate better terms with the OTAs and disallow the OTAs from dealing directly with their franchisees or branded hotels.
Case in point: InterContinental Hotel Group exemplified the industry’s determination to take back control from the OTAs by severing its relationship with Expedia and Hotels.com in August of 2004 and pulling all of its hotels from these OTA websites. The main reasons cited were merchant commission levels, circumventing the brand and working directly with IHG franchisees, lack of clear marketing practices, not honoring IHG trademarks, etc. It took more than three years – until November 2007 – for IHG and Expedia to sign a distribution agreement.
- Most hotel companies established internal E-Commerce Departments to deal with their websites, the direct online channel and various Internet marketing campaigns and initiatives.
- Many hotel companies developed Internet marketing proficiencies and expertise at par with the OTAs.
- Many hotel companies shifted the bulk of their advertising budgets from the offline to the online space.
- Many best practices were created and perfected during these “Golden Years” and the direct online channel in hospitality was firmly established and embraced by the industry.
As a result of the above strategic steps, the hospitality industry dramatically increased direct channel bookings (i.e. via hotel branded websites), and decreased the reliance on merchant and opaque OTA sites such as Expedia.com and Priceline.com.
Case Study: Internet Hotel Bookings by Channel for the Top 30 Hotel Brands
In 2006 and 2007, the top 30 hotel brands and the industry as a whole increased the hotel brand website booking contribution to as high as 76.1% and decreased reliance on merchant and opaque OTA sites to as low as 18.4% from all online bookings.
Here is a summary of Internet bookings by channel for 2006 and 2007:
| Top 30 Hotel Brands: CRS Hotel Bookings |
2007 |
2006 |
‘07 vs. ’06 |
| Internet Bookings: percent from total CRS bookings | 42.02% | 37.6% | +4.4% |
| * via Brand Website | 75.9% | 76.1% | |
| * viaThird-Party/OTAs | 24.1% | 23.9% | |
Incl. Merchant Sites (e.g. Expedia) | 10.4% | 10.6% | |
Opaque Sites (e.g. Priceline) | 8.0% | 8.0% | |
Agency/Retail Sites e.g. HRS, Booking.com, etc | 5.7% | 5.4% |
Source: eTRAK Report
2008-2010: The Years of Industry-Wide Amnesia
When the recession hit the industry back in 2008, I truly believed the hospitality industry would not allow a repetition of the shameful post- 9/11 years. Why did the industry allow the OTAs (again) to have a field day at the expense of the industry, and another “billion dollar leakage” to go to the OTAs in the form of abnormally high markups and commissions?
I was convinced that during the “Golden Years,” hoteliers had become seasoned eMarketers, had fully embraced the direct online channel and instituted measures and processes in place to disallow OTAs from taking advantage of the industry in an economic downturn.
Was I dead wrong or what?
The hospitality industry suffered from some kind of industry-wide amnesia and had completely forgotten the tremendous damage done to the industry by the OTAs in the months and years after 9/11.
Many hotel companies (including a number of major hotel brands) exhibited a typical “knee-jerk” reaction to the deteriorating economic environment, forgot everything they learned in the post- 9/11 period, and “succumbed to the devil” by embracing the indirect online channel (OTAs) to compensate for decreasing business. These hotel companies have been accommodating the OTAs with bigger discounts, unique promotions, etc., thus jeopardizing their direct online channel and destroying years-worth of achievements such as rate parity, best rate guarantees and more.
In other words, some hotel companies literally betrayed the industry by surrendering to the temptations of the indirect channel and demands of Expedia.com, and some of them did this in a particularly unintelligent way.
The following clearly illustrates how within a very short period of time, hoteliers became susceptible to discounting and working with the OTAs, resulting in a significant shift from the direct online channel to the indirect online channel:
| Top 30 Hotel Brands: CRS Hotel Bookings |
2007 |
2008 |
2009 |
Q1 2010 |
| Internet Bookings: Percent of total CRS Internet Bookings | ||||
| * via Brand Website | 75.9% | 75.2% | 70.9% | 71.7% |
| * viaThird-Party/OTAs | 24.1% | 24.8% | 29.1% | 28.3% |
Incl. Merchant Sites (e.g. Expedia) | 10.4% | 10.7% | 14.2% | 14.6% |
Opaque Sites (e.g. Priceline) | 8.0% | 8.7% | 11.1% | 10.2% |
Agency/Retail Sites e.g. HRS, Booking.com, etc | 5.7% | 5.4% | 3.7% | 3.5% |
Source: eTRAK Report
In a few short years the industry leaders – the top 30 hotel brands – lost 5% market share to the OTAs, which represents millions of dollars in bottom line revenue. The rest of the industry: smaller hotel brands, independents, resorts, etc. did not fare much better. Though concrete data is simply not available, it is logical to expect these smaller industry players lost a much bigger market share to the OTAs compared to the major brands.
There is no doubt that Expedia.com and the other OTAs have gained new market clout in this economic downturn. How did the OTAs achieve that?
- Major hotel brands and the industry as a whole have been slow to develop a counter-strategy of their own and as a result have lost “momentum” and market share.
- Emboldened by the industry’s desperation and slow travel demand, Expedia demanded new terms and conditions that were against everything the hospitality industry stood for: last room availability, guarantees that the best rates are only found on Expedia/Hotels.com sites, penalties to properties that do not use these OTAs 100% of the time, etc. Some major brands succumbed to Expedia’s demand for access to last room availability and made other major concessions contrary to business logic and accepted best practices.
- Back in October 2009 Choice Hotels was the only major brand who stood firm against the damaging, unreasonable demands by Expedia, and told Expedia they wouldn’t sign an agreement that would allow Expedia to become the de facto “Rate Police” of the whole industry and dictate its inventory distribution and revenue management decisions to the industry.
- Expedia’s 24 and 48-hour sales, as well as city-wide sales offered by hotels on Expedia and other OTAs (in breach of established rate parity principles and best rate guarantees on the hotel’s own site), have convinced the traveling public that Expedia offers the best hotel deals today.
- Expedia has taken on the role of the industry’s “rate police”, punishing hotels that dare not to offer this OTA all of the hotel’s available rates, special promotions and even packages.
- Expedia has been playing hotels against each other by extracting concessions which would be unthinkable in any other situation. We have seen this happen over the past two years all over the industry:
- On the Independent hotel level, where one hotel is being played against another. Typically competing hotels in the same destination are invited to participate in a “24-hour sale” or “48-hour sale” on Expedia sites and “suggested” what the discount should be. Hotels that ignore these “sales opportunities” risk losing their “preferred status” with Expedia.
- Expedia’s approach is similar to smaller and midsize hotel chains and boutique and luxury hotel brands.
- Especially interesting is the approach towards whole destinations, where the “threat of exclusion” motivates hotels to participate in destination-wide or city-wide promotions that demand 25%-30% discounts on top of the existing margin discounts of 25%-30%.
Back in October of 2009, in my article “The Prisoner’s Dilemma, the Stockholm Syndrome, or a Case of Both?” I argued that Expedia had become the “market bully” and was taking advantage of the hospitality industry, which was struggling to survive as a result of the worst recession in modern times.
I argued further that since the removal of airline booking fees in 2008, which was the only substantial revenue source outside of hospitality, Expedia and the OTAs could survive only at the expense of the hospitality industry. Exploiting the desperation among hoteliers, Expedia and some of the OTAs adopted increasingly aggressive market behavior toward the hospitality sector. The results were more than damaging for the hospitality industry and resulted in years of multi-billion dollar “leakages”.
The Billion Dollar Leak: Experiencing an Unbearable Industry Drain All Over Again
The OTAs heavily rely on the hotel industry for the bulk of their revenues. For example, hotel bookings contribute to a little over 30% of the OTA global gross booking volume. At the same time, hotel bookings contribute to more than 60% of OTAs commissions/booking fees!
In its SEC filings, Expedia acknowledges that over 60% of its revenue comes from transactions involving the booking of hotel reservations, with less than 15% of its worldwide revenue derived from the sale of airline tickets. To clarify, over 54% of the OTAs’ U.S. domestic reservation volume (44% of the OTA global gross booking volume) comes from selling airline tickets, and yet airline ticket sales produce a paltry 15% of Expedia’s revenues.
In other words, hotel reservations are financing the OTAs’ operations and allowing the OTAs to “make a killing” by reaping billions of dollars of abnormally high merchant (wholesale) commissions, and to survive after they stopped charging airline ticket booking fees.
In its 2007-2010 SEC filings, Expedia provides a crystal-clear confirmation that the billion dollar “leakage”, first discussed by STR back in 2003, continues in full force and at much higher levels.
Over the last several years, revenue “leaked” from the hotel industry to Expedia in the form of abnormally high merchant commissions has been increasing every single year. This “leakage” exceeded $2 billion in 2007 and reached $2.3 billion dollars in 2009!
| Expedia Merchant Gross Bookings | 2007 | 2008 | 2009 | First 6 Months 2010 | Estimated 2010 |
| Gross merchant bookings (in millions of dollars) | $8,355 | $9,098 | $9,254 | $5,375 | $10,842 |
| 25% merchant commission (in millions of dollars) | $2,089 | $2,275 | $2,314 | $1,343 | $2,710 |
Source: SEC, HeBS
This leakage is estimated to reach $2.7 billion in 2010, based on the results from Expedia’s first six months of this year and the rate of increase of 14.65% over the same period of last year.
To summarize, the $2.7 billion dollar “leakage” in 2010 is only the damage caused by Expedia. Expedia has an approximate 50% market share of the OTA market. If we calculate for the rest of the OTAs (Travelocity, Orbitz, Priceline), the total leakage in 2010 will reach a staggering $5.4 billion dollars!
What Can Hoteliers Do to Overcome this Massive “Leakage”?
Hoteliers must realize that a) the OTAs will not surrender their dominant position voluntarily, without putting up a fight (we repeatedly witnessed this after the end of past economic downturn), and b) increased travel demand, the beginning of which we are starting to notice, does not automatically translate into higher occupancy, ADRs and RevPARs: hoteliers must be more proactive and creative than the OTAs and the competition to get a “bigger piece of the pie” (increase market share and benefit more from the growing demand).
There are a few other important industry developments to be taken under consideration:
- GDS Channel Is in Steady Decline: GDS hotel bookings via the CRS of the top 30 hotel brands declined by 3.7% in 2009 vs. 2008, and constituted only 23.6% of the total brand CRS bookings last year (eTRAK). In Q1 2010 GDS share from total CRS booking dropped to the all-time low of 22.7%.
- The Voice Channel Contribution Is Decreasing: Voice channel hotel bookings via the CRS of the top 30 hotel brands declined by 2.9% in 2009 compared to 2008, and amounted to 22.2% of total brand CRS bookings last year (eTRAK).
In other words, hoteliers do not have many options when considering other non-OTA distribution channels. 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.
Many hoteliers claim they cannot afford to market themselves via the Internet and that is why they resort to the OTAs since their services are “free.” The following case study shows why the OTA channel not only is not “free”, but is far more expensive than the Direct Online Channel and why focusing on the Direct Online Channel provides meaningful savings that go straight to the bottom line:
Case Study: How to Add Half a Million Dollars to the Bottom Line
A hypothetical New York City Hotel with 200 rooms, 77.2% average occupancy rate, an ADR of $215.14 in 2009 (STR), and 45% of bookings being made via the Internet will incur the following distribution costs (using the industry average 60:40 direct vs. indirect online ratio):
- Cost of Direct Online Channel Distribution: 7,608 bookings x $12.92 = $98,295
(Cost per booking via the hotel’s own website, including website hosting and maintenance fees, advertising spend, campaign management fees, and Omniture analytics. Based on 530,000+ bookings in 2009 via hotel websites from HeBS’ full-service hotel client portfolio)
- Cost of Indirect Online Channel Distribution: 5,072 bookings x $107.57 = $545,595
(Calculation based on a hypothetical NYC hotel of 200 rooms @ 77.2% average occupancy rate = 56,356 roomnights/2 nts average stay = 28,178 bookings total, of which 12,680 are Internet bookings (45% of total bookings). Direct online bookings = 7,608 (60%) and Indirect Online Bookings = 5,072 (40%))
If the hypothetical 5,072 OTA bookings are instead made via the direct online channel at $12.92 each, the bulk of the OTA distribution cost, namely $480,065, would go directly to the hotel’s bottom line ($545,595 – $65,530, i.e. 5072 bookings x$12.92=$480,065). This is nearly half a million dollars added to the bottom line. Name one hotelier who would not have liked that in 2009!
Across the industry, in 2010, Direct Online Channel sales will exceed 60% of total online hotel bookings. In Q1 2010, 71.7% of online bookings for the top 30 hotel brands were direct via the brand websites, while 28.3 % were via the indirect online channel i.e. the Online Travel Agencies (OTAs).
The ultimate goal for the industry should be as follows:
- Major hotel brands: OTA contribution (including agency, merchant and opaque model) should be kept below 15%.
- Average for the hospitality industry: OTA contribution (including agency, merchant and opaque model) should be kept below 25% (the level the indirect channel has traditionally had for many years, even before the Internet).
There is no doubt the Direct Online Channel provides hoteliers with immediate results in the current economic environment as well as long-term competitive advantages. The Direct Online Channel must always be at the centerpiece of any hotelier’s Internet marketing and distribution strategy. Travel consumers booking via the hotel website (direct customers), are more loyal, bring in more revenue and tend to travel more often.
What should hoteliers do to improve their direct vs. indirect online channel exposure?
Business Objectives:
- Maintain strict rate parity across all marketing channels and maintain a best rate guarantee.
- Create unique product offerings and provide unique value proposition via the hotel website.
- Engage your customers directly via social media and mobile initiatives, and Web 2.0 features and functionalities on the hotel website.
Marketing Objectives:
- Focus on direct online channel marketing initiatives with proven ROI to increase market share and generate incremental revenue via the hotel website:
- Website re-design and web 2.0 optimizations
- Search engine marketing (SEM)
- Search engine optimization (SEO)
- Email marketing to the hotel opt-in list
- Multi-channel marketing initiatives, promotions and contests
- Social marketing: Facebook, Twitter, Flickr, YouTube
- Mobile marketing via mobile website, mobile SEO and mobile marketing initiatives
- Strategic linking and online sponsorships
- Launch online marketing initiatives, addressing your top business segments and feeder markets.
Conclusion:
Revenue “leaked” from the hotel industry to the OTAs in the form of abnormally high merchant commissions of 25% and higher will reach $5.4 billion in 2010. This leakage must be stopped and reversed as it drains the hospitality industry’s bottom line and threatens the mere survival of the industry.
With GDS and voice channels in perpetual decline, hoteliers do not have many options when considering non-OTA distribution channels. The only viable option to drastically reduce reliance on the OTA channel is for the industry to embrace 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 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, paid search, email marketing, online display advertising, and proven social media and mobile marketing initiatives.
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Whilst I’d be the first to agree with you that O.T.A.’s are becoming a threat to hotels, I question your economics. And you appear to be pitting O.T.A.s against hotels which is dangerous and unhelpful – they’re on the same side. When you see your distributors as competitors, there’s something seriously wrong.
No hotels, whether small independents or international chains, can rely on direct business. Think about it – how does The Utopia Hotel in Paradise market itself over and above the 20 other 4 star hotels in down town Paradise? Yeah, it’s built up a small loyal customer base over the years but what about the other 90% of their unsold rooms. Do you really think that they’ll fill them with your web 2.0 techniques and so on?
The fact is, travellers want to compare competing hotels side by side before booking. Hotel websites can’t (or certainly don’t) offer that possibility so, for that reason alone, hotels need O.T.A.’s so they can appear among their rivals.
There are other significant hidden benefits of working with O.T.A.s. Hotels most likely get a huge amount of their online business piggy-backing off O.T.A.s. Customers see the hotel on Expedia and then go and book it at the hotel directly. The O.T.A.s have paid all of the marketing costs. It’s a guess but I reckon the average hotel gets a large part of it’s so called ‘direct’ business as referrals from O.T.A.s. Try getting a hotel to drop all O.T.A.s for a while and see how much direct business they lose. I didn’t see you include that in their marketing costs.
Then, this 25% you refer to doesn’t all go to the O.T.A.s. O.T.A.s also get a huge amount of their business through their affiliated sites. They have endless tie-ins with everything from phone companies to individual home websites. As such they make sure your hotel appears everywhere a customer might be looking. How is a hotel going to make sure that it appears in all the right places? As I say, drop the O.T.A.s and find out.
These tie-ins cost a lot. Affiliates can command up to 15% of the O.T.A.s commission. Your headline figure of 25% is quite misleading – the cost of marketing for O.T.A.s is huge. You seem to suggest that it’s squandered on Google. No, that’s the O.T.A. bidding on Google for you – try it yourself – it’s not cheap but you need to be there.
25% doesn’t sound outrageous to me. If you think a hotel can market itself online for less than 25% of its revenue, then you know something about marketing which you’re keeping secret. Companies have tried to go alone. Dell is the biggest household name in PCs and it still didn’t manage to exist as a direct only website. I don’t fancy the chances of the Utopia Hotel in Paradise.
Why you’re still pushing rate parity I don’t know. Apart from the questionable legality of price maintenance (as currently being reviewed by the O.F.T.) it’s of no benefit to the hotel whatsoever. It’s playing right into the hands of the O.T.A.s. You’re allowing the O.T.A. to guarantee to their visitors that they won’t get a better deal cheaper anywhere, even at the hotel directly, ensuring that they don’t need to jump over to the hotel’s site to book directly. Have you not noticed that the largest O.T.A.s are not only accepting rate parity – they’re insisting on it. Did you never wonder why?
And price parity induces hotels to offer all sorts of other weird and wonderful deals to distribute excess stock like ‘opaque pricing’. I don’t see that being in anyone’s interests other than the O.T.A.s.
What’s the alternative to rate parity? That customers can book rooms at lower rates on O.T.A.s than if they book direct with the hotel? Is that shocking? I don’t think so. It’s basic market economics. You give your distributors every opportunity to sell on your behalf. They’re not a threat, They’re not competitors. They’re your sales people. Your job is to make sure everyone who stays at your hotel loves it. You want to talk about leakage? Talk about that girl on reception who offers your guests the welcome of a wet mackerel. That’s leakage. That’s two pissed off customers then and there, with no intention of coming back, and another hundred customers deterred by the shocking review on Tripadvisor.
I don’t like to see the O.T.A.s bullying hotels any more than you. I want hotels to receive a fair price as much as you. What we need to see is a better understanding between O.T.A.s and hotels so they’re not battling each other to sell the same product. Sorry to go all Zen on you but that’s a waste of energy. ‘Leakage’ of energy, if you prefer.
Great article/analysis Max. I too believe hotel distribution has come unraveled with far too much emphasis being placed on the OTAs. Keeping it at 15% would help restore a healthy balance.
To do that however, hotels will need to invest more heavily in serious marketing efforts to designed to build stronger customer relationships and loyalty. An investment in marketing might cut into the savings in the example above, but any hotel that does will still reap significant financial rewards and be more in control of their destiny.
Madigan
Dorian hs a point, but I think the real question is, at what price are the hotels going to work with the OTAs? The article suggests that they are doing so at too high a price and that they are letting the “inmates run the asylum.”
Based on my experience (as a Receptive Operator) working with hotels over the last months I suspect that this is probably the case. The properties I have worked with seem to be even more clueless that ever, with little, if any, control on their interface with the public. They do not seem to have noticed that there is significant competition for business and feel free to treat their contacts with impunity and wanton disregard for their requirements. If that is the public face, it is hardly surprising that the “private” face can have screwed up their relationship with the OTAs as described!
[...] agencies (OTAs) seem to have over hotels. Hospitality eBusiness Strategies started off with a blog post by Max Starkov sounding the alarm over continued and growing “leakage” of hotel revenues [...]
If only this were an unbiased evaluation of the very complex online travel marketplace. Correct me if I’m wrong, but HeBS earns nearly all of its revenues from direct hotel clients. In other words, HeBS is essentially competing with the OTA’s and Google Adwords for a share of the hoteliers marketing budget. Whilst I agree that Hotels need to master the online channel, they need to be told it will cost them more, not less, to market through other channels.
The industry didn’t suffer amnesia, they suffered serious economic difficulties. These are very smart people, it is an insult to assert that all of them “knew not what they were doing”. Many understood that for every reservation made on Expedia’s websites, probably another 5 are made direct with the hotel as the result of utilizing Expedia’s various properties (Hotels.com, TripAdvisor, etc.) for shopping and rate comparison. In addition, once those customers stay on property, the smart hoteliers collect contact information and are able to successfully direct market to those customers for years going forward.
Hotels are not like airlines where routes and gates are limited and controlled. Some cities have as many as 350 hotels and the thought that a single hotel or brand could successfully market a single property or group of properties in such a competitive marketplace at a higher ROI than Expedia is incomprehensible. To prove this point, try to set up a small travel site and secure high-margin contracts with 5 hotels in a large market like New York. Then using all you know about SEO, SEM, PR and etc., try to generate sufficient booking volume to maintain those contracts at a profit. You will not be able to do it. The conversion ratios for the marketing spend will be too low with such a small selection.
Even with a complete selection, it is still difficult to generate a profit because of the leakage mentioned above… mainly that customers use third party booking sites for research and fast rate comparisons and then call the hotels direct. Without the OTA sites, most people wouldn’t know about the hotel sites they end up booking thru. People don’t find hotel sites on Google, they find them on Expedia, Travelocity, TripAdvisor and Priceline and then search Google to find the hotel site. It’s a delicate ecosystem, just ask IHG and MGM why they finally caved in. If you aren’t in Expedia’s results, it’s worse than not being in Google’s results. Smart hoteliers know that the majority of people searching Expedia end up booking direct after their research phase is complete. The rest book with the OTA’s because of convenience, brand trust or time savings.
It’s fine if you want to scare hoteliers into spending more money with HeBS, SEM shops and Google Adwords but at least be honest with them about the true costs of customer acquisition. It doesn’t take a rocket scientist to see through the smoke screen of Expedia’s financial statements and understand they are operating on extremely tight margins. Selling airline tickets is a cakewalk compared to selling hotel rooms on the Internet. Marketing hotel rooms through OTA’s is significantly less expensive than marketing them through Google Adwords. One hotel in Las Vegas spent $75 per booking on Adwords before killing the program. (Again, because of the way selection and variety affects conversion ratios).
Teach your customers how to embrace the OTA’s and the incredible marketing machine they have created. Explain to them how most of their direct site traffic (type-ins and Google) are actually the result of a shopping cycle that begins on the OTA sites. Show them how to capture that Expedia customer for life once they check-in at the front desk and explain to them that Expedia can barely afford to market their lower ADR rooms in the current economy even at 25% margins. Look at Expedia’s profits, not their revenues, when evaluating the leakage theory you propose. Certainly hoteliers cannot market a single property or group of properties in a mass marketplace like the Internet at the same cost and conversion ratios as the large, extremely efficient OTA’s.
If I were to open a hotel, I would give all the rooms to the OTA’s from day one and focus on providing such a great experience, environment and level of service that I’d never have to market my hotel to “new” customers again.
Dorian,
Thank you for your comment. I somehow did not notice in your posting that you actually worked for an OTA yourself. The questions I am raising in my article are all about the cost of OTA distribution. Yes, in my view, which is shared by 99.9% of hoteliers, the 25% OTA commission is abnormally high. Why don’t the OTAs charge the airlines with a 25% commission? There is no difference in selling an airline ticket online from selling a hotel room online. How come airlines pay OTAs 0% commission and OTAs expect hotels to pay them 25% commission for practically the same job done?
For our client portfolio, the average cost per booking via the hotel website is 10 times lower than the average booking via an OTA. Period.
OTAs can still play a vital role in hotel distribution and service particular segments of the traveling public that prefer a travel package (hotel+air; hotel+air+car rental; hotel+car rental; hotel + event ticket, etc). This role will never disappear: this is where OTAs can provide a real value-add. But the role that OTAs play in distribution of barebone hotel inventory, without providing any value in the process, will diminish over time.
there are many luxury hotels that are quite cheap and affordable these days, ..
Thank you for today’s post, seriously, can you become a topic author for wikipedia because the current entries submitted there for our hobby is frankly dross. I don’t quite agree completely with it but I agree with it on the most part and I definitely applaud your effort in putting it so succinctly.
[...] to a much discussed article released by Hospitality eBusiness Strategies titled “The Billion Dollar Leak – The Impact of the Merchant Model on US Hotel Profits” revenue leaked from hotels to the OTAs in the form of abnormally high commissions was estimated [...]
I appreciate this post as it reinforces and supports similar discussions we have here in Switzerland, though the industry structure is quite different (85% of small and medium-sized hospitality enterprises). A recent distribution study showed that commission paid to OTA are about 80 million Swiss francs. More detail on http://www.slideshare.net/Roli1219/distribution-channels-in-the-swiss-hotel-industry-2009
[...] Billion Here, a Billion There – According to a Hospitality eBusiness Solutions (HeBS) analysis, “hotels stand to lose a staggering $5.4 billion in revenue leakage through third party [...]