The following is an excerpt from Max Starkov’s latest contribution to the “Successful eMarketing” blog on HOTELS magazine’s website.
Back in March of 2005 I published an article “The End of the Merchant Model as We Know it”, co-written with Jason Price. In this article we argued that the Internet was all about transparency, efficient distribution of information, and inexpensive e-commerce transactions and was by far the most efficient marketing and distribution medium ever invented. In this sense the abnormally high merchant commissions (20%-30%) levied by online travel agencies (OTAs) constituted a temporary anomaly, not the rule. We further explained that there was a direct correlation between the traditional travel agency commission of 10% and the OTA merchant commissions, and that as the travel agency commissions would inevitably go down and one day disappear, so would the OTA merchant commissions, same as it happened in the airline and car rental sectors.
Now, more than five years later, we are revisiting the same topic and trying to ascertain the future of the OTA Merchant Model.
Over the next five years the OTA Merchant Model as we know it will disappear. It will be transformed into a “Commission Override Model” where OTA commissions will be tied to booking volumes in the form of commission overrides above the standard travel agency commission that exists at the time.
In the same time, travel agency commissions will shrink from the current 10% level to 8% then 5% and then disappear for good in the same manner as it happened in the airline and car rental sectors. This will result in downward pressure on the current OTA merchant commissions, which are by default tied to the standard travel agency commission. OTAs will be able to earn override commissions above the standard travel agency commission only if they commit to concrete booking volumes. Naturally these commission overrides will be at a fraction of today’s levels.
As market conditions and industry indicators improve, and as major hotel brands and other smart hoteliers increase pressure on the OTAs to lower merchant commissions and tie higher commissions to higher OTA “booking productivity” and bigger share of the OTA bookings, the OTA Merchant Model will be transformed:
• From a net merchant rate model (net rate at 20%-30% below best available rate) and no commitment to room allotments and booking volume
• Into a “Commission Override Model” where higher booking volume production will earn the OTAs better commissions or “overrides” above the existing traditional travel agency commission levels.
The good news is that these commission override levels will be at a fraction of today’s abnormally high OTA merchant commissions of 20%-30%.
Naturally, the first decisive step to move the industry from the OTA Merchant Model to the more industry-friendly OTA Commission Override Model should be undertaken by the major hotel brands that have tremendous negotiation power with the OTAs. All it takes to open the floodgates is one “brave” major hotel brand to negotiate a commission override agreement with one OTA during the next round of contract negotiations.
What Are the Immediate Benefits to the Industry from Adopting the Commission Override Model?
Here are two important benefits the industry will receive from the adoption of the Commission Override Model:
• OTAs will be asked to commit to certain booking volume or booking revenue, tied to certain commission levels, unlike the current situation where typically the OTAs make no commitment to booking volumes, yet they receive abnormally high OTA Merchant Commissions of 20%-30%. In this way the hotel company can better project all major industry indicators such as occupancy, ADRs and RevPARs as well as cash flows based on the expected hotel website revenue+OTA booking volume commitments, etc.
• The issue with the Internet Booking Tax controversy will simply disappear since OTAs will not operate with net rates, rather with gross retail rates thus calculating the tax on the gross (retail) rate.
Click here to read the entire blog article on HOTELS Magazine website, which includes new research, industry stats, case studies and outlines the latest industry developments and trends that will lead to the disappearance of the OTA Merchant Model as we know it and its transformation into a Commission Override Model.
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