Industry Update
Opinion Article 1 March 2016

Expedia’s Accelerator Program - The Final Nail in the Coffin of Hotel Profitability

By Max Starkov, Adjunct Professor NYU Tisch Center for Hospitality, Founder & Director at NextGuest Digital

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Background

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Though Expedia's new Accelerator Program has not officially launched, it has been widely discussed by the company's top management during investor calls and TV interviews. It is also being promoted to hotels in a number of locations by Expedia's market managers.

What exactly is the Accelerator program? Simply put, it is a "bid for position" commission program in which hoteliers are encouraged to provide Expedia with a higher commission in exchange for better visibility (read higher ranking) of the property listing in Expedia's search/availability results pages.

The idea is that if a property is in a dire occupancy need, they will be willing to give Expedia a 30%, 40%, or even 50% commission for better "visibility," which in turn means more bookings for the property.

Why is Expedia introducing this program? Over the past 10 years or so, OTA commissions have been going down at a steady clip. Many major brands were able to push down commission/margin levels from as high as 20% down to less than 14%. The proliferation of "soft" brands such as Autograph Collections, Luxury Collections, etc., have added a multitude of independent properties to the lower commission levels negotiated by the major brands. The true independent hotels have seen only slight improvement in commission levels yet some properties in strategic locations have been able to push down commissions below the 20% mark.

If you exclude CPC revenue from Trivago.com, Expedia's other major revenue stream, Expedia Media Solutions is stagnant at best and generates revenues in the lower teens. Expedia has never been able to convince hoteliers to spend serious advertising dollars on its sites since hoteliers resent the "double taxation" nature of this advertising spend: paying for advertising while paying commissions for bookings on Expedia.com at the same time.

So here comes the Accelerator Program, an attempt to reverse the trend of decreasing commissions and generate an additional revenue stream for the OTA.

"Pay for Better Placement" is not a new concept

Expedia's main rival Booking.com has been offering a static version of a similar "pay for better placement" program for over 15 years now. The OTA offers a two-tiered program: standard and premium listings, the latter offering higher ranking of the property in search/availability results. Naturally the premium listings come at a steeper commission of 18% and above.

All the meta search sites utilize a similar "pay for better placement" business model: the higher you bid, the better the ranking on the page.

Is the Accelerator Program good for hotels?

With the new Accelerator Program the cost of distribution will go up, up and further up. What happened to the Internet being the most transparent and cost-efficient distribution channel ever invented? Even before this new Accelerator Program, the online OTA channel has become the most expensive distribution channel in hospitality: more expensive than traditional travel agents and tour operators, more expensive than the voice channel.

This program will not only increase cost of distribution and further damage the bottom line, but will engage precious revenue management resources at the property and corporate level. In other words, the Accelerator Program will have a downward spiral effect on hotel profitability.

Is it good for travel consumers?

With this new "pay for better placement" program, Expedia will push properties that provide higher commissions to the top of search/availability results. How could this be good for travel consumers? Less-than-stellar hotels that offer bigger commissions to Expedia will "outshine" the rest of the pack who offer "regular" commissions. Naturally, Expedia will not be disclosing to its users that the top 10 or 15 hotels they see in search/availability results are paying a higher commission to be there.

So who is the winner?

The only winner is Expedia and its self-centered interests. Hoteliers and travel consumers are both losers from the Accelerator Program.

What can and should hoteliers do?

The new Accelerator Program should be a wake-up call for the whole industry. Now is the time for hotel owners, managers, franchisors and franchisees to take charge of their online distribution "destiny" and focus on the direct online channel.

What should hoteliers do?

First, hoteliers should have the confidence that they CAN drive more direct bookings. We are enjoying a great time in the hospitality industry and have more tools and technology available than ever before to shift share and improve the hotel's bottom line. Now is the time to take back control and not allow the OTAs to increase their market share further.

Second, every property, hotel management company, hotel chain or brand should adopt a "Direct is Better" top-down strategy with the primary goal of generating more direct online bookings. Without such a strategy, the property and hotel company end up with under-staffed and under-budgeted in direct online marketing efforts, bandwidth and focus. A "Direct is Better" top-down strategy includes accountability for owning the property's website performance and determines whose salaries/bonuses are affected by the website's ROI (therefore incentivizing direct online bookings).

Recent "direct is better" initiatives by Marriott and Hilton deserve the industry's admiration and should serve as a "shining example" worth following.

Third, fix once and for all the highly unusual way hospitality accounts for costs of distribution: the OTA commissions are considered as acceptable "cost of distribution fees" together with travel agent commissions, GDS pass-through and other transaction fees, while direct online channel expenses come from the Marketing and Advertising Budget of the property. Many hoteliers account for the transaction cost for the website booking engine as a distribution expense, but the cost to generate this same booking (website, SEO, SEM, Online Media and retargeting, etc.) is considered an advertising expense. Why?

Any expense to generate direct online bookings should be considered not as an advertising expense, but as cost of distribution expense, similar to the OTA and travel agency commissions and other distribution fees. This is the only way to compare "apples to apples" and provide much needed resources to boost direct online channel bookings.

For example, in 2015 across our client portfolio, the average cost of distribution (Cost-of-Sale) in the direct online channel was 4%. Compare this to 18% from booking.com and 22%-25% from Expedia. Unfortunately, the 4% direct online channel cost of distribution came from the very limited hotel marketing and advertising budget, while the hefty OTA commissions came from the unlimited cost of distribution fund and were simply deducted from the booking revenue without any limitations.

Fourth, invest the appropriate amount to digital technology and marketing to generate more direct bookings. Under-spending by independent and branded properties alike in digital marketing and technology has been a problem in our industry for many years. The limitations from the backwards way of accounting the cost of distribution in the direct online channel as an advertising and marketing expense (described above) is one of the main reasons for this systemic under-spend.

We have entered a new era of online distribution and digital marketing in which just having a website, a few paid search campaigns and occasional email marketing initiatives no longer allows hoteliers to achieve any level of real success and only deepens their dependence on the OTAs.

In 2016, the majority of hotel rooms (55%) will be booked online (Google Research). The vast majority of travel consumers, leisure and corporate alike, plus corporate group planners and SMERF group organizers, do their travel planning and research online. Hoteliers simply cannot afford to under-spend in digital!

In addition, the process of planning travel has become increasingly complex, requiring hoteliers to engage the travel consumer at every possible touch point. The average travel consumer journey takes about 17 days, and the average visitor goes through eight research sessions, 18 site visits, and six clicks before making a booking (Google Research).

We have a very concrete whitepaper on the subject: The Smart Hotelier's Guide to 2016 Digital Marketing Budget Planning. Page 21 offers a 2016 Digital Marketing Budget Snapshot and the "Budget Outline & Allocations" section (pages 6 – 19) outlines exactly how to structure your budget to achieve the right mix of ROI-generating initiatives.

Conclusion:

Expedia's new Accelerator Program is bad news for the industry. It will no doubt lure some weak and "asleep at the wheel" hoteliers, resulting in further over-dependence on the OTA channel and destruction of their bottom line.

The industry must resist the temptation of "easy" bookings that come at the expense of irreparable "OTA drug addiction," deprive the property from gaining valuable payroll, capital and digital knowledge resources and lead to a downward race to lost hotel profitability.

Investing in the direct online channel should become the ultimate strategic objective for any property and hotel company. Direct bookings should be the benchmark by which salary increases and bonuses are determined at the property and corporate level. Employees should be incentivized when the market share needle is moved from OTAs to direct online bookings.

2016 should be the year for investing in the right digital technology and marketing techniques, adopting optimum digital marketing budgets that will allow hoteliers to boost their direct online channel presence, and implementing a full-blown merchandising strategy to engage users and drive direct bookings.

Max Starkov

Founder & Director at NextGuest Digital. Recognized as a thought leader in digital marketing strategies in hospitality, Max is a frequent guest speaker at industry events and conferences. His expertise is sought after by a diverse client portfolio of top tier hotel brands, luxury and boutique hotel chains, hotel management companies, resort and casino companies, franchisees and independents, as well as major Wall Street investment banks and financial institutions.

    More from Max Starkov

    ABOUT NEXTGUEST

    NextGuest Digital uses the latest in digital marketing technology to assist hotel brands in crafting their digital presence. Through the agency's smartCMS®, Content Personalization Engine, Smart Data Marketing, and other innovative initiatives, hoteliers see a drastic boost in direct bookings, as well as lower distribution costs and an increase the lifetime value of guests. NextGuest Digital is part of NextGuest, an all-encompassing partner that helps hoteliers acquire, engage, and retain their next guest. Based in New York City, the company is comprised of NextGuest Digital, CRM, Labs, and Consulting. www.nextguest.com | (800) 649-5076 | [email protected]

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