Another Move By The OTAs That Is Harmful To Hotel Profitability – What You Need To Know
By Max Starkov, Adjunct Professor NYU Tisch Center for Hospitality, Founder & Director at HEBS Digital
Below we will discuss the issues with these two new initiatives by Expedia and Booking.com, reminiscent of the old Wild West times of hotel distribution and the early years of unruly OTAs, before rate parity and best rate guarantees. Both OTA initiatives use package or wholesale rates in clear violation of package and wholesale rates contract terms.
We feel compelled to remind hoteliers how detrimental these new OTA offerings are to the hotel bottom line and suggest several action steps hoteliers must undertake to remedy their negative impact on profitability.
What is Expedia's Add-On Advantage?
Simply put, this initiative sells "naked" discounted hotel package rates, which were never meant to be sold unbundled with air, car rental, etc. For the Package Booking Program, typically hotels provide Expedia with discounted rates—20%, 30%, and even 40%—with the caveat that these rates cannot be offered "naked" to customers and must be bundled in a package with air, car rental, etc.
Here is how the Add-On Advantage Program works: After customers book an airline ticket (Step 1), Expedia sends them an email (Step 2) with steeply discounted hotel rates in the destination the customer is flying to, pushing customers to book a hotel in addition to the airline ticket they have purchased. The problem for hoteliers is that the steeply discounted hotel rates Expedia is offering in Step 2 are from Expedia's Package Booking Program and these rates are not meant to be sold unbundled, i.e., "naked."
In Step 2 of the Add-On Advantage program, customers clearly see the discounted hotel rates that were supposed to be offered by Expedia only as bundled package rates, which is in clear violation of the terms of Expedia's Package Booking Program.
But the damage does not end there: Today's travel consumers are exceptionally savvy travel shoppers, and they will go and compare the discounted hotel rates Expedia offers in Step 2 to the rates on the hotel own website. The result? Consumers will see that, yet again, Expedia offers the best rates in the market, and next time they will go straight to this OTA website, not even considering the hotel website.
Expedia is widely promoting this new Add-On Advantage program via TV advertising in key markets, and throughout the digital marketing channel.
Why is Expedia doing this? Although over 60% of transactions on Expedia are airline reservations, this OTA makes practically no money from selling airline tickets, except for GDS kick-backs, since the airlines stopped paying agency commissions a long time ago. So the only way for Expedia to make some money from airline tickets is to bundle air with hotel, car rental, or local tours and activities in some form of a package, and markup all the package components.
Unfortunately for Expedia, Americans do not like to book packages, and typically prefer to book air first and, if they can, use miles for free tickets or upgrades, and hotel second and, if they can, use points for partial or full stay, upgrades, and more.
In the past 15 years, in spite of very aggressive promotions by Expedia and other OTAs, travel consumers refused to change their trip planning and booking behavior. As a result, package bookings on OTA sites never took off: Packages now linger at levels below 10% of all transactions. Hence the new Expedia Add-On Advantage Program, which allows Expedia to sell airline tickets and separately sell uniquely discounted hotels without the need to bundle air and hotel rates into packages, which Americans hate to book.
What is Booking.basic?
Using the Booking.basic logo and the slogan "Save more with just the basics," Booking.com now features discounted restricted "basic" rates that must be prepaid and are non-refundable. These "basic" rates are out of parity and lower than Booking.com's own rates. The reservations for these rates are "facilitated by third party business partners," which industry analysts have identified as Agoda.com (which is part of Booking Holdings, Inc.) and Ctrip.com, the Chinese mega-OTA (Booking Holdings Inc. owns 8% of Ctrip.com and is a strategic partner of the Chinese OTA).
The problem is that these "basic" rates come from wholesale and group rates hotels have given Agoda and Ctrip for specific package programs, not for public use or unbundled sales and global transient distribution, which is in clear violation of the wholesale contract terms.
Action plan for hoteliers:
- Expedia's Ad-On Advantage Program: If your property participates in Expedia's Package Booking Program, review your contract terms and explicitly disallow Expedia to offer the discounted package rates unbundled in any shape or form. In other words, the package rates cannot be offered "naked" to the customers and must be bundled in a package with air, car rental, etc.; the package should be offered with a single package price to the travel consumer. If you experience any resistance from Expedia, simply stop participating in the Package Booking program.
- Booking.basic Program:Amend your agreements with Agoda, Ctrip, and other OTAs, bed banks, and wholesalers to include provisions banning the use of group/wholesale rates for transient customers or selling discounted rates that are meant for packages in a "naked" form, i.e., unbundled from air, car rental, or local tours and activities. If you experience any resistance, stop providing these OTAs, bed banks, and wholesalers with wholesale inventory and pricing altogether.
- Focus on the direct channel to improve profitability:Endemic under-investing in direct online booking-generating technology and digital marketing is one of the main reasons why hospitality has allowed the OTAs to continuously gain market share over the years.
Hotel owners and managers must realize that falling hotel profitability is due to OTAs increasing market share and "sneaky" initiatives like the Add-On Advantage and Booking.basic. The only option to increase profitability is to boost direct bookings, maximize incremental revenue opportunities, lessen dependence on the OTAs, and invest adequately in website technology and digital marketing to engage past, present, and future guests and drive direct bookings throughout the entire path to purchase.
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About HEBS Digital
Founded in 2001, the firm is headquartered in New York City and has global offices in Las Vegas and Asia-Pacific. Through its Smart Guest Acquisition Suite, including the smartCMS®, Content Personalization Engine, Smart Data Marketing, and full-service digital consulting and marketing solutions, HEBS Digital helps hoteliers drastically boost direct bookings, lower distribution costs, and increase the lifetime value of guests. Its diverse client portfolio consists of top-tier luxury and boutique hotel chains, independent hotels, resorts and casinos, franchised properties and hotel management companies, convention centers, spas, restaurants, DMO and tourist offices.
Part of NextGuest Technologies, HEBS Digital and Serenata CRM, the most comprehensive Hotel CRM Suite today, are the creators of the hospitality industry's first Fully-Integrated Guest Engagement & Acquisition Platform.
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