Industry Update
Opinion Article13 June 2019

What happens to rate parity when Airbnb is an online travel agency?

By Gino Engels, Co-founder and Chief Commercial Officer at OTA Insight

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Airbnb continues to be one of the travel industry's favorite topics, right up there with Google's march towards dominance in the same industry. Take, for example, Airbnb's massive investment in OYO, which gives it a stake in a potentially formidable competitor that also helps Airbnb hedge its bets in a growth market like India. OYO's budget focus is complementary to Airbnb's upscale appeal, as Airbnb needs to serve customers from budget to luxury if it wants to become an end-to-end travel platform.

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OYO generates most of its demand directly, much of it from mobile bookings, which aligns with Airbnb's own strengths. As Airbnb integrates its acquisition of mobile-centric HotelTonight onto its own platform, there's now even more inventory bookable on mobile.

OYO also runs its own hotels, leasing and franchising its budget hotels. It's both a platform and a provider, a demand generator and a supplier.

As lines blur between platform and provider, there are some real questions around rate parity and price competitiveness in this brave new world.

Getting to that apples-to-apples comparison

Most travelers can compare hotels to vacation rentals on the same platform. Vacation rentals are a significant source of revenue for Expedia and Booking.com, Google users can search vacation rentals via the hotel product and Airbnb has already begun adding HotelTonight to its existing hotel supply.

For consumers, comparing vacation rentals directly to hotels in search results is a desirable experience that expands choice. But it also means that there are no easy apples-to-apples comparisons.

The amenities and property characteristics that make a four-star hotel are not what make a four-star-reviewed vacation rental property. For guests, this is a complicated process that affects how they perceive hotel value propositions.

For hotels, the direct comparison of "hotels versus vacation rentals" in a single interface makes it nearly impossible to benchmark against vacation rentals in their comp set. As hotels look for ways to price competitively alongside rentals, there's a growing need to surface this information in a way that's relevant, says OTA Insight's global commercial manager, Clive Wood:

"It has to make sense as far as comparing star categories and other property details. It's not easy to do. Existing benchmarks are more for other property managers who manage multiple units rather than the hotels, who need to benchmark their own prices against a competitive set that's growing more complex."

Impact: Tools will evolve to track this activity. Hotels will also do more to attract direct bookings without competing for keywords, such as loyalty discounts and value-added packages.

Navigating new commission models - and more content to update

Evolving commission models also create a parity headache for hotels. Again, it comes down to consumers being able to get to that direct comparison between different types of accommodations presented on the same platform.

For vacation rentals on Airbnb, the majority of Airbnb's commission revenue comes from its guest fee. Depending on factors like reservation length and property type, this fee ranges from 5 to 20%.

For hotels, the platform recently announced a move to "host-only" fees for hotels in many regions. The change brings Airbnb more in line with how other OTAs charge commissions.

Even with this new commission structure, there's an opaque pricing environment where guests can't determine the true cost of accommodation. The added complexity for consumers can also impact a hotel's revenue management strategy.

In addition, Airbnb-as-OTA introduces the challenge of consistent content. As hotels adapt to Airbnb's unique structure (such as reviewing guests and guest communications), hotels must build new muscle memory. Content needs to be updated, guests need to be reviewed and communications must be managed within Airbnb's own platforms.

These are all new tasks that require updated workflows and careful attention to the dynamics and expectations of a new platform.

Impact: The guest fee, and inconsistent content, makes it hard to benchmark your hotel to others listed on Airbnb. Since hotels can't know the final price to the guest, there's a blind spot for hoteliers to price competitively. If you decide to distribute on Airbnb, factor in Airbnb's unique commissions to ensure that rates are in parity with your other channels.

Spiking customer acquisition costs

The Expedia/Booking duopoly already dominates digital marketing, out-manoeuvering many hotels in advertising auctions. Once Airbnb goes public, there's added pressure to perform. Add in another competitor flush with cash, and digital advertising costs may skyrocket further.

It's possible that online advertising will become even more competitive, pushing search and social advertising further out of reach for many hotels. To compete effectively against the sophisticated demand engines, more hotels will turn to digital marketing agencies - further increasing marketing costs.

Impact: As hotels face rising customer acquisition costs, direct bookings become more critical to profitability. This increases the damage inflicted by bad actors that undercut the hotel direct channel. It also puts more power in the hands of those who can most efficiently generate demand and convert that demand into bookings. Parity becomes problematic, as lowering prices is an easy and affordable way to generate demand.

More disintermediation?

In contrast to Google's cost-per-click model, Airbnb is the merchant of record. So familiar complaints about losing direct access to the guest relationship remain. 

If hotels push more inventory to Airbnb to take advantage of the lower commissions, they face similar struggles with pulling guests into their own ecosystem for future bookings.

On the flip side, if Airbnb manages to actually keep commissions lower than other platforms, then the disintermediation may be welcome.

Airbnb has great brand recognition and generates demand without advertising as heavily as OTAs. The distribution cost may align with hotel expectations, and then the Airbnb/hotel relationship is less confrontational.

Impact: As platforms compete for demand, their commissions may continue to rise. There's no guarantee that Airbnb will keep its lower costs. If commissions increase (and Airbnb were to offer a loyalty program), hotels may struggle to compete with Airbnb's value proposition.

Focus, focus, focus

There's a lot going on at Airbnb. The company is busy building an end-to-end platform that includes its existing Experiences product, in addition to emerging initiatives around trip planning and transportation.

A lack of focus and competing priorities may lead the company to falter. Google may continue to insert itself into how travelers search and book travel. And, of course, the OTA duopoly will keep evolving.

It's really all about focus. Hotels can't control growing distribution complexity and must continue to do what they do best: deliver a singular experience that guests can't get elsewhere.

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Gino Engels

From the very beginning in 2012, OTA Insight’s vision is to provide user friendly revenue management tools and become the global leader in data intelligence for the hospitality industry. We launched OTA Insight with a mission to help the hospitality industry visualise and leverage its data. Years of constant development and collaboration with hotel partners has resulted in a simple-to-use, live business intelligence platform.

    More from Gino Engels

    About OTA Insight

    OTA Insight empowers hoteliers to make smarter revenue and distribution decisions through its market-leading suite of cloud-based business intelligence solutions including Rate Insight,

    Parity Insight and Revenue Insight. With live updates, 24/7 support from our customer success team, and a highly-intuitive and customisable dashboard, the OTA Insight platform integrates with other industry tools including hotel property management systems, leading RMS solutions and data benchmarking providers.

    OTA Insight's team of international experts are based all over the world, including the UK, US, France, Germany, Belgium, Spain, Italy, Brazil, Mexico, Singapore, Australia and India, and supports more than 40,000 properties in 168 countries. Ranked one of 10 "Ones to Watch" in the Sunday Times Tech Track 100, OTA Insight is widely recognised as a leader in hospitality business intelligence.

    For more information, visit www.otainsight.com and follow us on Twitter @otainsight.

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