Working with OTAs: The Indirect Distribution Dilemma
13 experts shared their view
Our recent study uses multi-year, objective data to clearly demonstrate that hotel properties that work with Online Travel Agents (OTAs) perform significantly better financially than those that do not, with commissions being more than compensated for by the increased revenues, resulting in higher bottom-line profits. However, in reality, many hotels still have a (perhaps historic) negative opinion of OTAs. While appreciating the resulting bookings, many still perceive OTAs as competitors rather than partners and fail to commit fully to what should be a win-win relationship.
With travel reigniting following the COVID-19 pandemic, what can/should OTAs consider doing to better seduce hotels and convince them to engage more fully with this valuable distribution channel?
I never really understood this historic negative view of OTAs by some hoteliers. I mean, I get it, the commission levels reaching 25%, sometimes even 30%, that was steep. The current situation is more within the 15-20% range, which is still too much for some hoteliers. The requirement for rate parity and other conditions were also seen as a burden. But the real question remains: would you have gotten that booking without the OTA?
Getting direct reservations is the ideal scenario, but unless you have a distinctive location, or some kind of unique selling proposition (USP), getting found online is becoming increasingly difficult and comes with a price tag. Content creation, social media management, website optimization (SEO) and acquisition campaigns (SEM), newsletters... all these come at a cost estimated between 4-5% of acquisition for a client. It's not free, not to mention the human resources that must be in place to manage such reality.
What OTA could or should consider doing better is educating hoteliers about the added value they bring to the online distribution landscape. Sharing customer data with loyalty programs for example, is something Expedia has tried in the past and remains a good idea.
OTAs are a necessary evil, and they bring value most of all whenever they bring incremental revenue to hoteliers. The challenge is to strike the right balance in the distribution mix.
OTAs can often provide hotels an excellent opportunity to reach guests that they can't reach on their own at a reasonable cost. If OTAs are willing to commit to hotels that they want to fulfil that role, there's a fairly simple formula for them to do so:
- Reduce margins for independents. While many of the major chains have leveraged their scale to drive down the margins their properties pay, many independents still face relatively high margins. Yes, it's true that OTAs sometimes represent an economical choice. But it's also true that independents can frequently capture sufficient demand and pocket an additional 5-10 points of revenue on direct business simply because OTAs continue to insist on margins of 20% or greater from individual properties. Giving independents margins more in line with larger chain properties would go a long way to demonstrating commitment to being a valued partner.
- Provide greater flexibility in inventory management. For many hotels, margin isn't the biggest challenge they face in working with OTAs; inventory control is. OTAs looking to seduce properties to working with them — and play the role as a true partner — must offer independents and chain hotels alike greater flexibility around closing out dates, close to arrival/departure, MLOS, and related tools in their inventory management toolkit. Few property owners or managers would object to paying higher margins on inventory that they can't sell on their own; but having to eat that cost on last room available, or even close to last room, during high demand periods is too high a price to pay.
- Better control onward distribution of rates. It's understandable that OTAs would want something in return for providing these options to hotels, such as reduced rates for closed user groups. And in cases where OTAs strictly enforce those closed user group restrictions, hotels likely would see benefits from participating. Unfortunately, these restrictions are too often poorly controlled, resulting in hotels being hit with penalties for failing to maintain parity. Which is odd, since usually it's not the hotel who broke parity, but rather rogue OTA sites. These out of parity situations hurt hotels in many ways: for instance, parity warnings or listing penalties from other OTAs, and rate dilution. OTAs should work to ensure that they're not distributing rates to sites that routinely ignore closed user group restrictions and direct their penalties towards the guilty parties, not hotels.
OTAs want to partner with hotels. And a true partnership benefits both sides equally. Perhaps OTAs would be better served worrying less about how to “seduce” hotels with their products… and seek a healthy marriage instead.
I am quite surprised we're still discussing this topic in "Them Vs. Us" terms. I've been in the travel industry since the late '90s, and I think, except for the early '00s (for obvious reasons), I've never seen a single property NOT listed on -at least one- OTA. Oh, that's not true; I've met a hotel in Paris, a few years ago, that was adamantine not to work with any OTA, and was aiming to go 100% direct. Plot twist: it didn't work out. My take is that, when hoteliers receive the monthly commission invoice, they only focus on how much they have to pay, versus how much money they made thanks to online travel agencies. With direct bookings, that's a whole different story: without a fixed commission, hoteliers tend to think these bookings are "free." Well, bad news is that they're not: booking engine commissions, advertising on search/metasearch engines, website creation, promo-codes, hosting, SEO, etc. It's not uncommon to get to two-digit % CPA quite easily, and I've seen properties making less profit from their direct bookings than from OTA's. So, from a profit point of view, the whole debate is pointless. What OTAs may (and should) do in order to "better seduce hotels" is probably to stop undercutting rates, but if you get me started on that, I may as well open a new viewpoint. What the hell! Maybe I will.
Not working with OTAs is foolish. Their costs are within the average for distribution costs of other industries (auto industry is 30%, DTC e-commerce is 40-50%, Amazon sellers are around 45%). The problem with OTAs is, like many online distribution platforms, they are really bad at caring for their supply-partners. Everything is skewed for the consumer because that's where the money is. But it doesn't cost a lot to care for your partners. Listening to them would be a start.
For example an ad campaign that helps increase travel at the UEFA Euro Cup instead of self-serving brand promotion in a time when people are struggling to find a way to travel. Supplying real help and data to their partners so they can better manage their limited and perishable goods. But this isn't in their DNA and changing a companies DNA is apparently not possible. Let's see what time says... because it is in moments like these that incumbents get kicked out by innovators.
Let's not sugarcoat it: OTA distribution comes at a very steep cost to the hospitality industry. OTA commissions paid by hotels, as percentage of Guest Paid Revenue, have DOUBLED since 2015 (Kalibri Labs). In 2019, the last “normal” year, only in the U.S. hoteliers spent $28 billion in the form of OTA commissions to acquire guests.
The question is not whether to use the OTAs or not - this question has been settled a long time ago. Even in 1995 - prior to the emergence of the OTAs - 25% of hotel room nights were generated by intermediaries: travel agencies, wholesalers, tour operators. The real question is: How much dependency on the OTAs is healthy for your property: 20%? 30%? 50% or more of of booked room nights?
So what should be considered as a healthy distribution ratio direct online vs OTA booked room nights? Is the U.S. independent hotels' negative ratio of 1:3 in favour of the OTAs healthy? Or the negative ratio of 1:4 of European independents? Definitely not!
I believe a healthy distribution ratio is the one of 2.5:1 direct online vs OTA booked room nights, enjoyed by the major hotel chains. Marriott and Hilton are doing even better with 3:1 ratio.
I understand that independent hotels do not have the brand recognition, marketing and technology prowess and loyalty membership of the major hotel brands. But independents are systematically underinvesting in digital marketing and technology and have only themselves to blame for their increasing dependence on the OTAs. In 2019 independents invested less than 5% of room revenue in marketing and IT combined. Compare this to Expedia investing in marketing 42% and Booking 33% of revenue! Add to that the sad fact that independents have slashed their marketing and IT budgets by further 50% since the beginning of the pandemic (STR).
Why the direct channel should continue to be the main focus of a balanced distribution strategy? Distribution cost is the only cost factor hoteliers still have some influence over, unlike the remaining cost factors like labor costs, bank loans, real estate taxes, utilities, etc. It's as simple as that: The cost of direct online bookings can offset the cost of OTA distribution. For 20 years we at NextGuest (now merged with Cendyn) have been tracking the cost of direct online bookings across our portfolio of hotel clients. The average all-inclusive direct cost (website design + development amortized over 36 months, website maintenance, hosting, analytics, digital marketing - SEO, content marketing, SEM, metasearch, online display, retargeting, social media, etc., - CRM, consulting fees, etc.) has varied through ups and downs in the marketplace but has always been in the range of 4.25%-4.5%. If the property and its digital marketing agency do an adequate job, that is.
So what is a smart distribution channel strategy? Blended distribution strategy is the smart thing to do in hospitality! I believe independents should aim to achieve 1.5:1 ratio direct online vs OTA booked room nights. How do you achieve that? Independents should a)invest adequately in digital marketing and technology and b)own their local, drive-from and short haul feeder markets and should delegate the long haul and overseas markets to the OTAs.
Distribution is a cost and getting a booking is not part of a "marketing budget cost" roughly estimated at the beginning of the year. Any booking has its cost of sale, a variable fee that has to be paid in ANY CASE. This is like to consider that you'll have an irregular cost for every breakfast you'll serve to your guests. Someone will eat like a pig, someone will not even show up. Online distribution then is a specific challenge and it's not in the typical host's masterships. OTAs scale these "new" era costs very efficiently serving many hotels without a particular preference. Is this distribution cost-effective? Yes, in most cases. Is this Hotel-centric and customized? No. This distribution can be optimized? Yes, if you want to play in the online distribution Premiere League. It's going to request investments and involve risks. On top, there is a mentality issue. Hoteliers are hotel-centric. They live their hotel business as the centre of their interest and belive that for customers would be the same. They think: "a guest calls US, a guest goes to OUR website". Even large hotel chains believe to be the first idea for a guest seeking a deal. On the other hand, customers are strongly like "I do my own interests". They want to scan the market, in a particular location in minutes and spot the best treatment, for the best possible price. Only after this, they get a shortlist of 2 or max 3 possible hotels to check on their site or, God bless, "we have to call them in office hours, just like in the eighties". OTAs know this very well. They stand on the customer's side with all the online tricks that people (and even more millennials) love. OTAs are storms of computer engineers with a pack of money. Would you bet them at their own game? Not sure. Can you "use them" for your own needs only when necessary under particular conditions? I'm sure you can!
The distribution landscape mandates that mainstream hotels participate and fully engage with OTAs, setting aside those '0.1%' that are truly niche. It's been twenty plus years since the OTAs came to the forefront. The war between book direct and the OTA is over. Hotels lost. Make peace and build revenues together. Use OTAs to generate trial. Build loyalty amongst past guests, And whatever you do, don't try to compete with the OTAs by spending delirious sums on Adwords to push your search position ahead of them. Rather, spend your precious funds to improve upon your guest experience.
It's the wrong question. The OTA's are doing exactly what they are supposed to do and even more. They are not only bringing in customers but they also give insights into the customer through their extranets. And are they pushing boundaries and sometimes overstep them? Absolutely - mostly because they can, and many times because what's the alternative?
Hotels need to wake up and find a balanced approach, it's not them vs hotels, neither whose guest is it and neither "Screw OTA's and do it yourself" approach. Hotels are the product that is put on the shelf by the OTA's and in order to get better placement, well you need to do better, want better branding, well - be better branded....not so different to supermarkets really.
An OTA has one job: Convert customers into a paying guest in the destination the customer is looking for: So, OTA's do not have to do more to seduce, hotels though need to take advantage of it from an insights and / or guest perspective. Many times OTA's get ahead (and hoteliers complain) because the industry lets them.
I agree with Peter that OTAs can be a good business partner for hotels and already a valuable distribution channel. Many hotels see OTAs as a necessary evil to survive in a tough time, primarily because of the high commissions they pay to OTAs. I recommend OTAs may take a few actions to demonstrate that they are a valuable partner for hotels, such as:
- Provide a weekly or monthly report to a hotel regarding its travelers' demographics booked through the OTA site.
- Summarize consumer reviews about a hotel every month or every quarter, informing the hotel what its travelers care about, what they like the most, and in which area they often feel unsatisfied.
- Inform a hotel of the top three or top five competitors in the market every month or quarter based on travelers' search behavior on the OTA site.
OTAs can help hotels gain market insights and business intelligence by applying machine learning algorithms to analyze property-level data. Some OTAs might have already provided some of those value-added reports to their hotel partners. If that is the case, I encourage the OTAs to engage the hotel sales team and see what additional value/reports they can add to the partnership.
There is no denying that OTAs are essential to hotels' success and that any hotel unwilling to work with them is only shooting itself in the foot. However, they are more of a necessary evil than a saving grace. Indeed, thanks to their billion-dollar marketing budgets, OTAs have reached a dominant position in the online travel market, which enabled them to impose drastic conditions on hotel partners (high commissions, rate parity, guest data ownership, ...). And while hoteliers are basically forced to list on OTAs to generate online bookings, this does not mean necessarily that the likes of Booking.com and Expedia should be praised for their generosity.
In fact, we would advise hoteliers to take advantage of OTAs' online reach by listing on their platforms while, concurrently, strongly reinforcing their direct channels by adopting new technology solutions.
I read a summary of the study and it is interesting academic research but we should be careful drawing conclusions for the US market based on a study of Belgian hotels using Booking.com. I'd love to see further research in this area that looks at US hotels using Expedia and Booking.com since these two OTAs dominate the US market.
A true hotel-OTA partnership should aim to provide the best guest experience possible. My thought to achieve that is to solve a major pain point between hotels and OTAs: ownership of guest data. If OTAs are truly looking to partner with hotels (and I don't believe they are) a major step forward would be transparency over data ownership, allowing the hotel to better understand the guest and their booking patterns and preferences. I believe that would help to drive incremental revenue and repeat bookings.
The 2021 travel landscape has dictated that the leisure guest is all-important and that guest loyalty should be the prize, not channel loyalty. Any strategy that overly relies on one channel will be leaving revenue on the table. 2020/21 has shown us that channel management and distribution strategy is one of the most important elements of hotel operations, that is something that is certain to remain the case.
OTAs should educate hoteliers on the long-term benefits of improving their guest stay experiences vs burning time, capital and energy on trying to out-perform OTAs in online bookings.
To put it simply, OTAs are perfect for a first-time visitor to your hotel destination. If a returning guest books via the OTA for their 2nd visit, then this is a complete failure on the hotel for missing the opportunity to create value or establishing a compelling reason for the guest to book directly.
Improved data sharing will help OTAs win over the most reluctant of hotels
It is clear that the Online Travel Agencies (OTAs) are all working hard to gain an ever-increasing share of the distribution pie. Despite Google expanding its services to win more on-site bookings and direct bookings also increasing, on the whole, the main OTAs have continued to dominate and grow throughout the pandemic.
That said, there is always more that the OTAs can do to win over the hearts and minds of those hotels that are determined to go it alone as the industry begins to transition out of the downturn.
At Fornova, we have long advocated that hotels should become more strategic in their partnerships with the OTAs making the most of their tools to boost their visibility in feeder markets they struggle to penetrate on their own while focusing their in-house resources on attracting guests from markets where they have brand presence – usually locally and within the drive-to regions.
As Agoda's Andrew Smith has advised: "Hotels need to look at more ways to increase their online presence, so customers are seeing them and increase their potential to convert.” In short, if guests can not see the hotel they won't stay there.
There are three areas where OTAs can build better links with reluctant hotels:
1. Increase transparency
OTAs provide a fantastic range of tools to help hotels target their potential guests in their chosen regions. But, without improved transparency and easier to access data it can be difficult for them to track the results of their investment.
While the functionality to filter promotions are advanced including options to filter by country and demographic, unfortunately the data for the results is less developed. Often hotels are only told the number of guests they have attracted as a result of the campaign and have to calculate the overall percentage uplift themselves. A relatively easy fix for the OTAs would prove extremely useful for hoteliers and quickly demonstrate the return on their investment.
2. Explain the billboard
It can be easy for OTAs to assume that the benefits they provide are obvious to hotels and it is just a question of when they will turn to them. But some of the knock-on benefits of promoting a property through an OTA are not widely understood.
Yes, they will help hotels improve their visibility online during the promotion but partnering with OTAs is shown to also drive traffic to brand.com sites. According to Expedia, research shows that 65% of consumers booking directly with the property visited an OTA before booking direct, and about 18% of those consumers even visited an OTA on the day of the booking.
3. Share insider knowledge
Understanding and monitoring the comp set is central to distribution and revenue management – more so now than ever. The OTAs are a mega source of competitor data. Finding a way to share with their hotel clients which competitors are using promotions, including using country rates could be a game-changer for some hotel's distribution strategies.
With resources constrained like never before, it's understandable that some hotels will do all they can to avoid paying the big commissions to the OTAs. But they need to be careful not to throw the baby out with the bathwater. With their big brand presence and reach, partnering with OTAs are a highly effective way to reach markets where hotels would ordinarily get lost among the competition. By taking a few simple steps to improve transparency and build a stronger two-way partnership OTAs could convert even the most skeptical of properties.
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