A balanced collaboration with OTAs and a focus on direct visitor conversion will bring more direct bookings to hotels than competing head-on with OTAs
Last year I wrote Online Hotel Bookings: Hotel Direct vs OTA to analyze the impact of hotels’ strong push to drive direct sales and bypass Online Travel Agencies (OTAs). In this post, I will take a closer look at:
- Why Should Hotels Collaborate with OTAs
- Where Can’t Hotels Compete Against OTAs
- What Can Hotels do to Grow Online Direct Bookings Today
1. Why Should Hotels Collaborate with OTAs
1.1. OTAs are the largest channel for online hotel sales
Depending on the region, OTAs drive anywhere between 50% to 72% of online hotel bookings, according to Phocuswright.
Share of hotel online bookings:
USA: OTAs > 50% – Hotels < 50%
Europe: OTAs 69% – Hotels 31%
LATAM: OTAs 69% – Hotels 31%
APAC: OTAs 72% – Hotels 28%
And OTA’s share is growing:
There are differences between large hotel brands and independents. According to Google data, online bookings represent 43% of total bookings for large hotel groups (“megabrands”) and 55% for independents. The breakdown of online bookings reflect that independent hotels are much more dependent on OTAs. Up to 73% of independent hotel online bookings come from OTAs. In the case of large hotel brands, this share is down to 30%.
Within the OTA sector, there are two competitors that are concentrating an increasingly large share of online bookings: Booking Holdings and Expedia. These two OTAs are responsible for 93% of total OTA bookings in the United States and 69% in Europe.
1.2. No, OTAs are not ripping off hotels
Hotels often complain about the high costs of selling through OTAs, and how OTAs take advantage of hoteliers by charging them extremely high commissions. Peter O’Connor addresses this question in his article Why OTA Commissions are Actually a Steal. The reality is that OTAs work under very thin margins. Let’s take a look at Expedia’s 2017 results:
→ Expedia profits 70¢ for every $100 in gross bookings
Let’s now look at how Expedia’s operating income compares with other leading OTAs, and with the world’s largest hotels.
Hoteliers point out that OTAs don’t incur in the high costs that hotels naturally have (real estate, hotel operations, food & beverage, etc…). True, but OTAs have a set of unique costs of doing business that hotels don’t face either:
- Selling and Marketing costs. Expedia’s $5.2 billion is equivalent to over 50% of revenues.
- Customer Service and Fraud Prevention. OTAs have large 24/7 multilingual operations to provide service to customers that will be staying at hotels. Expedia in 2017 spent $1.6 billion on this.
- Technology. OTAs are technology companies operating efficiently at large scale and bringing continuous innovation. Expedia spent almost $1 billion in technology and content in 2017. I was unable to find this category in hotel groups’ financial statements.
The reality of OTAs:
✓ Low margin business
✓ Highly competitive sector. Few OTAs survive, and a handful thrive
✓ Marketing and technology investments can only work at scale
✓ 99% of OTA revenues are reinvested in generating hotel and flight sales and servicing hotel customers.
1.3. For a hotel, it is cheaper to pay an OTA for a booking than paying marketing intermediaries for a direct booking
The commission that hotels pay OTAs is around 18%. Is this excessive? Conventional wisdom says yes. Are hotels better off finding a way to sell direct? Here too, conventional wisdom says yes. But I think it’s wrong on both counts.
As I did in a previous post, let’s look at the economics of both scenarios (I changed some of the assumptions here):
Scenario 1. Booking via OTA
– Average commission/booking paid to OTA = 18%
– Average booking value: $200
Cost per booking via OTA: $36
Scenario 2: Direct booking (acquired via Search or Metasearch)
– Cost Per Click: $0.8
– Hotel website conversion: 1.2%
Cost per direct booking: $67
Direct online bookings don’t just arrive organically to a hotel. A large share of them have to be acquired, as the table in section 1.1 shows. And the more a hotel wants to grow in online direct bookings, the larger this acquired share will be. If hotels expect to compete head on against OTAs in customer acquisition, hotels need to have in place large scale online marketing campaigns managed by sophisticated online marketing teams (the cost of which I am not even including in this example).
In these hypothetical scenarios, not only is booking via OTAs cheaper for a hotel than the direct route, it’s also a guaranteed result. In scenario 1, hotels pay a commission for actual guests and actual stays. It’s a completely variable cost based on performance. In Scenario 2, hotels could be paying a fortune to a marketing channel with hardly any guarantees of generating actual bookings.
If the entire OTA segment didn’t exist, hotels would have to rely on traditional marketing and distribution channels, which are anything but free, and in most cases, without the marketing efficiencies offered by the OTAs, often result in extremely high customer acquisition costs, limiting profitability— Peter O’Connor
1.4. OTAs generate bookings to hotels at a 0% commission cost and leads at $0 cost
There is a billboard effect in working with OTAs. Being present in their platforms is 0 cost brand advertising and generates direct bookings for the hotel.
A three-year survey by WIHP found that over 20% of direct hotel bookings take place as a result of the customer finding the hotel listed on an OTA. A more anecdotal evidence of the billboard effect is reported by Fastrack Group, which saw a 25% boost in direct bookings when a hotel client de-listed and later on reactivated their presence in an OTA.
If this billboard effect holds, then the effective commission rate that hotels are paying OTAs would be closer to 14%.
Furthermore, a Google survey found that, after discovering the hotel in an OTA, 52% of travelers will visit a hotel’s website to take a closer look and get more information. These are extremely valuable and targeted leads that are coming to the hotel at $0 cost that the hotel should try to seduce into booking directly instead of having them escape back to the OTA. In the third section of this post we will look at what the hotel can do keep more of these bookings.
1.5. OTAs are actually paying much higher commissions than hotels
In the previous example, a hotel typically pays an OTA an 18% commission on the booking price. In relative terms, OTAs are paying much more than this in “commissions” to Google and metasearches. They pay marketing intermediaries anywhere between 32% to 69% of their revenues (OTA revenues are around 12% of their gross bookings) to generate hotel and flights bookings. That’s between 1.8x to 3.8x more than the 18% average commission that a hotel pays.
1.6. Incremental business. Most customers who book hotels via OTAs would not have booked direct.
Not only are OTAs a relatively cheap customer acquisition channel. They also bring clients to the hotel that would never have booked directly with the hotel.
Most OTA visitors do not have a particular hotel in mind when they are searching. They generally are brand-agnostic. Expedia has stated that of all consumer searches in their platform, fewer than 0.5% are searching for specific brands. Hotels represent a highly fragmented space with millions of properties. A customer normally books a hotel in a destination that they are unfamiliar with and without prior knowledge of the property. For this reason, the hotel segment is heavily dependent on OTAs for discovery and efficient online distribution, as we saw in section 1.1. For airlines it’s a different matter. Travelers have a more recurrent relationship with airlines and they are familiar with the few that operate in their local airport. For this reason, airlines have a very high share of direct bookings (around 2/3 for traditional airlines and more than 90% for low cost).
OTAs have a global reach and multilingual web and customer service capabilities that brings clients to hotels from every single corner of the world. They also have a superior technology that allows them to enable a multiplicity of payment solutions and successfully filter potential high-risk transactions. These are OTA-unique capabilities that even the largest hotel hotel chains can’t easily (and profitably) replicate.
OTAs also attract valuable traveler categories. Compared with hotel loyalty programs, OTA loyalty programs have higher proportions of millennial leisure travelers (71% higher), millennial business travelers (44% higher), frequent travelers, and international travelers (source: Peter O’Connor).
1.7. Beyond booking
OTAs benefit from the large quantity of data they have access to. Hotels can partner up with OTAs to get value added services on many fronts including yield management, pricing intelligence, dynamic packaging, hotel loyalty program integration, etc…
2. Where Can’t Hotels Compete Against OTAs?
2.1. Technology / R&D
OTAs are technology companies that invest heavily in technology and R&I. As we mentioned earlier, Expedia’s technology costs were close to $1 billion in 2017, while hotels don’t even highlight this cost item in their annual results. A grossly unscientific illustration of the greater technology focus that OTAs have is by looking at the number of times that the word “technology” is mentioned in annual reports.
2.2. Technical Talent (Engineering – Marketing – Product)
The best possible technical talent would more naturally gravitate to an OTA (where they will be the stars) than to a hotel (where they might provide a service to the stars). Top engineering, marketing and product professionals are seduced by complex systems, large amounts of data, cutting edge innovation, AI, machine learning, multi platforms, multi devices, top-class colleagues, etc… In short, an OTA is a very attractive playground for technical resources and OTAs could have a considerable advantage over hotels in hiring these specialized resources.
2.3. Supply / Inventory
– Booking : 1,500,000 properties
– Expedia : 895.000
– Marriott : 6500 (0.3% of Expedia’s, 0.4% of Booking’s)
– IHG : 5400
– Hilton : 5100
→ Having more inventory for every taste and budget and in every single possible corner of the world means that the visitor has a higher likelihood of finding the right product in an OTA versus a hotel. This translates into a higher conversion rate. Conversion rate is the #1 driver of the OTA’s ability to invest profitably on customer acquisition.
2.4. Choice / Convenience / Objectivity
Increased product complexity favors retailers and aggregators as consumers need help in finding what they need under one roof and with a consistent UX. We cannot expect consumers to be industry insiders and know who are the providers for every type of accommodation. In an OTA, consumers can filter and compare apples to apples. Booking and Expedia have made great strides in expanding their inventory to reflect new consumer preferences. 75% of Booking.com properties are now “non-traditional” places to stay. Expedia is growing its property inventory by 70% year on year, with the highest growth coming from non-traditional accommodations.
Furthermore, the fact that OTAs also sell other travel products (flights, hotels, car rentals, tours, activities…) increases their attractiveness as a one stop shop. No need to hop around to find other travel products.
→ Brand agnostic, everywhere, everything, easy. Objectivity and a perception of aligned interests with consumers generates consumer trust.
2.5. Marketing / Customer Acquisition Excellence
Expedia and Booking marketing spend > $4.4 billion each. Even the largest hotel groups in the world cannot compete at this scale. OTAs excel in marketing and customer acquisition not only in the travel sector, but also their marketing is best in class sectors. Scale matters a lot in digital marketing, and particularly in Search Engine Marketing and in Metasearch. Their larger scale, their superior technology and their laser focused digital marketing expertise allows them to consistently dominate premium positioning in search engine and metasearch results pages, thus getting the bulk of visits.
→ OTAs have the talent, track record, scale, technology, critical mass and budgets to dominate premium real estate in search, metasearch and any other relevant online marketing channel.
2.6. Market Power
As mentioned earlier, the top two OTAs in the world (Expedia Group and Booking Holdings) concentrate a very large share of the total OTA market. They account for an estimated 93% of total OTA bookings in the US and 69% in Europe. Hotels, on the other hand, are highly fragmented. The top two hotel brands in the world are Marriott and Hilton, and they account for approximately 12% of hotel rooms worldwide.
2.7. Scale / Audience
The OTA’s mastery of customer acquisition is reflected in their scale and reach. Let’s look at the largest OTA and Hotel player:
OTA’s strong technology, marketing expertise and UX focus allows them to better adapt to however the customers decide to search for and book their travel online, regardless of the device they use. According to Criteo Q4 data, 45% of OTA transactions are mobile, versus only 16% for hotels. And the mobile edge is increasing, as year on year mobile bookings grew by 61% for OTAs and only 11% for suppliers.
3. What Can Hotels do to Grow Direct Bookings Today
3.1. Understand why people book through OTAs
Before we go in more detail into what can hotels do today to increase direct bookings, it is useful to understand first the reason why so many consumers book through OTAs.
Although a few of these reasons do address some of the unique benefits of OTAs (“largest selection”, “all my travel in one place”), many of the rest should not necessarily be monopolized by OTAs . They are within the reach of hotels. For example, the most important criteria mentioned for booking with an OTA is that it’s “easy to use”. Although OTAs do excel in UX and ease of use, many hotels can make significant improvements in their booking flow to make it easier for direct visitors to book. Another of the reasons mentioned to book with OTAs is that reservations are “easier to change/cancel”. There should be no reason why hotels cannot do this efficiently and offer even more attractive terms.
Many of the changes I will suggest in this section will enable hotels to better compete against OTAs in many of the above categories.
3.2. Focus on conversion rate
Hotels can increase direct bookings by improving the conversion rate of:
– Direct visitors
– Visitors coming via an OTA. As we mentioned earlier, 52% of travelers will visit a hotel website to kick the tires after seeing them in the OTA. But too many of these visitors are heading back to the OTA to finalize their booking.
The impact of conversion rate improvements is very significant. Let’s assume that a hotel chain has 10 million monthly visits, a conversion rate of 1% and an average booking of $250. That’s 1.2 million transactions / year and $300 million in revenue. If this hotel group could increase its conversion rate to 1.2%, it would get $60 million in additional revenue. That’s more than Marriott’s “It Pays to Book Direct” TV campaign (estimated at $1 million according to a report) and close to Marriott’s entire annual marketing spend (estimated by Skift at $100 million).
The Hotels Network is a technology company that uses predictive personalization to help hotels increase direct bookings. Using more than 20 million data points, they charted the relationship between conversion rate and hotel booking engine monthly searches.
Conversion rate tends to decrease the more searches a hotel has. However, there is also a large variance in conversion at any given number of searches. At the search level marked by the red line, conversion ranges from close to 0% to 10%.
→ Whatever the conversion rate of a hotel is today, it can improve
Hotels that pay attention to and take action to work on their conversion rates have significant better conversion rates than those that don’t.
There are multiple factors that have an impact on a hotel’s conversion rate.
Given that hotels should be focusing their resources and attention to running their already complex enough business, it would not be realistic to expect them to have the in-house capabilities, know-how and technology infrastructure to address all of them. Fortunately, there are a few SaaS companies (such as The Hotels Network) specialized in providing turnkey and easy to set up solutions for hotels to increase direct bookings with immediate and lasting results. Let’s look at a few of them.
- Optimize for mobile
We saw that hotels have a much lower share of mobile bookings compared to OTAs. As is reflected below, hotels area leaving many bookings on the table by providing a subpar mobile booking experience. (Desktop conversion of users to searchers = Index 100%. Desktop conversion of searchers to bookers = Index 100%). This data shows that there is a lot of optimization potential for mobile devices
- Optimize pricing
It’s no mystery that there is a strong correlation between booking price and conversion rate. But it is less obvious to take the correct real time price point decisions that will optimize the hotel’s RevPAR.
- Track and take actions based on rate price disparities with OTAs
Differences between the price as advertised in the hotel website and the price as advertised in an OTA have a strong impact on the hotel’s conversion rate. The higher the savings on the hotel website vs the OTA’s the higher the hotel’s conversion rate…up to a point after which it remains flat. Hotels have price parity clauses, so having a better price is not always obvious. But it is critical that at least hotels don’t have worse prices on their own domains than what customers can find in an OTA. It is therefore fundamental for hotels to integrate tools that allow them to automatically track OTA pricing and take appropriate actions in order to maximize revenue.
- Show price comparison
It is common knowledge that people visit multiple sites to shop and compare prices prior to booking. According to a travel behavior study, the average number of websites visited is 4.4 , although Expedia says that it’s closer to 38. Regardless of the exact number, the case is that if someone lands on a hotel site, chances are that it’s just one more stop on visitor’s price comparison and information gathering tour. It is important for the hotel to capture this opportunity and retain the customer in the hotel’s site.
Once in the hotel’s website, visitors want to know how the hotel price compares with other platforms (OTAs), so the hotel should show them that information upfront. And not only show the price, but highlight other benefits of booking direct. This is valuable information (as the success of metasearches proves) and will increase the likelihood of the visitor staying. It will also help in building trust with the hotel brand. Hoteliers can easily control which OTAs they want to show information for, and also set the rules of when and what to display.
- Show hotel reviews
Hotel reviews are an important component of customers’ decision making process. Reviews are also another reason why customers would leave a hotel’s website to search for the hotel’s reviews elsewhere. Here again, the hotel should show customers the hotel’s reviews from multiple platforms (Tripadvisor, Booking, Facebook, Expedia, etc…) in order to make up their minds and close the deal right there and then. The Hotels Network’s context and personalization tools allow hotels to automatically display reviews of the specific elements (location, food, service, etc…) that are right for the context and for what each visitor is likely to be most influenced by.
- Alerts and notifications
Hotels can show a variety of notifications that nudge visitors to book with a greater sense of urgency. OTAs do this very efficiently, and so should hotels. Messages can be adapted automatically to each user (with AI and ML) to have the greatest impact of conversion. Notifications can range from promotions, instant offers, direct booking benefits, etc…
- Exit-intent retention messages
When a visitor leaves the hotel’s site without booking, there is no guarantee that they will come back. As a last resort attempt to keep visitors from abandoning, hotels can show targeted messages when the browser is about to leave their site. Not ideal because it can look a bit desperate, but these messages work. A targeted popup strategy can increase conversions 5–10%.
- Save searches and retarget
To address users who leave without booking, hotels can still take action to increase the likelihood of not losing the sale. For example, hotels can save visitor searches so that, if the user comes back, they can easily resume their previous search and not need to start from scratch. Hotels can also use personalized retargeting to attract prior visitors while they are browsing third party sites (social media sites, OTAs). In essence, hotels can make it easier for previous visitors to come back and book direct with the hotel.
In this example, not only does the Palace Hotel Barcelona allow the returning visitor to resume their search, but it also highlights many additional advantages in booking direct.
- Machine Learning and Artificial Intelligence
Tools like The Hotels Network’s Oraculo allow hotels to predict visitor behavior and adapt the website content and offers shown to increase conversion and RevPAR. Using this type of algorithm, hotels can:
– Predict the user behavior and booking probability
– Identify the ideal price point
– Optimize and personalize pricing, offers, room types, promotions and incentives
– Constant A/B testing for continuous optimization
- Sell complementary travel products
We saw earlier that “buying all my travel in one place” is an important reason why customers prefer to book with OTAs. Hotels can also offer a combination of services around their core hotel product. Flights, car rental, tour, activities or travel insurance can be be reserved along with the hotel as dynamic package or as stand alone services. By offering products that customers are likely interested in, hotels are thus increasing the potential for cross selling, up selling and conversion improvements.
3.3. Targeted advertising in OTAs
A key objective of digital marketing is occupying as much prime real estate as possible wherever there are potential customers. That includes Google search results and metasearch. OTAs should also be attractive platforms for hotels to advertise in in a highly targeted and contextual way. As I wrote in a previous post, Amazon is a very efficient advertising platform for retailers and brands and it has become the third largest digital advertising platform after Google and Facebook. Similarly, Expedia and Booking (and most other OTAs) are building up strong advertising capabilities that are nearing $1 billion in annual advertising revenues each, equivalent of up to 11% of their core travel revenues.
→ If hotels spend money in digital marketing, they should surely explore advertising where the majority of online hotel bookers concentrate: OTAs.
3.4. Earn customer loyalty
This is the core of hotels’ business and what they do best. Hotels have a clear edge over OTAs on the fact that customers spend days/weeks experiencing the hotel brand and interacting with the hotel. Investing on building unique brands and superior guest experiences is surely to have a better return on direct bookings than competing against OTAs in customer acquisition.
“You guys all criticize me for how much I charge you for guests to come to your hotel. I think you’re looking at it wrong. Look at us as the cheapest source of referrals that you could imagine. If they come through me, you pay me once, and if they come back to me again and again, shame on you. You should make them a loyal customer” — Former Expedia CEO Dara Khosrowshahi
Hotels should equally strive to earn the loyalty of customers who booked through OTAs. Many hotels treat OTA bookers as second class guests, which is a self destructive strategy towards a growing customer base with significant prescriptive power.
As a final thought, here are the dos and don’ts on how can hotels approach digital distribution
…suffer from Direct Booking Obsession
…run away from OTAs
…fight losing battles against the OTAs
…give visitors reasons to leave your website
…focus on what you can’t control
– Provide a superior and memorable guest experience regardless of the guest’s booking channel
– Adopt a balanced online distribution strategy to adapt to customer preferences
– Work on your website’s conversion to immediately increase direct bookings
– Explore a wide-ranging collaboration with OTAs beyond simple booking
– Focus on what you can control: service, guest experience, direct online booking platform