May 10, 2018

The OTA’s Attempt at Discrediting the Value of the Hotel’s Direct Channel

By Max Starkov

Background:

Earlier this week, the European Technology and Travel Services Association (ETTSA) released a report called “Hotel Distribution Costs,” examining the costs associated with direct and indirect distribution channels for hotels, together with the impact of channel shift.

ETTSA is an organization “representing and promoting the interests of global distribution systems (GDSs) and travel distributors (read: OTAs), towards the industry, policy-makers, opinion formers, consumer groups and all other relevant European stakeholders.”

The report, prepared by a consultancy called Infrata, concluded that hotels that attempt to boost direct bookings at the expense of agencies and OTAs risk having lower occupancy rates with “no measurable” savings on costs, and suggested the main reason for hoteliers to push direct sales is to “reduce transparency for consumers.”

The ETTSA report uses “a magic wand” to convince the naïve or whoever is listening that hoteliers would be much better if they abandon their useless direct distribution efforts and rely on the OTAs for their distribution. The report’s highly selective “analysis”:

  • Dramatically overstates the effect of the much discredited “OTA Billboard Effect”— remember the unfortunate Cornell University “study,” financed by the OTAs? This study, disproved many times over, tried to convince hoteliers that they should use OTAs in order to generate more bookings from the property’s own website, due to the so-called “Billboard Effect.”
  • Underestimates the complexity of the online travel consumer journey: Today’s travel consumer engages in 38,983 digital micro-moments in just under two months, and the average travel consumer journey takes about 17 days, eight research sessions, 18 site visits, and six clicks before making a hotel booking (Google Research).
  • Tends to over-estimate the hotel’s direct distribution costs and undervalue OTA distribution costs, which go beyond the OTA commissions, and include costs associated with revenue management, APIs, GDS, CRS and channel management systems, etc. OTA channel management alone occupies an increasing share of the revenue manager’s bandwidth, which means rising payroll and benefit expenses.
  • Does not account for the fact that direct booking costs are fixed, while OTA distribution costs are a percentage of room revenue and grow with higher ADRs or longer length of stay (LOS).
    Makes the rather offensive claim that hoteliers’ direct booking campaigns are motivated by the hotelier’s desire to “decrease customer transparency.”

 

How much does a direct booking cost?

Direct distribution costs vary by type of property (branded vs. independent), hotel category (luxury vs. budget), complexity of hotel product (spa resort vs. limited service), even across geographies (well established online travel marketplace like North America vs. emerging market), and so on.

Here at HEBS Digital, the average direct distribution cost is 4.5% across our client portfolio, consisting of thousands of 4- and 5-star independent and “soft branded” hotels, resorts and casinos, small and mid-size luxury and boutique hotel brands. This direct cost includes all of the direct channel expenses, comprising of direct channel strategy, virtual team account manager and website revenue optimization consulting; mobile-first website design and development, amortized over 36 months; smartCMS website technology platform; ongoing cloud hosting and CDN, Adobe Analytics and reporting; professional SEO (technical SEO and on-page) with BrightEdge; SEM/paid search on Google and Bing; online media and GDN retargeting; smart data marketing, social media marketing, email marketing, and more.

Compare this to the 15%-25% OTA distribution cost.

Direct bookings are more than distribution cost savings, they are about targeting new “best” guests, about generating incremental revenues, about lasting customer engagement and retention.

Hilton’s CEO Christopher Nassetta said recently in a Skift interview: “We’ve been working very hard on strategies to have more direct relationships with customers. Direct bookings and loyalty are inextricably intertwined with one another, and they have a direct impact on Hilton’s ability to offer a superior guest experience.”

 

Why do direct bookings matter?

 Distribution costs are rising:

Distribution Costs: have been rising steadily over the last seven years due to OTAs increasing market share versus hotel direct bookings. A study by Kalibri Labs “Demystifying the Digital Marketplace” provided concrete evidence that this dramatic shift exceeded 40%.

Except for distribution costs, hoteliers have limited control over the other main cost drivers in hotel operations:

  • Labor Costs: creeping up due to unionized labor contract and mandated minimum wage/living wage increases in many municipalities
  • Debt Service: at best, interest rates on commercial loans are staying flat
  • Franchise Fees (Rewards, Marketing, Royalty, Reservation, etc.) are creeping up, as usual
  • Utilities: normally 5% of gross. Water, Sewage, Gas & Electric are all creeping up; Water & Sewage are growing pretty fast lately
  • Real Estate Taxes: always creeping up at the whim of local municipalities

 

Revenue capture is declining:

In spite of a record-breaking performance in Q1, 2018 and the very optimistic forecasts for the rest of the year (STR), hospitality industry profitability is declining. U.S. hotels earned roughly $155.2 billion in guest-paid revenue in 2017, but paid an estimated $25.2 billion to acquire guests in the form of OTA commissions and other distribution costs, retaining significantly lower net room revenue of $130 billion (Kalibri Labs).

Revenue capture—i.e., net room revenue that remained with the hotels after accounting for distribution costs (OTA commissions, traditional agency commissions, and other distribution expenses)—declined from 84.9% in 2015 to an estimated 83.5% in 2018 (Kalibri Labs).

 

Guest engagement and retention is in jeopardy:

Have you looked recently into what type of guest data the OTAs provide hotels, especially independent hotels? First Name, Last Name, OTA-credit card and OTA-email for communications. This is it!

The OTA guest comes, stays and leaves, and the hotel is left holding a bag of meaningless guest data. There is no CRM possible with this data, no in-stay upselling emails and messaging, no post-stay “Thank you“ emails, no OTA guest satisfaction surveys, and no marketing automation or drip campaigns.

Very few hotels train their front desk to even try getting additional information from the OTA guests and completing the guest profile data in the PMS.

At the minimum, hoteliers, especially independents, should create internal processes and systems to: a) complete the OTA guest profiles in the PMS, b) create a “Next Time Book Direct” program and promote it to the OTA guests, and c) adopt full CRM capabilities at the property, including a Guest Appreciation Program/Reward Program, and include all OTA guests in it.

 

Conclusion:

Contrary to the findings of the pseudo-scientific ETTSA report, direct bookings (4.5% or lower distribution cost) are cheaper than OTA bookings that carry commissions of 15-25%, plus other fees.

More importantly, direct bookings provide more than just distribution cost savings—they are about acquiring new “best” guests, generating incremental revenues, and creating lasting customer engagement and retention.

 

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Editorial Contact:

Margaret Mastrogiacomo
EVP, Strategy
Phone: (212) 782-3764
Email: margaret@nextguest.com