Focus on Distribution: Hotels Value Agents, But OTAs Rule

This is the first in a series on hotel distribution and travel agents.

For hotel operators, the costs of selling rooms through traditional travel agencies and travel management companies are far far lower than for rooms booked through mega online travel agencies. And agents deliver a higher-yield customer as well.

So why aren’t hotel companies beating down the doors of traditional agencies and TMCs?

Hotel operators may prefer working with traditional agents – and do better economically by them – but they feel forced to deal with the big guys. Online travel agencies simply have too much marketing power for hotels not to focus on them.

That’s the outlook shared by two top distribution experts – John Burns, president of Hospitality Technology Consulting, and Bonnie Buckhiester, president of Buckhiester Management.

Commission costs
There is little doubt that OTAs are a costly distribution channel for hotels.

“You have to wonder why a hotel would ever deal with an OTA,” said Buckhiester. “They are paying OTAs as much as 25% commission, and when they do packages or promotions it can be even more than that.

“On the surface, it doesn’t make sense, but to a great extent it’s because of the size and marketing clout of OTAs,” she said.

“When you look at the marketing budget of an Expedia versus a [hotel] brand, there is no comparison. Consumers know the Travelocity gnome and William Shatner’s Priceline ads,” Buckhiester said.

The OTAs’ marketing clout is bolstered by their heavy investments in consumer research. Buckhiester said she learned of one focus group study “where they watched people as they booked travel – monitoring their eye movements to see what they responded to.”

High visibility
“The issue is one of visibility,” said Burns. “Travel management companies and travel agencies are steady and important producers of hotel reservations. But they are comparatively low-visibility.

“Hoteliers are grateful for their reservations volume, but they are distracted, focusing instead on an immediate pain point: OTAs and other intermediaries.

“The travel agency side is not broken. It’s working fine. Agents may feel under-recognized and maybe under-appreciated, but I don’t believe that’s the case,” Burns added.

Hidden costs of OTAs
Hoteliers don’t actually pay commissions to OTAs, according to Burns; instead hotel operators give OTAs discounted room rates. But that amounts to the same thing in terms of distribution costs.

For larger hotel operators, OTAs typically command discounts, or commissions, ranging from 15% to 25%, he said, while for smaller hotels the upfront costs of selling through OTAs can be higher than 25%. That compares to a standard hotel commission for travel agents of 10%.

Even when OTA commission levels are lower than that 15% to 25% range, there are other costs that hoteliers must factor in when selling through OTAs, Burns said.

“What tends to be overlooked is that the final cost is not the commission rate of, say 15%, from a Booking.com. It’s not that. It’s the promotions that are almost required to participate on these sites.

“You need to pay for positioning on the display, so that what starts at a 15% commission ends up at 21%. Hotels enjoy incremental business [through OTAs], but at what cost?”

Higher-yield hotel guest
There’s another factor that ought to favor travel agents as a hotel distribution channel. The average daily rate (ADR) of hotel rooms booked through GDSs tends to be higher than for bookings through either OTAs or hotel brand websites, according to Burns.

In addition to delivering customers at a higher daily rate, travel agencies book hotel guests who have a longer average length of stay, Burns said.

Additionally, he said, “there is a case to be made” that travel agents’ clients spend more once at the hotel – on meals, etc.
 
“Travel agent reservations are very desirable,” Burns said.

Small share, big bite
Surprisingly, OTAs command a small market share of hotel distribution.

“The last figure I saw was 8% of total hotel bookings,” said Burns.

But OTAs have done a good job of leveraging their marketing budgets to broadcast the message to consumers that OTAs are the best place to buy, offering the best deals and the most convenience.

“They are very astute marketing organizations,” Burns said. “They have carefully engineered a perception in the  public mind that they offer better rates, one-stop shopping convenience and support in the event of problems.

“The OTAs’ value proposition is well-engineered and very capably promoted. Maybe those on the  hotel and travel agent side can learn from them.”  

Next time: Mega intermediaries and the future of hotel distribution