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Are OTA's Impacting Your Profits?

In part two of a two-part story, we unravel the reliance on OTAs and their potential to suck up industry profits. Here's why.

Thursday, September 02, 2010
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The Billion Dollar Leak: Experiencing an Unbearable Industry Drain All Over Again

The OTAs heavily rely on the hotel industry for the bulk of their revenues. For example, hotel bookings contribute to a little over 30% of the OTA global gross booking volume. At the same time, hotel bookings contribute to more than 60% of OTA commissions/booking fees!

In its SEC filings, Expedia acknowledges that over 60% of its revenue comes from transactions involving the booking of hotel reservations, with less than 15% of its worldwide revenue derived from the sale of airline tickets. To clarify, over 54% of the OTAs’ U.S. domestic reservation volume (44% of the OTA global gross booking volume) comes from selling airline tickets, and yet airline ticket sales produce a paltry 15% of Expedia’s revenues.
In other words, hotel reservations are financing the OTAs’ operations and allowing the OTAs to “make a killing” by reaping billions of dollars of abnormally high merchant (wholesale) commissions, and to survive after they stopped charging airline ticket booking fees.

In its 2007-2010 SEC filings, Expedia provides a crystal-clear confirmation that the billion dollar “leakage”, first discussed by Smith Travel Research (STR) back in 2003, continues in full force and at much higher levels.

Over the last several years, revenue "leaked" from the hotel industry to Expedia in the form of abnormally high merchant commissions has been increasing every single year. This “leakage” exceeded $2 billion in 2007 and reached $2.3 billion dollars in 2009!

Expedia Merchant Gross Bookings 2007 2008 2009 First 6 months 2010 Estimated 2010
Gross merchant Bookings
(in millions of dollars)
$8,355 $9,098 $9,254 $5,375 $10,842
25% merchant commission
(in millions of dollars)
$2,089 $2,275 $2,314 $1,343 $2,710

Source: SEC, HeBS

This leakage is estimated to reach $2.7 billion in 2010, based on the results from Expedia’s first six months of this year and the rate of increase of 14.65% over the same period last year.

To summarize, the $2.7 billion dollar “leakage” in 2010 is only the damage caused by Expedia. Expedia has an approximate 50% market share of the OTA market. If we calculate for the rest of the OTAs (Travelocity, Orbitz, Priceline), the total leakage in 2010 will reach a staggering $5.4 billion dollars!

What Can Hoteliers Do to Overcome this Massive “Leakage”?

Hoteliers must realize that (a) the OTAs will not surrender their dominant position voluntarily, without putting up a fight (we repeatedly witnessed this after the end of past economic downturn); and (b) increased travel demand, the beginning of which we are starting to notice, does not automatically translate into higher occupancy, ADRs and RevPARs: hoteliers must be more proactive and creative than the OTAs and the competition to get a “bigger piece of the pie” (increase market share and benefit more from the growing demand).

There are a few other important industry developments to be taken under consideration:
  • GDS Channel Is in Steady Decline: GDS hotel bookings via the CRS of the top 30 hotel brands declined by 3.7% in 2009 vs. 2008, and constituted only 23.6% of the total brand CRS bookings last year (eTRAK). In Q1 2010 GDS share from total CRS booking dropped to the all-time low of 22.7%.

  • The Voice Channel Contribution Is Decreasing: Voice channel hotel bookings via the CRS of the top 30 hotel brands declined by 2.9% in 2009 compared to 2008, and amounted to 22.2% of total brand CRS bookings last year (eTRAK).
In other words, hoteliers do not have many options when considering other non-OTA distribution channels. In our view, the only viable option to drastically reduce reliance on the OTA channel is for the industry to embrace the Direct Online Channel.

Many hoteliers claim they cannot afford to market themselves via the Internet and that is why they resort to the OTAs since their services are “free.” The following case study shows why the OTA channel not only is not “free”, but is far more expensive than the Direct Online Channel and why focusing on the Direct Online Channel provides meaningful savings that go straight to the bottom line:

Case Study: How to Add Half a Million Dollars to the Bottom Line

A hypothetical New York City hotel with 200 rooms, 77.2% average occupancy rate, an ADR of $215.14 in 2009 (STR), and 45% of bookings being made via the Internet will incur the following distribution costs (using the industry average 60:40 direct vs. indirect online ratio):

  • Cost of Direct Online Channel Distribution: 7,608 bookings x $12.92 = $98,295

    (Cost per booking via the hotel’s own website, including website hosting and maintenance fees, advertising spend, campaign management fees, and Omniture analytics. Based on 530,000 bookings in 2009 via hotel websites from HeBS’ full-service hotel client portfolio)

  • Cost of Indirect Online Channel Distribution: 5,072 bookings x $107.57 = $545,595

    (Calculation based on a hypothetical NYC hotel of 200 rooms @ 77.2% average occupancy rate = 56,356 roomnights/2 nts average stay = 28,178 bookings total, of which 12,680 are Internet bookings (45% of total bookings). Direct online bookings = 7,608 (60%) and Indirect Online Bookings = 5,072 (40%))

If the hypothetical 5,072 OTA bookings are instead made via the Direct Online Channel at $12.92 each, the bulk of the OTA distribution cost, namely $480,065, would go directly to the hotel’s bottom line ($545,595 – $65,530, i.e. 5072 bookings x $12.92 = $480,065). This is nearly half a million dollars added to the bottom line. Name one hotelier who would not have liked that in 2009!

Across the industry, in 2010, Direct Online Channel sales will exceed 60% of total online hotel bookings. In Q1 2010, 71.7% of online bookings for the top 30 hotel brands were direct via the brand websites, while 28.3 % were via the indirect online channel i.e. the Online Travel Agencies (OTAs).

The ultimate goal for the industry should be as follows:

  • Major hotel brands: OTA contribution (including agency, merchant and opaque model) should be kept below 15%.

  • Average for the hospitality industry: OTA contribution (including agency, merchant and opaque model) should be kept below 25% (the level the indirect channel has traditionally had for many years, even before the Internet).
There is no doubt the Direct Online Channel provides hoteliers with immediate results in the current economic environment, as well as long-term competitive advantages. The Direct Online Channel must always be at the centerpiece of any hotelier’s Internet marketing and distribution strategy. Travel consumers booking via the hotel website (direct customers), are more loyal, bring in more revenue and tend to travel more often.

What should hoteliers do to improve their direct vs. indirect online channel exposure?

Business Objectives:
  • Maintain strict rate parity across all marketing channels and maintain a best rate guarantee.

  • Create unique product offerings and provide unique value proposition via the hotel website.

  • Engage your customers directly via social media and mobile initiatives, and Web 2.0 features and functionalities on the hotel website.
Marketing Objectives:

Focus on direct online channel marketing initiatives with proven ROI to increase market share and generate incremental revenue via the hotel website:

  • Website re-design and Web 2.0 optimizations

  • Search engine marketing (SEM)

  • Search engine optimization (SEO)

  • Email marketing to the hotel opt-in list

  • Multi-channel marketing initiatives, promotions and contests

  • Social marketing: Facebook, Twitter, Flickr, YouTube

  • Mobile marketing via mobile website, mobile SEO and mobile marketing initiatives

  • Strategic linking and online sponsorships

Launch online marketing initiatives, addressing your top business segments and feeder markets.

Revenue "leaked" from the hotel industry to the OTAs in the form of abnormally high merchant commissions of 25% and higher will reach $5.4 billion in 2010. This leakage must be stopped and reversed as it drains the hospitality industry’s bottom line and threatens the mere survival of the industry.

With GDS and voice channels in perpetual decline, hoteliers do not have many options when considering non-OTA distribution channels. The only viable option to drastically reduce reliance on the OTA channel is for the industry to embrace the Direct Online Channel.

Hoteliers need a robust Direct Online Channel strategy, accompanied by adequate marketing funds, to be able to take advantage of the steady growth in the Internet channel and shift from offline to online bookings in hospitality due to declining GDS and voice channels. Hoteliers must carefully employ ROI-centric initiatives, including website redesign, website optimization and SEO, paid search, email marketing, online display advertising, and proven social media and mobile marketing initiatives.

About the Author and HeBS:
Max Starkov is Chief eBusiness Strategist at Hospitality eBusiness Strategies (HeBS). HeBS is an award-winning, full-service hotel Internet marketing and Direct Online Channel Strategy firm, strictly dedicated to the hospitality and travel verticals. Having pioneered many of the "best practices" in hotel Internet marketing and direct online distribution, HeBS specializes in helping hoteliers profit from the direct online channel and transform their websites into the hotel’s chief and most-effective distribution channel, establish interactive relationships with their customers, and significantly increase direct online bookings and ROIs. Visit us online at www.hospitalityebusiness.com

A diverse client portfolio of over 500 top tier major hotel brands, luxury and boutique hotel brands, resorts and casinos, hotel management companies, franchisees, independents, and CVBs has sought and successfully taken advantage of HeBS’ hospitality Internet marketing expertise. Contact HeBS consultants at (212)752-8186 or info@hospitalityebusiness.com.

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