How Hotels can use Social Media to battle the OTA Challenge
OTA – Online Travel Agencies
Traditionally, the principal source of income of OTA’s is commissions paid for bookings of hotels. A fixed percentage also receive a large variety of bonuses, benefits and other incentives from travel and tourism related companies as inducements for travel agents to promote their products. The customer is normally not made aware of how much the OTA’s is earning in commissions and other benefits.
Distribution Channel Analysis: a Guide for Hotels published by HSMAI Foundation these sites primarily employ net wholesale rates. They operate as a traditional wholesaler from a rate and markup perspective, but they are very different in that they communicate and relay reservations entirely online. The “merchant model” means that a hotel provides a third party vendor a net rate that is often 17% to 35% below retail levels. The merchant model website (it is an online wholesale travel agency) then decides what rate to post on its site to sell to the consumer.
The report also shows that for Hotels concerned about intermediary costs such as the estimated $2.7 billion cost of OTA commissions in 2010 (as calculated and estimated by this study) or the additional estimated $1.3 billion paid to retail travel agencies through the GDSs (as calculated and estimated by this study), the prospect of paying double these costs to a widening array of third party intermediaries within 3 to 5 years may be shocking, but it is not unrealistic. Using a hypothetical example, a hotel with $3 million in room revenue may have paid $120,000 to $150,000 in distribution costs in 2010 and may well be paying close to $200,000 to $250,000 by 2015.
HeBSDigital wrote a report in 2010 End of the OTA merchant model – this time for real. This reports indicated at the time that over the next five years the OTA Merchant Model as we know it will disappear. It will be transformed into a “Commission Override Model” where OTA commissions will be tied to booking volumes in the form of commission overrides above the standard travel agency commission that exists at the time.
This reports two primary benefits from the Commission Override Model:
- OTAs will be asked to commit to certain booking volume or booking revenue, tied to certain commission levels, unlike the current situation where typically the OTAs make no commitment to booking volumes, yet they receive abnormally high OTA Merchant Commissions of 20%-30%. In this way the hotel company can better project all major industry indicators such as occupancy, ADRs and RevPARs as well as cash flows based on the expected hotel website revenue+OTA booking volume commitments, etc.
- The issue with the Internet Booking Tax controversy will simply disappear since OTAs will not operate with net rates, rather with gross retail rates thus calculating the tax on the gross (retail) rate.
Taking the Bull by the Horn
My friends at Software Advice a company that provides free reviews of hotel management software, did a case study on How Customers can skip OTA’s by offering exclusive incentives.
This survey was done due to that the battle continues to rage between hotels and online travel agencies (OTAs). While OTAs drive over 20 percent of total room bookings, hotels suffer from the 10-25 percent commission fees they must pay to be listed. Of course, getting customers to visit your site instead of an OTA is not without its challenges. But, once there, how can you convince them to book directly through your website?
The Social Media Shift
Social Media has brought on a new shift related to How Hotels Target market segments now make an educated booking decision. Today Hotels has to bring the experience to the Customer. And ultimately Hotels should be positioned to provide this experience from their preferred channels.
Important keys today is Surprise and Delight the customers by utilizing incentives. We are facing a Social Media Trade-Off with the Customer. One of the conclusions from the case-study by Software Advice is that offering a variety of free room upgrade options is the single strongest motivator for travelers to skip the OTA discount and book directly.
This an incentive that contains both Surprise and Delight when used in the right context. Obviously the Hotel can’t upgrade every customer, so the key is to put in place a proper Strategy here.
Every incentive that the Hotel provide through Social Media Channels has to add value for Customer that make a Direct Booking with the Hotel. The Hotels Value Proposition deliver on particular combination of values – price, quality, performance, selection and convenience.
The Social Media Tipping point for Hotels lays in Value Innovation. Value Innovation is created where a Hotels action favorable affect both its cost structure and its value proposition to buyers. Cost savings are made by eliminating and reducing factors that the Hotel Industry compete on.
The question is: Are Hotels today ready to take on the OTA Challenge through Social Media Channels?
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