Investigation: Hotels and online agencies battle on three fronts (Part One)

Don’t be fooled, despite the occasionally cordial "partnering" rhetoric between the major hotel brands and OTAs, this is an existential battle.

The battle is being fought on three fronts – business models, advertising spend and traveler loyalty.

Having largely divested equity interests in their hotel portfolios, most large hotel groups have morphed into integrated branding, technology and distribution platforms.

By rapidly birthing new brands, hotel chains maximize their footprint in popular locales-fulfilling demand originating across a wide spectrum of traveler segments.

It appears that modern hotel groups are beginning to share more traits with OTAs than the hotel owners and third-party management companies tasked with developing real estate, staffing and operating the properties.

The Battle of Business Models

Hotel owners fuel the success of OTAs, with the vast majority of OTA revenues from hotel booking-related compensation that typically ranges upward from 15% of the revenue booked via the OTA, although the major brands may pay slightly less.

Fees paid by the hotel owners are, logically, also the lifeblood of the hotel brands.

In the U.S., the median cost of a traditional hotel franchise runs 11.5% of total room revenue.

That total encompasses royalty, advertising/marketing, reservations and frequent traveler program fees (among others.)

The challenge for hotel owners is the collision of the OTA, brand and hotel property management business models.

For a booking sourced through an OTA, a hotel owner may pay 15% to the OTA, 11% to the hotel brand and 2% to a credit card processor.

If a third-party management company is involved, another 3% of gross revenues must be added.

These assessments are independent of any property-level promotion, sales, advertising, marketing or payroll funding allocations.

This 30%+ cut of room revenue is arguably not sustainable for hotel ownership over the long term.

Hotel brand booking attribution can also be an indelicate science. First, corporate bookings handled by Travel Management Companies (TMCs) normally flow through a Global Distribution System (GDS).

Within a GDS, each property must affiliate with a single hotel brand, and the brands require member affiliation with their chain code.

This means every TMC/GDS corporate booking, even for those at a locally negotiated rate for a neighboring headquarters, are credited to the brand, via its Central Reservation System (CRS) channel.

Additionally, many hotel brands forbid member properties from hosting their own websites and/or booking engines, instead, offering a unified brand-centric channel that is also funneled through the brand’s CRS channel.

The brands aren’t being evil, hotel branding undeniably produces significant benefits for members and functional centralization of these channels makes operational sense.

However, it’s not in a brand’s self-interest to isolate and highlight demand sub-segments that may be more property than brand-centric.

If you realistically look at the amount of money spent to sell a room night with a brand, you have to remember that 100% of those bookings are not because of the brand.

Robert Warman – CEO, Langham Hotels

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While hoteliers hate to admit it, OTA bookings represent a low-risk, productivity-based compensation model where attribution is easily tracked.

For hoteliers, the main complaint is economic – they would prefer lower OTA commissions.

It is the simplicity of the OTA business model that bolsters an OTA’s margin justification – they efficiently produce bookings with limited associated risk. 

Idealistic hotel owners have often dreamed of running a property without the need to contract with brands, management or intermediaries.

However, when the stark realities of securing financing, running efficient operations, competing for local demand, or gaining exposure in distant geographies arise (especially during market downturns), the owner’s checkbooks eagerly open – to a point.

Unfortunately, property-level marketing expenses generally exhibit the greatest risk, absorbing payroll costs and funding front-loaded sales/advertising campaign expenses.

Worse yet, the typical lack of property-level technological sophistication results in poor performance tracking due to siloed systems, marginal staff expertise and limited access to advanced analytics.

Winner: Online travel agencies

Comparing Ad Spend – It Isn’t Even Close…

OTAs heavily reinvest hotel sourced profits into direct advertising efforts.

In 2016, Priceline and Expedia collectively allocated nearly $6.5 billion, approximately a third of their aggregate gross profit, to advertising.

In 2017, that spend will total more than $9 billion – over double the direct advertising spend of the top five hotel brands combined.

This partly results from the ability of the OTAs to secure $16 billion in commissions, compared with the hotel brands billing $11 billion in royalty fees.

This aggressive level of investment is supported by three strategic advantages – better data, more sophisticated technology and the ability to dynamically adapt strategies.

Like the hotel groups, OTAs constantly monitor hotel pricing across competitive sets.

However, OTAs have the additional benefit of understanding how consumer booking behaviors vary by persona in relation to those properties, brands and pricing dynamics.

Cross-brand demand, inventory, pricing and conversion data is powerful.

OTAs employ sophisticated ad bidding strategies across search, display and metasearch advertising platforms.

Big data-powered predictive analytics are able to capture demand signals both internally from airline and car rental verticals, and externally from social, news, event, weather, traffic or retargeting campaigns.

Extensive data inputs and substantial historical booking data allow for robust testing to identify the highest quality signals that predict the best probability of profitable outcomes.

Hotel brands often run ad campaigns geared more toward presenting members fairly, as opposed to agnostically focusing on conversion, like the OTAs.

OTA bids are dynamically set according to demand, cart value, conversion probability and profitability.

Given less sophisticated big-data repositories and lower quality competitive conversion metrics, hotel brand websites, are challenged to be opportunistic.

Winner: Online travel agencies

* In the second part of this article, we examine the role of loyalty programs and how the battle might shift in the next phase.

Watch this episode of the PundIT Show from The Phocuswright Conference 2017, where some of the issues above are debated by the author Robert Cole and other hospitality experts.