A quick formula of when to use OTAs

A battle between direct bookings and OTAs (Online Travel Agents) will continue even after the virus situation calms down. I suspect that OTAs will put more pressure on room rates to get quick business to sustain themselves. It sounds like a bad deal (which it is) but there are a quick formula for hotels to consider when they should use OTAs.

One thing that we need to be on the same page first is that driving direct bookings is not free, far from it. Hotels have to pay for marketing resources as well as different types of ads, content creation, and display channels. This ‘cost of sales’ is a key determination of this post. However, direct bookings allow hotels to capture guest details for longer term marketing or loyalty investment.

  • If cost of sales is less than OTAs commission (< 20% on average) – no brainer, spend your marketing money to drive direct bookings.
  • If cost of sales equals to OTAs commission (about 20%) – still invest in driving direct bookings. You will get guest’s contact details and consent for your future marketing.
  • If cost of sales is greater than OTAs commission (> 20% on average) – shift your investment to OTAs is not a bad idea. What kinds of situations under this conditions?
    • Your hotel is in a highly saturated market. Customers just search to get the best deal. Investing in display ads might cost you up to 50%-60% range.
    • Your hotel is located in a low traffic market. It is likely that you have to spend a lot of money to just get customer’s attention that you exist.
    • Your hotel has to compete in the prime advertising space. if your hotel is located among big names with deep marketing pocket, OTAs could be your best friend.

There is no easy formula to work with OTAs. They do do a good job in many areas. They also invest heavily in technologies that many hotels cannot match. But, they suffer from the business environment change as well. We just need to be smart to learn and try new things.


When OTAs struggle

I was a bit surprised to read this news – Tripadvisor Reorganization Brings Exec Departures and New Life for Viator. A few weeks ago, there was also news about Expedia’s CEO stepped down because there was a disagreement about his strategic direction and the expectation from the board. Basically, those Online Travel Agents (OTAs) are struggling to compete in the market.

In the Tripadvisor’s case, what they tried to do is to fight back in a tour and activity segment led by Aviator, a company they acquired in 2014. Aviator’s performance dropped due partly to the entrance to this segment by Airbnb and Booking.com.

My 2c is I used Aviator a few times and it pretty much positions itself as a shopping centre for tours and activities. Airbnb, on the contrary, is a platform for anyone to host holiday experiences. The Airbnb’s approach is admirable that I even think to adopt for my company.

Who would think even the largest OTAs in the world struggle to compete?


Hotel Industry

I have got a chance to help the hotel team with their marketing efforts. I spent times doing research to understand their terminologies so I didn’t look silly during the process. The more I learn about this industry, the more I feel there are a lot of opportunities to disrupt how the marketing is done.

The major challenge for all hoteliers is OTAs (Online Travel Agents) like Expedia, Booking.com, Agoda. They are like a large shopping center that sells similar product. People of course like to go there because it’s a one stop shop. You can compare prices and there are so many options. Furthermore, those OTAs have invested excessively in technology. They offer a very good personalised experience. Hotels have a love-hate relationship with OTAs. Hotels have to rely on them, pay high commission, and don’t get full control of their own booking data. Worst of all, OTAs drive the room rates down due mainly to a competitive force.

It’s a common knowledge and practice that all hotels want direct bookings. The influence from OTAs is great to the level that hotels can’t even set different prices on their websites. They have to stick to this illusive ‘rate parity’. They are afraid to get punished from those OTAs. Another funny thing about the influence of OTAs is all hotels must have a revenue management team – big or small. This team’s job is to do research about competitors’ rates and customer demand. They then adjust prices up and down depending on the research information. Some hotels put the revenue management function ahead of other functions to drive bookings. And, I don’t really understand this logic. Price is important but you also need to give good reasons to customers to consider your price and to see that your price give good value. By good value, I don’t mean cheap rates.

The marketing function in this industry is quite secondary. I have amused when I learnt about this fact. It is a battle that I intend to take from now. It wouldn’t be easy when OTAs have trained customers to look for the cheap or discounted rates. And, it wouldn’t be easy when the hotels respond to this OTA challenge by focusing on revenue management side.

That’s why it’s intriguing and I am excited to change that.