Statement #2: OTAs’ costs stop at the commission, which is well-worth the money
Another study (Working with OTAs: The Indirect Distribution Dilemma) that recently gained a lot of traction analyzed the importance of relying on OTAs, especially Booking.com, to generate revenue. The main claim was that the volume of bookings generated by OTAs outweighed the cost of the commission. However, there are several apparent issues with this research.
In addition to being focused solely on pre-pandemic Belgian independent hotels, the study only accounted for the monetary cost of working with OTAs and failed to analyze incidental consequences. As hotels have grown to learn, the price of signing a contract with an OTA goes way beyond the commission and comes with a sway of hidden costs that indirectly weight on hotels’ bottom line. Below is a non-exhaustive list:
Loss in customer loyalty: One of the main ways OTAs took over the online travel market is through their loyalty program. Indeed, in order to stifle hotels own loyalty strategies, most OTAs do not share customer data with the hotels, even after the booking.
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Reduced image control: Within the closed environment of OTAs interfaces, hotels have drastically reduced control over their content as well as the guest experience they want to provide as compared to their own website. This can translate into a poor representation of what your hotel is trying to convey and a mismatch between customers’ expectations and reality.
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Rate parity: While it has been forbidden in some countries, rate parity is still effective in most parts of the world. This clause forces hotels to always disclose the best price available on OTAs. This obligation weighs heavily on hotels pricing flexibility and ability to promote direct bookings over third-party bookings. Especially since this rule is a one-way street, with OTAs being free to offer better rates on their platform (by cutting on their commission) to capture more sales.
We can also highlight the inherent bias related to the way the study is setup. Indeed, By 2020, most hotels with the budget and resources to have their own digital strategy are already present on Booking.com. Which means that the only hotels left to compare are most likely very small hotels that mostly depend on local customers and very regional or sporadic tourism. What would be more interesting would be to compare the profits margins of the different channels of sale, accounting for all costs. (including the cost and risk management of free cancellations)
To be clear, the main takeaway from this list is not that hotels should stop working with OTAs altogether. In fact, most hotels would still benefit from the increased exposure and extra bookings that these platforms can offer. The objective of this argument was to shed lights on the reverse side of the coin which is often left behind when analyzing the pros and cons of hotels partnerships with OTAs.
Statement #3 Using online marketing to drive direct bookings is more expensive than getting bookings from OTAs
Another point that is often raised to promote OTAs over direct bookings is that advocating for the former is actually pricier that simply relying on OTAs advertising power. For example, in this short article (Direct is Not Always Best – Hotel OTA Commissions in Comparison to the Benefits They Provide), the author claims that marketing costs to drive direct bookings can be as high as 15% of the value of the sale, which is not much lower than OTAs’ commissions when accounting for the time and resources needed to run such campaigns.
Surely if this were true, there would be exactly zero need for hotels to invest in any kind of digital marketing related campaigns. However, the numbers reported in the aforementioned article are very much on the higher end of what hotels should aim for in terms of acquisition cost. Other studies put the numbers more around 30/40 cents per click and the cost of acquisition closer to 5%. Furthermore, even if one agrees on the 15% marketing cost, generating direct bookings would still be much more valuable than third-party booking as it will allow the hotel to grow its customer base and eventually build customer loyalty. Besides, it is worth reminding that the cost of retention is almost 10x lower than cost of acquisition of a new guest.
In light of this, one might ask why many hotels are still relying so heavily on OTAs to generate bookings. Probably either because of a lack of time, skills or all of the above. Although it is almost assuredly not because it is too expensive. As Cory Chambers, VP and chief revenue officer at Hospitality Ventures Management Group, puts it: “relying heavily on OTAs is the lazy person’s way out of it”. […] I just look at the OTA expense, and that’s putting a lot of money out there that you could be realizing if you did your own direct sales effort”.