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7 Steps to Position Your Hotel
in the New OTA Environment
This article is from the Spring 2010 issue of Hospitality Upgrade magazine.To view more articles covering technology for the hospitality industry please visit the Hospitality Upgrade Web site or to request a free publication please call (678) 802-5307 or e-mail.
by Tim Coleman
March 2010

Recently the blog wires have been buzzing with the war that broke out between a large OTA (Expedia) and a large hotel chain (Choice). As soon as the dueling press releases hit the street in the Choice-Expedia dust-up, there were numerous bloggers jumping on Expedia  pushing “take it or leave it contracts” with higher commissions and onerous terms and conditions. There were no-holds-barred as industry pundits exhorted hotels to stand firm on last room availability, secretly hoping that Choice would cause Expedia to back down. Ultimately, of course, Choice and Expedia reached a business agreement, probably to the disappointment of some who wanted to see blood.

Fortunately, cooler heads prevailed, because both sides would have lost revenues in the short run; and this year is not a time to risk revenue loss over a long term structural problem. When I say structural problem, I am talking about the role of the OTA and other travel agents in the hospitality arena. For the record, the top four are Expedia, Travelocity, Orbitz and Priceline. These four have multiple affiliate sites and there are many other OTAs out there as well.

To understand this current situation, it helps to look at how we got where we are. In the late 70s, neither travel agents nor hotels had the automation or resources to take advantage of their joint business opportunities. Travel agents were small businesses who could not afford to negotiate with each hotel chain, let alone all the independent hotels and franchisees. So, they joined consortia (Woodside, Hickory, ABC, etc.) to facilitate some level of market power and economies of scale. On the other side, the hotel industry was very fragmented with even the largest chains having less than 15 percent market share. As a result, hotels once again piggy-backed on the airline distribution system and simply began using ARC and IATA travel agents. This solved a problem for both sides and allowed the travel agent channel to grow in hotel business. Unfortunately, most hotels did not understand the agency relationship and simply were happy to pay 10 percent for the business without having to worry about who was appointed as their agent or how much the commission should be. It was the easy path to just keep paying 10 percent, even as the airlines stopped overpaying the channel. Marriott was a notable exception. They appointed some agents who actually sold Marriott and paid them 10 percent while keeping all the other agents at a lower commission. Unfortunately, the hotel industry did not follow.

The 10 percent commission may have made sense when travel agents needed to make long phone calls and send numerous letters to make a booking. But GDS and Internet automation reduced travel agent costs significantly. When online booking engines expanded, the hotel industry had no anti-trust immunity and was so fragmented that no single hotel could afford to lower the commission rate. This provided an extra profit incentive for online travel agents. All it took was an Internet booking engine and the purchase of a defunct agency’s ARC number and 10 percent commissions came pouring in. Some original online booking agencies (like World Choice Travel, for example) sprouted affiliate systems and had plenty of income to split commissions and still make a tidy profit.

Expedia and other OTAs saw a unique opportunity to use the excess (over costs) hotel commissions to build a business based on growth. Expedia, for example, wagered a lot of their initial capital and reinvested all the excess commissions in huge advertising budgets and media campaigns to bring more hotel bookings through its portal. They spent hundreds of millions of dollars on this bet. In addition, they spent like amounts on data gathering and analysis. They now really understand how their booking engine works and what it means to be on every page and line in their display. Indeed Expedia has built a corporate asset that includes millions of people coming to their site every day to book hotels. 

So, that leads us to today. Hotels are in a deep recession and need all the business they can steal from each other and Expedia has business for everyone. In order to keep its growth and position in the industry, Expedia needs high commissions and access to inventory; so they have inserted higher commissions (as high as 30 percent merchant model and 45 percent package discounts) and a last room availability clause in recent contracts.  From Expedia’s perspective, this is simply seeking to reflect their desire for growth and a return on their investments over the early years. On the other hand, from some hotel perspectives this is Expedia taking advantage of the current market and their market position to raise their cut of every transaction even more above their costs while hotels need them too much to complain. Both sides have legitimate points.

Given this environment, what should hoteliers do? If your answer is to cancel the Expedia contract, think again. In the short run, you are not in a position to challenge Expedia’s leadership market position in hotel bookings. So accept what you cannot change and follow some practical ideas.

Step 1  Work on your Expedia contract. Although Expedia would like you to believe that there is no wiggle room in their new contracts, there is. If you accept the contract they send, you may miss an opportunity to tailor it a little more to one that makes sense for you. If you must pay a 30 percent discount, make sure you understand what added benefits you may get. You should ask for a reduction when this rate would take your net rate below your cost per occupied room. Also, you should know that many hotels and chains have discounts in the teens let alone the twenties, so ask what you need to do to get on that segment.

Step 2 Work harder on your Expedia relations. Once you have made the best available deal on your contract, it is even more important to work the relationship. First and foremost assign someone at your property to work daily with the Expedia representative. Secondly, get access to your Expedia reports and use them to analyze your opportunities. Watch your placement in the Expedia display; every time they ask for something, ask for a recap of your placement algorithm. They will not divulge it but it changes in all their sites so you can discuss it and ask for better placement to gain business in some critical need periods.

Step 3 Understand what placements and media purchases are available and determine when they might be incrementally profitable. Even as a small hotel with little leverage, there are media opportunities with Expedia that may give you access to the precise customers for which you are looking.

Step 4 Don’t forget the billboard effect of Expedia and other OTAs. A recent Cornell study by Chris Anderson proved that by showing up on Expedia, you drive some incremental business to your own proprietary site.

Step 5 Negotiate with all OTAs not just the big four and play each one against the other. If your group and in-house business is strong, you may not need all the expensive OTAs.

Step 6 Rededicate your efforts to build direct business on your own Web site. Trust me, hotel guests will see your name on OTAs and will then shop on your site. When they arrive, make sure you have the best terms and conditions and lowest rate for these customers.

Step 7 Recognize that a new booking channel is emerging that is considered private. I am talking about Twitter and Facebook. Here, you can offer your followers and friends special deals that do not need to be offered on OTAs. Use these channels to fill your need periods and allow your public rates to be set a little higher.

Armed with these tactics, you can weather the current storm and worry about your distribution strategies and OTA negotiations at a later time.

Tim Coleman is a revenue management consultant and chairman of HSMAI Revenue Management Special Interest Group.

For related articles on this topic please see:

Significant Announcements by Online Travel Agencies / November 2009, John Burns

http://www.hospitalityupgrade.com/_magazine/magazine_Detail.asp?ID=418

 

The OpenTravel™ Alliance: Creating Open Universal Data Specifications for the Travel Industry / 2004, Mike Kistner

http://www.hospitalityupgrade.com/_magazine/magazine_Detail.asp?ID=388


De-Mystifying Distribution - Implications for the Hotel Industry / June 2005, Cindy Estis Green

http://www.hospitalityupgrade.com/_magazine/magazine_Detail.asp?ID=169

 

The Leader in Open Standards in the Travel Industry / March 2006, Valyn Perini

http://www.hospitalityupgrade.com/_magazine/magazine_Detail.asp?ID=77


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Contact:

Geneva Rinehart 
Managing Editor 
Hospitality Upgrade Magazine 
and the Hospitality Upgrade.com website
www.hospitalityupgrade.com/
grinehart@hospitalityupgrade.com

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Also See: Is Your Site Hospitable? 5 Simple Strategies You Can Use to Improve the Customer Experience and Dramatically Boost Conversion / Claude Guay / December 2009

Aligning Digital E-commerce, Distribution, IT, Revenue Management, Sales, Operations and Marketing Objectives / David Atkins / December 2009

Sales 3.0 Technology; Key to New Business Development in 2010 & Beyond / Carol Verret / December 2009

Hospitality Upgrade Magazine Surveyed Hospitality Industry's Top Technology Leaders at Annual CIO Summit With Intriguing Results / October 2009

Hospitality Upgrade Magazine Reports Record-Breaking Attendance for Annual Meeting of Hospitality Industry's Top Technology Leaders; The eighth annual CIO Summit will be held September 9-11, 2009 at the Royal Sonesta Hotel in Cambridge, Massachusetts / August 2009

Twitter or Not to Twitter; Time Waster or Lead Generator? / Cindy Estis Green / August 2009

Clean Up Your (Server) Room! And find some immediate cost saving hiding in plain sight / Lyle Worthington / July 2009

Marketing to the Cell Phone Generation / Bill Geoghegan / July 2009
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