Just the Facts, Ma’am: Direct Bookings are 9% More Profitable for Hotels
May 23, 2016 9:44am
OTAs, metasearch, wholesalers and traditional travel agencies can be an important part of the mix, but they are no match for booking direct
May 23, 2016 – Following the launch of book direct campaigns by a few of the major hotel brands, some articles have surfaced with unsubstantiated information questioning the value of the business through direct channels. Hospitality Upgrade sought the guidance of an industry expert to find out what the industry data actually shows. Kalibri Labs, a Rockville, Md. based big data firm maintains a growing database from more than 25,000 hotels and tracks all bookings, revenues and customer acquisition costs with a history back to 2011.
Based on analysis provided by Kalibri Labs, direct brand.com bookings continue to be significantly more profitable than OTA bookings. The findings showed that direct bookings remain more profitable for the hotel industry — to the tune of 9 percent — and when factoring in ancillary spend, profitability can be almost 18 percent better. Costs that are considered for this analysis include commissions, transaction fees, loyalty fees, and any other direct channel costs.
On top of this, the acquisition costs for customers using direct channels decrease over time while those for OTA customers remain steady or may increase as commissions rise. Hotels essentially pay the same commissions every time a guest comes through an OTA; there is no reduction in cost when volume increases or guests come back. In contrast, as loyalty rosters grow, the overall marketing costs are reduced and the entire system becomes more efficient. The added advantage of direct engagement leads to improved relationships with guests.
The other factor regarding the OTA channel is that the presumed “billboard effect” benefit, touted by third parties to justify the high commission cost of their channels, has been shown to be a myth. The Online Travel Shopper’s Journey study published by the AH&LA Consumer Innovation Forum (to be released in June 2016 as Part I of Demystifying the Digital Marketplace: Spotlight on the Hospitality Industry) will explore this in detail, but the key finding from the 2015 study is that there is only a slight likelihood (7 percent) that a consumer will visit an OTA and then return to brand.com to book.
Further to this, early research by Kalibri Labs following the book direct initiatives reveals that when OTAs have “dimmed” hotels by removing photos and other content to de-emphasize their visibility, the hotel demand shifted to other channels, mainly direct ones, suggesting that the amount of incremental business through OTAs may be in fact less than originally thought. This raises the question of the value of paying a premium in commissions for business that will come anyway through other channels. In examining trade-offs more closely on the hotel side, Kalibri Labs reported, the higher net ADR suggests that although some loyalty guests who had previously paid full rates are taking advantage of the discounts, many are not. This metric will be carefully tracked as the campaigns are more fully deployed but this preliminary finding implies that the book direct programs may be shifting new customers into the loyalty programs rather than simply seeing trade-down pricing from existing customers.
Kalibri Labs advises that third-party business from OTAs, metasearch, wholesalers and traditional travel agencies can be an important part of the mix, but their report summarizes: striking the optimal balance between direct and indirect business sources will ultimately result in a hotel enjoying higher profit contribution, delivering better consumer experiences through higher levels of guest engagement, and yielding healthier economics for a hotel as a result of a diverse business base.
Read the detailed analysis exclusively in the upcoming issue of Hospitality Upgrade available June 2016. Sign up here to receive your free subscription and have the full article delivered to your inbox.
This article may not be reprinted without express permission from Hotel-Online or Hospitality Upgrade. Sharing via social media channels is acceptable.
Tags: hospitality upgrade,
With more than 32,000 readers in 110 countries, Hospitality Upgrade is committed to shaping and defining the future of the hospitality technology industry. With such formidable industry events as The CIO Summit and The Executive Vendor Summit, its network of industry trend-setters and technology purchasers is unparalleled. For more information or to sign up for a FREE subscription and join our growing network of informed hospitality technologists, please visit www.hospitalityupgrade.com.
Contact: Geneva Rinehart
Kalibri Labs is a next generation benchmarking platform to evaluate hotel revenue performance in the fast moving digital marketplace. The Kalibri Labs industry database supports on-demand reports, cloud-based dashboards and revenue strategy consulting. The robust database of stay data and cost of sales for over 25,000 hotels is a valuable resource for hotel brands, operators, owners, developers, investors, destinations and vendors providing them the ability to benchmark revenue performance by hotel, competitive set, chain scale and by geographic market.
Contact: Cindy Estis Green
Research Uncovers Increased Intermediation in Groups and Meetings Market Segment
IBC Launches 'ILES: A Year of Learning Webinar Series' for Independent Hoteliers
HEBS Digital Guarantees Hoteliers a Boost in Direct Bookings with a 40% Website Conversion Rate Uplift
OTAs and Hotels: Friend or Foe?
Cloud5 Expands Direct Reservations Services with New Contact Center in Puerto Rico
How to Jumpstart Your Hotel’s Direct Bookings through Search Engine Marketing
Promoting Local Experiences Might Lead to More Direct Bookings
The History of Direct Bookings - an Infographic
Stop Complaining and Start Doing
Book Direct: The Numbers Tell the Story
Hospitality Upgrade Announces Recipient of the John Cahill Student Seat for the 2016 CIO Summit
John Cahill Recognized with a Permanent Student Seat at Hospitality Upgrade's CIO Summit
onefinestay's Greg Marsh to Deliver the Keynote Address at the Fourth Annual Revenue Strategy Summit (RSS) - July 7, 2016 at the Renaissance Washington, D.C. Downtown Hotel
Ponterra Business Advisors to Address Hospitality Upgrade’s 2016 Executive Vendor Summit Attendees
4th Annual Revenue Strategy Summit (RSS) Slated for July 7, 2016 at the Renaissance Washington, D.C.
Why Did I Go to NYC? Was it the Technology?
NAVIS Introduces NAVIS Capture: Innovative Lead Management for Vacation Rental Companies
McKinsey & Company's Ethan Hawkes and Sree Ramaswamy to Deliver Keynote at Revenue Strategy Summit
Powered by Duetto, Speakers and Topics Announced for the 3rd Annual Revenue Strategy Summit (RSS)
How International Hospitality Enterprises Encourages More Direct Bookings
Please login or register to post a comment.
May 25, 2016 5:04pm
I think the above article presents a very unbalanced view so in the interests of open debate I would like to share a different viewpoint.
For me the big question is who exactly is the ‘hotel’. If it’s the brands then yes indeed a direct booking is more profitable. For them. However if it’s the owner of the real estate then the answer is much less clear. The claims made above only include DIRECT translation costs, and thus ignore both the base fees, incentive fees, marketing fee and loyalty club fees that must be paid to the hotel brand, as well as the capital costs of developing and operating direct reservations facilities, and the marketing cost of driving the direct reservation.
Just that first section alone - the substantial amount of fees that need to be paid to the brand for their contribution, easily eat up the supposed 9% surplus of direct over OTA bookings. And for smaller properties, the other costs have to be amortised over a small number of reservations, driving up the unit cost per reservation.
As I have proposed multiple times before, when added together, maybe the OTA fee is not as expensive as it looks.
More extensive research, from multiple viewpoints in needed to properly address this question.