The Billboard Effect... Revisited
June 27, 2014 4:56am
By Jean Francois Mourier
It seems like the summer is prime time for hotels and industry experts to re-examine the basic revenue management concepts that they have always held to be true. Most recently, an article was published on Tnooz.com called "Does the Expedia billboard effect still exist for hotels?", which examines the billboard effect and the various studies done by Cornell University, which proved it to be a valid phenomenon.
For those who aren't familiar with the concept, the billboard effect shows that hotels are able to increase their direct booking rates, simply by being listed on OTA sites. Chris Anderson of Cornell University conducted two studies one in 2009 and a more in-depth study in 2011 to determine whether the billboard effect was, in fact, an actual end result of a property being listed on OTA(s). Both studies showed that the being listed on OTAs did have a substantial effect on property's direct booking rates thereby proving the validity of the billboard effect:
The recent Tnooz article examined the results of these two studies and then offered commentary from various industry experts, who disagreed that the billboard effect was as prominent as it was previously. Some even went so far as to argue that the same effect could be achieved through other online sites (i.e. car rental sites, etc.), making the billboard effect negligible and diminishing the value of being listed on OTAs.
Being an industry expert myself, I wanted to take a moment to share my beliefs on the billboard effect.
I think that one of the biggest issues that most hotels and experts have with the OTAs is the high commission rate charged for all bookings originating through these channels. Hotels feel like they are being ripped off and that acquisition costs have skyrocketed too high (considering the comparable growth of revenues).
However, I believe that is a mistaken viewpoint to have. Just like back in the day when tour operator brochures were a necessary marketing medium for hotels, so are the OTAs today. In the recent past, tour operators would typically charge between 25 to 40% commission on each booking initiated through their brochures/advertising. Considering that OTAs charge commissions as low as 15% and even the most expensive ones rarely charge more than 35%, the OTAs are a much more affordable way to secure a much greater number of potential bookings.
It is a commonly understood fact that today's consumers use OTAs to research and book hotels for their upcoming trips. OTAs do create significant visibility for your property to potential guests and will generate increases in both OTA and direct bookings. Online bookings are made and paid in real-time, 24/7. Today, if a hotel is not listed on OTAs, they are losing out on bookings and will find it hard (if not, downright impossible) to be as financially successful as possible.
As such, does it make sense that tour operator brochures were a widely accepted marketing medium (and that their commissions were considered reasonable), but OTAs are not given the same credit?
But now back to the billboard effect. At its core, I believe that the billboard effect is a very real effect experienced by hotels that list their properties on OTAs. I don't think that the exact percentage increases experienced by hotels in the Cornell studies matter because they simply prove that it is a real phenomenon. While I firmly believe it is a necessity, simply being listed on OTAs is not enough to maximize the billboard effect that your property experiences. In reality, how much of an impact the billboard effect can have on your direct bookings is determined based on your actual revenue management strategy.
Your property should NEVER be relying only on OTAs for generating bookings. Hotels should always be combining distribution via OTAs as well as direct sales (both online and via phone). To ensure that your property is maximizing the billboard effect, all of your property's online rates should be controlled by a sophisticated, automated, real-time revenue management system. This technology will ensure that your property's presence on the OTAs will yield an increase in direct bookings as well.
Do you agree or disagree? Have you experienced the billboard effect at your property? I'd love to hear your comments. Please share in the comments section below or email us at firstname.lastname@example.org.
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