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The new business generator?

19 April 2013

On the face of it, online travel agents (OTAs) are a boon. They help hoteliers fill empty beds and ensure a wider marketing reach using their superior investment clout and technical expertise.

Nevertheless, there is a growing sense of unease about their growth. Not only is there the ongoing investigation into alleged resale price maintenance by the Office of Fair Trading, but analysis from financial services group Nomura has found that Booking.com and Expedia.com control more than 65% of European indirect online hotel sales.

In addition, there are reports that some OTAs are making a power-grab for cancelled rooms, withholding guest contact details from hoteliers and charging for preferred status on their listings.

Indeed, Richard Lewis, chief executive at Best Western, says it's not just the size of OTAs that is a concern, but their attitude. "It's their selective willingness to work in real partnership with the hotel industry," he says. "After all, the room inventory is held by the supplier - the hotel - not the OTA. From a hotel industry perspective, without our rooms what would they have to sell?

"The question is 'why would a hotel pay 
a higher commission for a room sale than 
they have to?' Strong revenue and yield management is crucial. Another question is 'does a particular OTA add any real value to the transaction?' Yes, they send a room booking, but do they add any further value for the guest or the recipient hotel?

Indeed, they will claim that the guest or booker is their customer (for which they hold personal and booking data) not the customer of the hotel… is that right?"

Expensive channels Clearly not. OTAs are one of the most expensive channels for room sales, and hoteliers need to manage them carefully and not rely too heavily on them.

"OTAs are a fact of life now," says Peter Banks, general manager of the 90-bedroom country house hotel Rudding Park, North Yorkshire. "We have opened Pandora's Box. For a small, independent hotel like us, it gives national and even European coverage that we wouldn't ordinarily get, but our commission with Booking.com has gone from £14,000 to £22,000 in a year - and if I don't pay it, somebody else will."

That's true. The OTAs feed off the fragmented hotel industry, which will do anything to fill those last few rooms.

"You pay your 15% commission and like it or lump it; get the business or don't," says Banks. "We will finish this year with 78-80% occupancy, but there is still 20% occupancy to fill. The model for hotels is difficult and OTAs feed off that."

Stephen Dodman, revenue director at Macdonald Hotels & Resorts, agrees commission has risen, but adds: "When we have volume to sell and can sell it at the right price through the OTAs, the commission is worth it - especially if that customer becomes a direct customer in the future."

Nevertheless, commission rates can be staggering. Warren Mandelbaum, chair of the Hospa Revenue Management Committee, says it is not uncommon for them to hit 30%, although this can drop significantly, depending on how attractive the hotel is to an OTA.

"Some see it as a necessary burden; others as an opportunistic marketing cost," says Mandelbaum. "Either way, if you want to attract new business and be available for sale in markets you have little clout in… in numerous languages and countries, you are left with little choice."

Certainly, one area where OTAs add value to a UK hotel is in global marketing reach. "The greater the reliance on an OTA to secure international source markets, the more sense it makes to use an OTA's expertise and big budget to guide business to the hotel in a way that an individual business or non-chain-affiliated hotel could ever hope to," Mandelbaum explains.

The OTAs' seat of power is in their Internet expertise. They use an algorithm model to weight different criteria based on commission percentage, hotel inventory available, guest review ratings, price/value, and so on. This determines the ranking at which a hotel is displayed on the OTA site, which increases or decreases the possibility of the room being sold.

Search engine optimisation is another headache, as many hoteliers discover when they Google their hotel name and the OTA pops up first. At Rudding Park, Banks shares his experience: "We asked Google for a pay-per-click (PPC) price. They came back with 36p. Imagine the deal the OTA did with Google! They outbid us on our own name. That is their power."

Dodman at Macdonald Hotels & Resorts, adds: "We have regular discussions with the OTAs about bidding on our brand terms on PPC to take our direct business and they are certainly flexing their muscles more in this area."

Most agree that hotels should be countering the OTAs by ensuring their own website 
is attractive and has an easy-to-use booking system.

"We sometimes work harder for the OTAs over and above the effort we put into our own websites to ensure competitive placement and favourable ranking," Mandelbaum observes. "A clear strategy should make provision for this, while ensuring maximum effort is also invested in a hotel's own low-cost channels."

The good news is that hotel websites are holding their own. According to Kantar Media Compete's Online Shopper Intelligence - UK Travel survey in April 2012, nearly 30% of UK travellers booked from a hotel brand website - the same percentage as booked from either an online travel agency or online hotels aggregator.

Rudding Park's figures bear this out. Banks says that in December and January, third-party booking agents brought in 5% and 7% of business respectively, while the hotel's own website brought in slightly more at 7% and 8%.

Interestingly, according to Kantar Media Compete's research, more than 40% of respondents found hotel websites more reliable than other booking channels for speed, price-accuracy, ease of booking, ease of making changes and so on. Only about 10% of respondents thought OTAs were better.

OTAs gained strength on the back of difficult times, such as after 9/11 and the global recession in 2008. But Lewis argues that hotels should now explore other ways of getting direct reservations - for example, using brand loyalty programmes to attract repeat guests.

"By working only with OTAs, it's difficult to see how hotels can thrive. It's a question of when and how hotels work with OTAs," he says.

Dodman at Macdonald Hotels has embraced this already: "We drive significantly more revenue via direct channels - we would not consider that OTAs could replace our own direct business."

The case for using an OTA They give us global reach

Rob Paterson, group director revenue at the 12-strong Malmaison group, is upbeat about OTAs. "They are a big part of our strategy," he explains. "We use them as our friends and partners. We are well distributed in the UK, but outside the UK we have no sales and marketing presence. The OTAs give us global reach."

He adds that, contrary to perception, OTAs bring in less than 20% of the boutique hotel group's UK guest business - the same level as is driven by its own website.

Nevertheless, Paterson concedes that the growing power of OTAs on the Internet is a worry; his solution is to work closely with them. "They develop apps much quicker than us because that is their core business," he says. "They are bidding on our brand on Google and we are trying to address this."

He is sanguine about commission rates, regarding it as a commercial transaction. "We think it is cost-efficient and gets more through-drive," Paterson says. "It's not inequitable; it's a choice we make."

For him, the worst-case scenario is 
if a customer searches for Malmaison in Google and Booking.com pops up first. 
"If the guest goes on to that site, rather than clicking the hotel site, they may end up choosing another hotel altogether," he says. "Though, to be fair, they are working with us on that."

With regards to driving inbound UK business, Malmaison will rely almost totally on the OTAs and it is working with new partners such as Agoda, the biggest OTA in Asia.

"We are not bidding in terms of French or Chinese [search words] because we are not in the international market," Paterson explains.

Surprisingly, he believes OTAs can drive sales on the hotel website. Guests find Malmaison listed on, say, Booking.com, but then click through to check out the company website and make a booking direct with the hotel.

The case against using an OTA We can give better value

As the owner of the 40-bedroom country house Nare Hotel in Veryan, Cornwall, Toby Ashworth's first concern about using OTAs is that they are impersonal. His argument is based on the fact that most of his guests are on holiday, spending their own money and paying for a bespoke experience. 
He favours telephone bookings or online reservations through the hotel website so that his team can build a relationship with guests before they even check in.

His policy makes sense when you consider that some 65% of guests are repeat business and a significant 15% are referrals. And as no two rooms are the same, it's tricky for the Nare to slot into a two-dimensional online booking system.

"We want to talk to our guests, so we telephone them or eâ€'mail them and build a relationship around that. We ask questions such as whether they prefer sheets and blankets or duvets, or about allergies," Ashworth says.

His second reason for not using OTAs is cost, arguing that the fee has to come from somewhere.

"You are adding a middle man," he observes. "You can pay 10-20% commission on a booking, but we can give better value to our guest instead."

The hotel's reputation has been built over 22 years, which helps with the marketing. Ashworth is a member of Pride of Britain and also uses advertising, direct eâ€'mail shots, newsletters and glossy brochures to raise the Nare's profile. He also keeps his website attractive and runs the enquiries number prominently across each page.

However, Ashworth concedes that for hotels with more rooms to fill the OTA system has its place. And although he has occupancy of about 90% in summer, he acknowledges there could be scope to fill rooms out of season using an OTA.

But he isn't tempted. In the end, it comes down to control. "We have to be careful to protect our rack rate - other hotels don't have that control. We are not looking to fill rooms at any cost. We are a luxury product, not one that can be discounted," Ashworth says.

"We are driven by quality, not by being the cheapest. People see us as value for money and that is hard to put forward on a third-party listing. I'm sure there is a place for OTAs, but small luxury hotels have to be careful."

TagsHotels
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