By now you might have heard that ADR has been on the rise in recent years, however, profit has been stagnant. Even the most sophisticated and educated team can’t avoid finger pointing, and usually the elephant in the room takes the blame: OTA commissions. In an extreme case, I have heard of a hotel exceeding its budget for commissions by a few hundred thousand dollars for the year.
So shall we talk about reducing the number of bookings on OTA and increase the number of Direct Booking? Let’s create attractive promotions and packages on the website with greater value, and create qualified discounts offering lower rate than all unqualified rates such as those published on the OTAs. These tactics certainly do work, however, you probably have noticed that they did not do much to deter the growing volume of business through OTAs.
By now, many hotels have run out of ideas in terms of revenue management, and the task of leading the battle against the OTAs get shifted to Director of Marketing (I believe Sales and Marketing are two wholesomely different departments and should be separated in all hotels, but let’s save that for another day). Director of Marketing will then contact various online marketing agencies and put together a proposal that will increase traffic directly to the website, and perhaps include a proposal to build a new attractive website including various features targeting the new millennials. The cost of such marketing efforts usually are in tens of thousands of dollars, if not hundreds. Mind you, this is not one-time-cost. Technology evolves rapidly and hotels need to constantly invest in digital marketing to steal share from the OTAs.
These are not wrong tactics whatsoever. However, before you continue to spend massive time and energy, and try to measure the ROI on all the investment in your marketing efforts, I would like to inform you that the OTA commission is not the reason why your profit has been stagnant for the past few years.
Cost of additional revenue is not true cost. Every OTA commission is associated with additional revenue. In fact, every OTA commission is associated with additional profit. Below is a very simple breakdown of a reservation through an OTA. Let’s say that the commission for OTA is 30% (higher than any real OTA commission out there). Let’s also say that the cost for servicing a room is $65. Now, you sold a rate at $200. You are still making an additional profit of $75.
OTAs can decrease your ADR, but will most certainly increase your RevPar. In the example below, let’s continue with the assumption that you have an outrageous commission of 30% on OTAs. Since the large share of OTA bookings is a problem for the hotel, let’s just assume that 50% of your bookings come from OTAs (although it usually is in between 15% – 35%). Even if the ADR of OTA segment is $30 lower than Direct Booking, it will still contribute to increased revenue and RevPar.
Now, if your share of Website booking decrease while share of OTA increase, then yes, your profit level will in fact decrease. That’s assuming that your ADR will be the same from the previous year. But we have started this conversation by saying that ADR has been increasing year after year, but profit has been stagnant. If ADR is increasing, then unless the share of OTAs are increasing at such a pace that it will even consume the additional revenue and profit generated by all other market segments, then OTAs cannot be singled out as the one reason that the profit has been stagnant.
Perhaps, instead of engaging in a battle against OTAs, hotels could achieve higher revenue and profit by working together with OTAs and focusing on maximizing visibility on the search results. Leave the greater battle against OTAs to Marriott, Hilton, Hyatt, Intercontinental, and Accor’s corporate revenue management team. In fact, let’s start a war against Last Room Availability on Corporate Negotiated accounts with little value, or Wholesale/FIT business that constantly sells hotels’ rates and inventory to third party websites such as Amoma.com.