OTAs vs. Direct: Creating a healthy mix

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Discover the most profitable channel then determine how to push revenue from the least-profitable channels to the most.

By Alicia Hoisington

There’s no doubt that online travel agencies (OTAs) have gained market share over the years. And with that, commissions also have grown. According to Kalibri Labs’ recent report “Demystifying the Digital Marketplace,” commissions paid to third parties rose at twice the rate of room revenue growth for the period from 2011 through 2015.

With many brands introducing initiatives to refocus on direct bookings, does that mean hoteliers should write off third-party booking completely?

Not so, sources say. It all comes down to strategizing for a healthy channel mix.

“Our strategy here really is to create and maintain and healthy mix between direct and indirect channels,” says Alexander Pyhan, vice president of distribution, OTA and meta for Marriott International. “Inherently in the strategy, certain distribution channels such as OTAs obviously play a role in our channel strategy and in our mix, mainly because not every consumer in this world is brand loyal to Marriott – although we want that, but it’s unreasonable to expect.”

He says OTAs should be part of hoteliers’ overall strategy, but there is need for moderation. “It needs to be part of a strategy and not part of an unfiltered acceptance of a third-party disruption channel.”

Consultant Tim Peter of Tim Peter & Associates says that OTAs can have value.

“There are places where a hotel simply isn’t going to have the reach to get in front of guests during very soft periods or where they might reach into markets where they don’t have the ability to serve,” he says. For example, if a hotel is in a Hawaiian market but doesn’t have the resources to focus on feeder market Japan, then an OTA can help to get inventory distributed to that target traveler.

“You need to look at [OTAs] as a partner… but not give them complete run of the house,” Peter says. “It’s really about having a distribution strategy that says where you will source reservations from that are most profitable over the course of the entire year, not just moment to moment. And OTAs can absolutely play a role in that when it works for you.”

An optimal channel mix
Cindy Estis Green, CEO of Kalibri Labs, agrees. “It would not be good advice to hoteliers to avoid OTAs or any other potential source of business. For the most part, most hotels rely upon a healthy mix of business from every channel. The real question is how much is the right amount to get from each channel? And every hotel has what I call an ‘optimal channel mix.’”

She says that business mix can vary a lot from hotel to hotel. For some hotels, the percentage of OTA business could be 25 percent or higher, for some 5 percent or lower.

“Every channel is valuable at different times and at different amounts,” she says. “What hotels have to do, which they haven’t focused on very much yet, is try to figure out what that optimal channel mix is for all channels and then manage to that. Once, for example, a hotel decides that its optimal mix for OTA is 12.5 percent, GDS is 10 percent and brand.com is 17 percent, then management has to stick to its guns managing inventory and spending funds to achieve that optimal mix.”

Estis Green says it starts with looking at overall business available in the market, competitive positioning of the hotel, location and how the product appeals to different business sources. From there, hoteliers can start to determine what an optimal channel mix looks like for them.

At the property level, managing costs isn’t about negotiating a better deal with an OTA, according to the Kalibri Labs report. It’s about understanding three things:

  1. The profile of demand in the market;
  2. The cost associated with getting that demand; and
  3. Proactively managing to the optimal channel mix because it can yield the highest net revenue and profit.

“Don’t try to boil the ocean” when it comes to finding the optimal channel mix, Peter says.

He says to first look at is net revenue per available room per channel. Then, break out the revenue coming in versus how much profitable revenue is coming in.

“If you’re getting too small a share of your reservations from your most profitable channels, then that’s where you need to focus your energy,” Peter says.

Ask what the most profitable channel is and then determine what can be done over the next three to 12 months to push revenue from the lowest profitable channels to the highest profitable channels, he advises.

“Don’t try to solve for every channel at once,” he says. “And then lather, rinse, repeat and keep following that process every quarter, every half year, every year, until you’re getting a more effective business mix.”

A focus on direct
Although OTAs can be a part of a healthy channel mix, direct bookings are king.

“It’s important for owners to have a direct-book strategy because the profitability on bookings is higher,” says Pyhan. “We don’t necessarily mind paying the acquisition cost for the newly acquired customer, but what we don’t want to do is pay for the same customer over and over.”

In 2011, there were 4.3 room nights booked directly for every indirectly booked room night, according to the Kalibri Labs report. In 2015, however, that number dropped to 2.7 direct room nights for every one indirectly booked room night – a nearly 40 percent drop. As such, many brands have stepped up efforts to capture direct bookings and more loyal customers.

Peter says that hoteliers need to pay attention to direct channels. Not only do they cost less than commission-heavy third-party bookings, but they open up opportunities to further market to guests. OTAs don’t typically share customer data with hoteliers, so any effort to remarket to these guests becomes difficult. Additionally, he says guests who book through OTAs tend to be less loyal, stay less frequently and not as long, and pay less.

Peter says there are several ways to get eyeballs on direct channels. For starters, it’s no secret that search is valuable. But instead of trying to go head to head with OTAs during the customer booking phase or with those guests who are close to booking, Peter says to look further up the chain to capture guests earlier. He says to target things such as events, activities happening in the hotel’s market or attractions near the property that can bring customers in as they begin the search process.

“You can start to build a relationship with them,” Peter says.

Social also can be effective, he says. “You can actually reach a fairly wide audience at a relatively low cost, and a very targeted audience.”

He says it’s also important to build a database of email address and social fans and followers. “Use those to reach people when they are earlier in the process so you enter their considerations, maybe not before they get to the OTA but certainly around the same time.”

Equally important is understanding the trip-planning process and knowing most customers stop at many sites during the sales process that leads to a hotel booking, according to the Kalibri Labs report.

“Maintaining a presence in each site has a cost, and tradeoffs must be made. The days of being present on every shelf are over,” according to the report. “That approach may have worked in the early 2000s but not today. The costs have risen too high for any hotel to afford to do that. Understanding the consumer sales journey is key to making the best tradeoffs.”

The report encourages hoteliers to consider content as a driving factor to book. “Making sure this content is readily available and that a hotel chooses carefully when deciding which content should be exposed for its own direct channels and for each of its merchandising partners can be the primary engine that shifts business from one channel to another,” according to the report. Compelling descriptions, videos and photos, and strong value propositions are key in this regard.

But Peter says a hotel’s website isn’t the only direct channel hoteliers should focus on. He says hoteliers should always be ready for the age-old direct channel of walk-in business. However, it’s not as critical as some other direct channels. He cautions hoteliers not to assume that the voice channel is dead.

“We’re seeing lots of trends with lots of hotels where voice lines have actually gone up, largely because the mobile booking process isn’t as good as it needs to be yet,” Peter says. “As people are holding a mobile device in their hand, ironically those things are actually phones, so it’s very easy for them to make a call.” This is especially true for last-minute bookings, he adds.

“Voice is a terrific channel. You get a lot of opportunities to upsell. You get opportunities to offer add-ons and merchandize your other offerings more effectively on voice,” Peter says, adding that voice allows for greater opportunity to help guests find more room availability.

“Oftentimes websites just tell people there’s no availability. If you have somebody on the phone you can say, ‘Let me see what days we do have available,’ and talk about periods where there’s softer demand and maybe shift the business to where there’s a greater need for you,” he says.

Peter says hoteliers can ramp up their voice channels by doing the following:

  • Training. Teach employees how to sell the product.
  • Staffing. Training is effective, but it’s nothing without ensuring people are actually in place to answer the phones.
  • Partnerships. If there are insufficient resources to staff properly, look toward partnerships that can provide voice or rollover services.

At the end of the day, Peter says it all comes down to a strong distribution strategy.

“Focus on where you’re trying to get your business from and what is the right process for actually driving business of those most profitable channels,” he says.            ■

Is the billboard effect dead?

The “billboard effect” was introduced in 2009 and again in 2011 by two separate studies from Chris Anderson, associate professor at Cornell University. Those studies found that online travel agencies, such as Expedia, acted as a sort of billboard for hotels listed on the site. That is, being listed and seen on an OTA could drive direct bookings on brand.com.

Recent research shows that the so-called billboard effect is dead, says Cindy Estis Green, CEO of Kalibri Labs.

“Using the same exact same data back in 2011, our interpretation was different,” she says. “Expedia wasn’t the only stop made by the consumer as implied by the earlier studies. There were many, in fact, seven to 10 other stops, including airlines, many other hotels and social media sites, and often Expedia was not visited at all before booking a hotel room.”

Then, the American Hotel & Lodging Association’s digital research group, the Consumer Innovation Forum, commissioned a study with Kalibri Labs and Professor P.K. Kannan from the University of Maryland’s Center for Excellence in Service to revisit the concept. Bookings data from 2012 and 2014 was used to determine which sites were visited by consumers right before a hotel booking was made.

“It turned out that only 7 percent of the consumers went to an OTA and then went back to book on a hotel site, which meant 93 percent went to the OTA and booked on the OTA,” Estis Green says. “So, the idea that it creates a billboard or generates a lot of extra business for a hotel’s direct channels just by being listed on the OTA does not match the reality of today’s consumer behavior.”

Consolidation across the travel industry
Much like the hotel industry, the online travel agency (OTA) space is ripe with consolidation.

Last year, Expedia acquired Orbitz for $1.6 billion. The deal positioned the company to owning nearly 75 percent of the OTA market share in the United States, according to Phocuswright research. By comparison, the next largest share of the market belongs to Priceline at 19 percent. Expedia also acquired Travelocity for $280 million in 2015; Wotif and Auto Escape for a combined $743 million; and a 62 percent stake in Trivago for $632 million in 2013.

For its part, Priceline has been no stranger to acquisitions. Perhaps its largest acquisition happened in 2013 when it bought Kayak for $1.8 billion. Additionally, TripAdvisor has gobbled up its fair share of the pie.

Does that consolidation hurt the hotel industry?
“It’s playing a role, to a degree,” says consultant Tim Peter of Tim Peter & Associates. “If you’re an independent, it will have a different impact on you than if you are flagged. If you’re an independent, consolidation on the OTA side will hurt your negotiation power. On the flag side, there’s more opportunity. It depends on where you fit in the ecosystem.”

“As OTAs consolidate, they are getting larger and creating larger platforms,” says Cindy Estis Green, CEO of Kalibri Labs, and the same goes for hotel-company consolidation.

“We’ll end up with fewer companies on both sides,” she says. “The stakes get higher. The decisions you make become even more important as there are fewer dials to turn. The power of brands will matter in the ability to manage this.”

Alexander Pyhan, vice president of distribution, OTA and meta for Marriott International, says it’s too soon to tell what will happen due to consolidation – especially as it relates to Marriott’s recent acquisition of Starwood Hotels & Resorts Worldwide. Marriott’s acquisition made it the largest hotel company in the world by room count.

“It’s hard to speculate at this point on where the distribution strategy will lend itself,” he says. “Overall, there is value in keeping the existing customer.”

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