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Opinion:
ESSEC BUSINESS SCHOOL

ESSEC BUSINESS SCHOOL

By taking on Expedia and Bookings.com, are smaller hotels biting the hand that feeds them?

Le 28-10-2013

This isn’t the first time that online travel agencies (OTAs) like Expedia and Bookings.com have been in hot water. Only last year a lawsuit was launched in the US accusing Expedia, Starwood Hotels and InterContinental Hotel Group of price fixing. This time, it’s the French-based Union de Métiers et des Industries de l’Hôtellerie (UMIH) who have flagged the situation to the European competition watchdog Autorités de la Concurrence.

What’s clear is that most hotels offer the same rates on their own sites as are offered on the major OTAs, which would suggest that they are working together to fix prices. Independent hoteliers are saying that this price parity is imposed by the OTAs. However, they also benefit from it as it means that the prices shown on their own direct website cannot be undercut. So while the OTAs are being cast as evil for insisting on price parity, in fact both parties benefit equally. Some might even claim that the hotels benefit more as they lack the marketing power to compete effectively with the OTAs, and that having price parity at least gives them some level of protection. That being said, if price fixing is indeed going on, this is clearly illegal in European Union law.

The big problem: A Rising Commission Nightmare

Price fixing by the major hotel chains and OTAs means that commissions have been steadily rising, driving up room rates. By consequence, there is a growing disconnect between the price the guest actually pays and what the hotel receives.

The Transport Research Institute’s (TRI) figures showed that in London in the past 10 years, room rates have grown 54% while commissions have grown more than twice as fast, increasing by 123%. This means that the bulk of profits incurred through room rate increases are being swallowed up by the OTAs. And according to TRI, the proportion of each room’s revenue being paid out in commission continues to grow year after year. This is clearly a concern for hoteliers and explains why the OTAs are now being fingered by the European competition authorities.

The Bigger Problem: The Limited Marketing Capabilities of Many Hotels

It’s important to look beyond the accounting at the bigger problem: Sure, looking solely at the percentages, it seems that poor old hoteliers are increasingly being exploited by the evil intermediaries. In fact, with very limited marketing capabilities, the majority of hotels would not be able to win such business for themselves even if customers were not being siphoned off by the OTAs.

The big question is: do smaller hotels really understand the true cost of customer acquisition? From a marketing perspective, the reality is that filling a room without going through OTAs would be incredibly expensive for most hotels – much more than they currently pay in commission. Driving such business directly would demand that they invest in better websites and implement online marketing techniques such as search engine marketing and social media marketing just to let the customer know they even exist. But for a small hotel in Paris, for example, buying Google Ad Words for “Hotel Paris” would be much too expensive to be justified, even if they had the technical skills to do so in the first place.

Many of these smaller hotels are thinking that in will cost them nothing to fill the rooms themselves. But in reality, they have to build the site, promote it, have a bookings engine and even then they are very likely not to sell due to weak merchandising skills that mean that most hotel websites have very low conversion rates. What these hotels also fail to consider is the opportunity cost of not paying such commissions and not getting this business from the travel agent community, online or otherwise. In such cases the cost would be equal to the room revenue, or 100%!

In the hotel industry today throughout, market penetration of OTAs is about 75% of online bookings, with many hotels generating about 40 to 50% of their business through such intermediaries. Small hotels try to limit their involvement, but this is generally through lack of foresight rather than a carefully though out and deliberate strategy. For small hotels, with little to no brand name and no online presence, the real cost of direct reservations is much higher than what they pay to OTAs. But because they do not actually sign a cheque at the end of each month, they don't realize it.

Certain elements of the trade press are helping to encourage the marketing misconceptions of working with Online Travel Agencies. Hotels, particularly independent, unbranded hotels in peripheral locations, need to realize that working with OTAs, when properly managed, can be good value for money. Although commissions are currently expensive, and given Booking.com’s daily commission override strategy, likely to become even more expensive in the future, the alternatives are high risk / low reward and even more expensive.
 

Peter O’Connor - Professor of Information System and Dean of Academic Programs at ESSEC Business School

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