Historically, when you wanted to stay at a hotel, you would have to make a phone call to the hotel itself to ask about availability and reserve a room. With the introduction of the Internet, customers began using hotel websites to check on vacancies and make reservations. Now, many online booking services will search for hotel rooms for you and find the best rate. These online travel agencies are transforming the hotel industry, but are they ultimately good or bad for business?
What Are Online Travel Agencies?
Online travel agencies (OTA) are third-party companies that sell flights, tours, and hotel accommodations to travelers at discounted prices. There is a wide variety of OTAs, each offering different services. Some offer a conglomeration of hotel or flight searches in one place, while others allow travelers to book their entire trip, from flights to hotel rooms to rental cars.
For hotels, there are two basic types of OTAs: the merchant model and the agency model. In the merchant model, hotels sell blocks of rooms to the OTA at a heavily discounted rate, bringing in revenue immediately. The OTA then has the responsibility of selling the rooms at a higher but still discounted price to make a profit. The agency model is based on the OTA offering rooms for sale on its website, but the hotel is paid by the guests and the OTA receives a commission.
The merchant model gives a hotel a guaranteed upfront payment whether or not the rooms are ever sold. The downside here is that the rooms are sold at a considerable discount, so the profit is not nearly as good as it would be if the hotel sold the rooms itself. However, it eliminates the risk of rooms sitting empty and collecting no revenue at all. The agency model does not offer a guarantee of revenue, but it gives the hotel more exposure by appearing on the OTA’s website. It also results in a better profit when the rooms are booked, as even when paying a commission to the OTA, the return is better than it is with a merchant model OTA.
The Pros of Using OTAs
Why should hotels consider partnering with an online travel agency? There are benefits to doing so, the most important being the increased visibility of the hotel. OTAs spend billions of dollars each year advertising their services and websites. For example, ads for OTAs like Priceline and Expedia are ubiquitous on television and the Internet. The advertising has worked, as the majority of travelers today say they use OTAs to plan and book their trips. The convenience that OTAs offer is a major factor in the success of their business model.
Being listed on an OTA is a cost-effective method of advertising for a hotel, too. The reach of OTAs is worldwide. They are also trusted by customers. Consumers tend to believe the reviews they read on OTAs because they feel that the OTA itself has no need to create false reviews. The OTA makes money regardless of which hotel its customers choose, and it is to their benefit to sell all the rooms they advertise. Also, OTAs tend to have lots of reviews on each hotel that prospective guests can browse and use to make their decision.
The Cons of Using OTAs
There are negatives to using OTAs, as well. The obvious one is money. OTAs will either purchase rooms up front at a highly discounted rate or will take a commission for listing and selling a hotel’s rooms. If a hotel sells a room on its own, it will bring in a considerable amount more than with an OTA.
OTAs also tend to have very lenient cancellation policies. This can lead to customers booking rooms and then canceling at the last moment, causing headaches and lost revenue for the hotel. In the same vein, using an OTA does not save on overhead, as a dedicated staff member must still monitor and update the OTA on room availability. Not doing so will result in double bookings and customer complaints.
What Should Hotels Do?
When it comes to OTAs, the best way for hotels to operate is to use a multi-channel approach. Pairing with OTAs, despite the fees and potential cancellation problems, is almost a requirement nowadays. Their reach and public image are too great to ignore. However, hotels should continue to keep their advertising and website as up-to-date and effective as possible. Direct bookings from the public are still the best revenue source for any hotel.