Cost saving of direct bookings is minimal says report

George Sell By George Sell
07 May 2018 | Updated 09 May 2018

Belgium: A new report says hotels which attempt to boost direct bookings over OTA business risk having lower occupancy rates with “no measurable” savings on costs.

The report, called Hotel Distribution Costs, was commissioned by the European Technology and Travel Services Association (ETTSA), and carried out by economics consultancy Infrata. ETTSA is a membership organisation which represents OTAs and GDS providers.

It suggests the main reason for hoteliers to push direct sales "is to reduce transparency for consumers" and that direct distribution is no cheaper for hotels than indirect.

Infrata found a 0.03 per cent difference in "net profit contribution" between direct and indirect channels, based on an average daily room rate in Europe of €112.

The study looked not just at headline costs such as agents and OTAs' commission, but also at the costs of customer acquisition, customer services and technology development

Report author Ian Lowden said: "When cost, revenue and consumer behaviour dynamics are accurately modelled, it's clear the cost of moving indirect bookings to 'direct' is marginal and possibly negative for the hotel."

ETTSA secretary general Christoph Klenner said: "The widely held belief that direct distribution is cheaper than indirect distribution has been debunked once and for all in this study. It seems the major incentive for hoteliers to push direct sales is to reduce transparency and comparability for consumers, reducing competition between hotels. Customers must be given the choice of which channels best suits their needs."

The authors of the study reviewed more than 25 academic and industry reports on the sector and interviewed hotels, technology providers, industry bodies and agents.

They report says: "The average net contribution of all the direct distribution channels is €4.59 per booking greater than the average of all the indirect channels. Were a hotel to shift their entire inventory (away from OTA channels) there would be a statistically insignificant change in the overall net contribution. However, a hotel is likely to face a significant drop in occupancy which would require a material increase in spend in the areas of customer acquisition, online marketing, technology development and customer services. When selling indirectly, these costs are usually borne by the intermediary from commission proceeds."

The report calls this "the billboard effect" and says: "Hotels benefit significantly from being displayed on OTA websites. Up to 35 per cent of hotel bookings can be attributed to guests finding out about a particular hotel, then booking directly with that hotel."

Without this billboard effect, the study suggests hotels would need to increase their spending on search engine optimisation (SEO) "by €7 to €10 per booking".

The authors say: "OTAs outspend hotel chains on non-branded hotel search by 'orders of magnitude'. This means higher visibility in the web search which translates into bookings."

Responding to the report, Avvio CEO Frank Reeves said: "While it's important to understand that the sponsors of this report, ETTSA, are directed by representatives of OTAs and online distributors, it would be wrong to make light of the need for hoteliers to fully understand - and tightly control - the relative costs of direct versus OTA bookings. It's worth emphasising also that the hotel example used in the report is representative of the major chains rather than independents. There are important differences such as franchise fees, CRS fees, loyalty etc. that are worth considering."
 
"I disagree with the premise that direct bookings are the same - or even worse - than OTA bookings and I believe most hoteliers feel the same. Here are some important principles regarding the direct channel, SEM and direct bookers that have not been adequately considered, in my opinion, in this report:
 •  OTAs increase SEM fees for hotels: OTAs still aggressively compete on hotel brand-name search terms on paid search channels like Google and Bing and the costs to hotels of PPC traffic is significantly higher as a result of this practice. I've yet to hear an explanation for how this is OTA's adding any value to hotels. In fact the opposite is the case, particularly when you consider that a hotel's competitors will also be marketed to the customer who clicks on the OTA ad. The report fails to recognise that SEM, and specifically the cost of PPC traffic, is inflated by this OTA practice and, in the scenario whereby a hotel does not use OTAs, brand name PPC would be much lower than it is today.  

• Reverse billboard effect: While I believe there is an argument for the billboard effect - but a declining one with the growth of meta-search IMO - the report fails to recognise the 'reverse billboard effect' whereby customers will quite often leave a hotel website in order to book on the OTA. Companies like Avvio and TripTease exist to help hotels tackle this very problem. Considering that hoteliers now pay PPC fees for up to 40% of their traffic, the 'reverse billboard effect' means that the true cost of OTA is actually higher than just the commission on an OTA booking. This does not appear to have been considered in the report.
• Loyalty is more than just discounts: Hoteliers should pursue guest experience that surprise and delight guests and this is most important when it comes to loyal guests.  While the report focuses on the loyalty discount programs of the bigger chains and reflects loyalty as an extra cost line item for direct bookings, it would be incorrect to assume that customers are only loyal because of a reduced rate.
• The cost of a direct booking is directly related to booking conversion: not only does a great booking engine grow the volume of direct bookings but, the stronger ROI that goes with improved look-to-book rates means a reduction in the SEM acquisition costs for direct bookings. Our goal at Avvio is to be the best booking conversion platform on the planet for hotels. The more we continue to move the conversion rate needle in the right direction, the better the value of a direct booking over an OTA booking. 

• Finally, OTA bookers are likely to be OTA-loyal rather than Hotel-loyal. When OTAs focus on adding value to hotels, rather than redirecting traffic from hotel brand name search terms for example, it is clear that there is still a real value-add delivered to hotels. A strong dependence on the OTA channel by hotels however is to ceed control and be at the whim of next year's contractual terms. 

 
It remains essential in my view that OTAs should be used strategically while at the same time hoteliers focus on growing direct bookings and minimising associated costs. I believe most hoteliers feel the same," concluded Reeves.

The 2018 Boutique and Lifestyle Hotel Summit, which takes place on May 21 and 22 in London, includes a session called: Demand management, dynamic pricing and direct booking, what's next for OTAs? Click here to find out more and buy tickets.

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