Every day we see images on the internet, television and billboards for websites that are advertising hotel rooms at rates that appear too good to be true. Sites like Expedia, Priceline, Orbitz Worldwide and Travelocity offer rates better than those listed by the actual hotels. There are so many online travel agencies (OTA’s) trying to get a slice of the market and it seems like new sites are appearing weekly even though 95% of the OTA market is dominated by the big four brands. But have you ever stopped to think about how online travel agencies work? How are they able to offer such low rates? If it’s as simple as these sites buying rooms from a hotel and selling them at a profit then why wouldn’t the hotels just offer the rooms directly to guests and cut out the middle man?
In this post I will explain how online travel agencies work to give you a better understanding of why their rates are so low, how their arrangements with hotels work, why hotels agree to these arrangements and what hotel management can do to increase revenue and wrest back some of the power.
How Do Online Travel Agencies Work to Offer Such Low Rates?
The reason sites are able to offer such low rates is quite simply because hotels agree to it. Online travel agencies work for commission and it typically goes like this,
- A hotel will sign an agreement to have some of their rooms sold on a particular website.
- The hotel has 100 rooms and the hotel must allocate 10-15 rooms each day for the OTA to sell.
- The OTA must sell the rooms at 30% – 40% below the hotel’s best available rate (BAR). The BAR is the lowest rate that the hotel advertises to the public on its own site and what is quoted to guests when they call the hotel directly to make enquire about room rates.
- So if the rate on a hotel’s website is $200, the OTA will have the same room listed at $140.
- Of this $140, the hotel pays 30% commission to the OTA.
- The hotel makes $98 from a room they are advertising at $200.
Where Revenue Goes
Looking at the numbers above it seems that any hotel management team would be crazy to enter into such an agreement. But the truth is that hotels need these OTA’s to sell rooms during the low seasons. Without OTA’s, hotels would be left with vacant rooms and the bottom line is that getting less than 50% of their best available rate is better than zero revenue. As you can see the hotel is losing out on more than half the revenue of what it would be making if it were to sell the room directly to the guest without a middle man.
Why Would Hotel Management Agree to Such a Deal?
Where hotels get their hands tied is that in order to use the OTA to sell rooms during the low season, these online travel agencies make it a condition of the agreements that hotels must use them year round. Unfortunately for hotels this means that the cheaper rooms are also being sold by online sites during the high season when they probably aren’t needed. During the busier times of year when hotels are more likely to sell out they can in theory, sell every room at full price. If we go back to the above graphic, 100 rooms at $200 each. But now they must allocate 10-15 rooms to the online site which means that for 10-15 of the hotel’s rooms they are only making $98 in revenue.
So ultimately when management weighs up the revenue made during the low season versus the potential revenue lost during the high season they come to the conclusion that it’s worth the losses when it’s busy to make up for the gains when things are quiet. They take the good with the bad.
Another reason why hotels enter into agreements with OTA’s is marketing. Sites like Expedia have become so large that hoteliers must also factor in the exposure they get by being listed on a 3rd party website. The market for OTA’s has grown so large that if you’re not listed on these sites then your hotel is missing out on valuable exposure and might even give the impression of your hotel lacking credibility. Potential guests might think “well if they’re not on Expedia then something must be wrong with the hotel”.
In an ideal world hotels would not have to form agreements with online travel agencies but full credit must go to these corporations for seeing a gap in the marketplace and creating a business model that has cemented itself in the hospitality industry. Hotel management needs to be smart when entering into a working relationship with online travel agents. Don’t think that you have to be listed on every site out there just because your competition is. You can afford to be selective when choosing which booking websites to sign with.
In an upcoming post I will talk about some ways in which hotels can maximize revenue around the arrangements with how online travel agencies work.
Thanks for reading
- What are your experiences with online travel agencies?
- Did I miss anything with online travel agencies that you’d like me to expand upon in a future post?