OTAs cost US hotels US$2.5b in 2010
 
OTAs cost US hotels US$2.5b in 2010
04 AUGUST 2011 7:59 AM

Hotel roomnights booked through OTAs accounted for 9.8% of total U.S. demand during 2010.

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NASHVILLE, Tennessee—Online travel agencies cost the U.S. hotel industry approximately US$2.5 billion during 2010, according to preliminary findings from the AH&LA and STR’s hotel distribution analysis and further analysis conduct by Tourism Economics.

The US$2.5-billion tally assumes all of the rooms sold via OTAs during 2010 would instead be sold on brand.com or property direct. That number does not include the costs associated with booking on the brand.com or property-direct channels.

The booking study, for which finalized data will be published in September by the HSMAI Foundation, was the focus of discussion Wednesday during a general session at the Third Annual Hotel Data Conference, held at the Gaylord Opryland Resort & Convention Center in Nashville, Tennessee. The report aims to analyze the costs and benefits of various distribution channels, such as OTAs, brand.com, voice, property direct and GDS. 

The study comprises booking data from 24,500 properties, of which more than 95 hotel chains were represented.

Hotel roomnights booked through OTAs accounted for 9.8% percent of total U.S. demand during 2010, said Steve Hood, senior VP of research for STR, the parent company of HotelNewsNow.com. Brand.com was the most dominant booking channel, accounting for 17% of all roomnights booked, followed by voice/central reservation system (13.7%), the aforementioned OTAs, and GDS (7.9%), among others.

Put another way: OTAs accounted for approximately 99 million of roughly 1 billion roomnights sold in the U.S. during 2010, Hood said.

Brand.com (19.4%) was also the most dominant booking channel in terms of total revenue share. Voice again came in second with 17.4% of total revenue share, followed by OTAs (7.2%) and GDS (10.4%), among others.

OTAs and demand
The OTAs’ share of total revenue has grown significantly since 2001, said Adam Sacks, founder and managing director of Tourism Economics. Back then, the booking channel accounted for 1.34% of the U.S. hotel industry’s total revenue. Today, that number has risen to 7.35%.

That increase has generated an incremental increase in demand, he said.

“In terms of demand, there is a relationship. The growth in OTA market share has indeed driven demand. It’s increased demand by a little over 1% over the period of the last decade,” Sacks said.

But with that influx in demand has come a decrease in average rates. A regression analysis performed by Tourism Economics revealed that for every 10% the OTAs gain in market share, the U.S. hotel industry as a whole would experience a revenue decline of 4.4%.

 

Hotels need to do a better job at “owning” their customers, said Choice Hotels International's, as Expedia's Nick Graham looks on.

“Over time, the gradual increase in hotel market share has had a negative effect on overall hotel revenues,” Sacks said.

 

The property-level perspective
Sacks was careful to emphasize his analyses addressed only the hotel industry in aggregate. The effects of distribution channel management could yield dramatically different results property by property.

Mark Lomanno, chief strategy officer at STR, agreed. While he took an opposing viewpoint that OTAs don’t generate any incremental revenue, he said distribution channel management yields winners and losers in the hotel industry as properties move finite demand from one location to another and from one time to another.

Cindy Estis Green, managing director of The Estis Group, said it’s for this very reason that effectively managing that channel is so important.

“Optimal channel mix requires analysis of demand and competitive analyses of the market situation,” she said.

Hoteliers should keep track of how much each channel costs versus how much revenue it generates. Finding that cost-to-revenue ratio will help determine which channels are most beneficial and which should be pursued by a given property and to what extent.

Nick Graham of Expedia Partner Services Group—and the lone OTA representative on the panel—further emphasized the channels within the OTA channel itself.

“When you peel the cover back within the OTA segment, there’s actually many channels of OTAs to manage,” he said, offering corporate versus leisure and international versus domestic as two examples. “… When you look at an OTA, don’t look at it as one source of business or one single entity (but rather a channel to mix in your strategy).

“The OTAs are not one size fits all. It’s about finding the right channel within the OTA mix for your property,” he said.

Still, OTAs are typically the most costly of any distribution channel, Sacks said.

The reason for that is simple, according to Bill Carlson, senior VP of performance analytics, for Choice Hotels International: OTAs are just another intermediary that stands between a hotel and the traveler. Added costs are inherent in that business model.

That’s not necessarily a bad thing in general, Sacks said, pointing to economic theory that states intermediation improves transparency, efficiency and is better for the consumer—and therefore better for the economy as a whole.

Hotels just need to do a better job at “owning” their customers, Carlson said.

“You would have to win that guest and do something unique, special … at the property—something the OTAs can’t touch,” Carlson said.

No Comments

  • robertgilmour26 August 4, 2011 5:42 AM

    Tells you everything about why its not good for hotels, nor is it necessarily for the customer because many hotels might pass on some of the saving by disintermediation. Also not all OTA's are created equal, and can skew, or even mislead, by e.g. favouring hotels which pay them a higher rate of commission - I know this to be the case. Again who wins - the OTA, not the hotel, and probably not the customer either. I know one property which pays over 25 % comm to LateRooms - and surprise surprise, they get far more bookings than a similar hotel which pays the bog standard 15% The direct relationship between the customer and the brand or independent hotel, via the hotel website, is the least 'influenced' route to the best room and customer service at the best price, and the potentially huge customer benefit of dealing directly with the hotel, most OTA customer service is shocking in my experience, they want to own the customer (particularly Expedia), but do not give a damn about the inevitable and often essential service issues this entails. The person above who thinks that OTA's have increased overall demand by 1% &c - can he/she explain how they arrived at that figure. i once did this test extensively at one of my hotels, and NOT ONE customer told me they would not have travelled at all but for the intermediary. The old adage - love them (OTA's and on line merchants) or hate them, we need them - and the cartel of rate parity which would probably be outlawed in any other industry, are about to be seriously threatened, [probably by Google) - and hotels are right in the mood for change, they've just never been well enough organised to drive it. OTA's and merchants add no value whatsoever to the customer experience. Convince me otherwise

  • Hotelier1966 August 4, 2011 6:14 AM

    I actually had read not too long ago that the "leakage" genererated by Expedia alone was supposed to be 2.7 Billion, and at 50% market share in the OTA market the total "damage" would consequently be closer to 5 Billion. What changed?

  • Steve Myers, Revenue Manager August 4, 2011 7:00 AM

    The OTAs give independant hotels exposure that most of them would not be able to afford on their own. Major OTAs spend more in advertising than many hotel brands. It also gives camparison shopper consumers the easiest option to compare rates in the least amount of time. This doesn't give the guest the best option for getting all the details, but most people shopping on OTAs are more price oriented then brand loyal. Brand.com cannot supply the comparison option. If I am just looking for a clean place to lay my head, why would you go to 15 different sites and spend the extra time. The best practice is to educate the guests that have used OTAs to book your hotel by offering them a better deal to book direct with you. (By better deal, I mean for you AND the guest.) If you are giving Hotels.com 20-30% then why not just give the guest 10-15% to book direct with you, which actually saves the guest money and still gains the hotel 10-15% over the revenue from the OTA. The OTAs are only the monsters we allow them to be. We have to control the channels. THey are a necessary evil, but only as necessary as we make them.

  • patrick August 4, 2011 12:07 PM

    Re: Hotelier1966’s comment … The study to which you referred was, as I understand it, a more general look at the issue that relied more heavily on projections. The preliminary findings I cite above represent the most recent, up-to-date analysis of hotel booking by channel. The data comes directly from the hotels themselves—nearly 25,000 of them, in fact. I neglected to include that sample size in the article as originally posted. I have since added it. Thanks!

  • hotelier1966 August 5, 2011 3:13 AM

    Thanks Patrick, I appreciate you clarifying this for me.

  • cynic August 8, 2011 12:20 AM

    And did the report include how much OTAs save the hotel industry in: - Direct marketing to consumers ? - Advertising ? - Content translation ? Assuming hotels want global exposure, it helps to translate your content into all languages - Customer service and telesales ? I thought not... And the assumption is that all OTA customers would book direct on the hotel's websites if OTAs were not in existence...Nice assumption- does anyone actually believe that would ever happen ?

  • Multi Brand Owner August 8, 2011 10:50 AM

    It is refreshing to see independant and trust worthy data on this critical industry issue. I look forward to seeing the full report that is being prepared to really be able to evaluate the conclusions. One thing I do know as a hotelier, this is my most expensive channel and I see many of my fellow operators relying heavily on it rather than doing the basics well. I am also concerned that the business practices of some OTA's are really hurting the industry, the lodging tax issue is one of the most significant.

  • Another Cynic August 8, 2011 8:04 PM

    The article doesn't go into enough details to make sense. First of all - how can the cost be $2.5B, what is the cost for all of the rooms booked by OTAs that would otherwise be empty? Assuming a 30% commission to the OTAs, that would be a "loss to the hotel" of $7.5B. Second - how can this analysis discount the "search engine" aspect of OTAs? Consumers shop an average of 6-9 sites before making a booking. OTA sites help good hotels merchandize their products and lead to bookings through other channels and don't get paid for the referral (unlike search and metasearch sites). Third - If a hotel doesn't want to distribute their product through an OTA or any OTAs (See Southwest Airlines) - they should just turn the channel off instead of worrying about the "Loss" being created.

  • surfpooch21 August 9, 2011 1:52 AM

    propaganda! there is ZERO cost in working with OTAs. name ONE hotel that has wrote a check to an OTA for business the last 15 years (outside of ad sales). now... why don’t you add up all those franchise fees, switch fees, TA commissions, GDS fees, et. al. to your brand.com revenue and then look at the business side by side. now if you'd like to talk about intrinsic cost.. that’s another matter all together... i hear the lamentations (as did i when i was a revenue manager): "OTA's are low rated with poor LOS". but tell me one hotel with that sentiment that ever used them for anything else?? the challenge with most revenue managers is they are accountants on the front side of the business. actuaries with no sales/mktg experience. most sales directors weren't any better, turning a blind eye to OTAs because they were dinosaurs that didn't take the time to understand what they were. then the hotel industry wakes up a decade later with a hangover pointing their low ADR addled fingers at online merchants as the villain. AH&LA and STR merely cooking metrics with a reckless title to this article that implies OTAs are stealing... truth is, anyone suffering from low adr is because they were missing a high rated segment, back filled with OTA business, then when management asked "why is your rate so low?", the hotelier responding 'because the big bad OTA made me do it'.... thank you for the 'group think' article... Cost??? c'mon.. and talk about timing... i suppose this article was a collusive step to get rid of 'costly OTA business' after the first 7 months of this year where many hotels enjoyed rates (and occupancies) they haven't seen in many years... sorry guys, the storm is over with the S&P downgrading the US credit rating... the recession isn't over, it’s just evolving... now i would LOVE to read propaganda where the hotel takes a stand against the 'parity cartel' where they don’t hide behind 'rate parity', stands up like a REAL businessman and have a proactive sales/mktg/rate strategy...now that would be propaganda worth reading

  • hotelier2011 August 9, 2011 6:41 AM

    there are fees associated with OTA's, their poor service ruins guest relations, their high commission rates 325-30% is outrageous, they do a poor job of upselling, OTA's are horrible for the hotel/hospitality industry, guests want cheap and they book cheap on OTA and expect the moon wal-mart mentality!

  • robertgilmour26 August 9, 2011 7:06 AM

    Zero costs in working with OTA's - who are you kidding Also if you don't understand your costs of sale, you should not be a hotelier

  • A Balanced view August 10, 2011 3:29 PM

    I dont think it is realistic to claim that working with OTAs involves zero cost, as some have claimed above. What is misleading is to suggest that 'direct' channels have zero costs. How much did Google ads cost hotel chains in 2010? What about all of the costs related to retention of guests (Preferred Programs)? The huge growth of Booking.com in the US and Canada is proving that the value of the hotel marketplace is greater than ever. Competition between the channels will ultimately result in a more competitive marketplace for distribution, and lower costs. But expecting OTAs to be a Not-for-Profit organization when they obviously add value is silly.

  • skooshhotels August 16, 2011 1:51 AM

    'The US$2.5-billion tally assumes all of the rooms sold via OTAs during 2010 would instead be sold on brand.com or property direct. That number does not include the costs associated with booking on the brand.com or property-direct channels.' What, so you ignore the cost of direct sales? That's absurd.

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