OTA evolution demands more pricing discipline
12 MARCH 2014 8:26 AM
There are pros and cons to partnering with online travel agencies, and hoteliers must understand the intricacies of booking patterns, distribution platforms and pricing models.
REPORT FROM THE U.S.—While planning a recent trip to San Diego, technology and distribution consultant Robert Cole was trying to keep his travel costs at a minimum. Familiar with the intricacies of online travel agency agreements, he knew how to find the best deals.
Cole first booked a cancellable reservation through Booking.com and chose the “pay later” option. Then he shopped around, found a nearby, comparative hotel for $11 cheaper and canceled his initial reservation. Had he “been gutsier,” Cole said he could’ve saved $21 per night at the same hotel by waiting longer to book and using an opaque channel.
It’s a practice—the gamification of bookings—that stands to become more common with travelers as additional OTAs introduce agency models in which the hotel collects payment and serves as the merchant of record, rather than the more traditional merchant model, where the OTA collects payment at the time of booking. And with sites like TripAdvisor’s Tingo, which watches rates for travelers and alerts them to price drops, hotel channel management is becoming increasingly transparent to the consumer.
“The scenario I frequently see, and have used numerous times during peak demand periods, is to book a hotel very early at the best available rate under a free cancellation policy through Booking.com to make sure I have something,” Cole said. “Then, as I get closer, I can start checking if rates are falling, or look at opaque sites like Hotwire or Priceline’s Express Deals. I am totally brand agnostic, so I use the opaque sites to save as much as possible.”
As The Priceline Group grew its agency platform Booking.com over the past decade, gaining a strong foothold in the U.S. market over the past few years, competitor Expedia launched Expedia Traveler Preference, allowing travelers to choose to pay at the time of booking or pay later at the hotel. La Quinta Inns & Suites and Marriott International signed on to the ETP program early; Hilton Worldwide Holdings, InterContinental Hotels Group and others more recently. All of those brands are in the process of going live with agency-model bookings, but other global franchisors have yet to renew their contracts with Expedia.
Cancellation policies for hotel listings on Priceline.com and Booking.com are set by the hotel for both merchant model and agency models; often hotels offer both non-refundable rates and free cancellation rates.
“It’s a matter of choice for the hotels, there are options with either model,” said Leslie Cafferty, VP and head of corporate communications at Priceline.com.
Cole said the issue with the merchant model is travelers typically need to pay first and then wait to get the money back if they cancel. “It’s more attractive to simply make the reservation under a pay-later agency model and cancel without having to worry about the refund,” he said.
Expedia Director of Industry Relations Adam Anderson said Expedia’s “hotel collect” bookings have roughly the same cancellation rate as other pay-at-the-hotel booking channels.
“To put the amount of Hotel Collect bookings in context, when we ran this analysis, the split of Expedia Collect and Hotel Collect standalone bookings was roughly 57% to 43%, so customers are not overwhelmingly choosing the Hotel Collect method,” Anderson wrote in an email.
As of August, Expedia powers Travelocity’s rates and availability. So, when travelers use a meta-search site like Kayak or Google’s Hotel Finder, typically at least three of the links in addition to the hotel’s own website are for companies that offer pay-at-the-hotel options.
A pricing problem
While it may make canceling easier, Cole doesn’t blame the OTAs’ introduction of agency modeling for hotel cancellations. Instead it’s a “lack of pricing discipline with hotel owners, managers and/or revenue managers” who are lowering prices as stay dates near and “teaching travelers some very bad habits,” he said.
“Airline passengers are mercilessly punished financially for booking at the last minute. Hotels frequently reward them for the same behavior. Not good,” Cole said.
“The new liberal cancellation policies are definitely a problem, especially for hotels that reverse yield, or drop rate at the last minute,” added Marco Benvenuti, co-founder of Duetto, a revenue-management system and consulting company. “All this flexibility in distribution is great, but of course it magnifies any mistake made by the revenue management team at the property.”
Sensing a growing disdain over rate erosion, a number of third-party online distribution platforms have launched campaigns to suggest that OTAs are more hotel partners than enemies. OTAs increasingly are vocal in claiming incremental business and steering clear of discounting.
“It’s a nice, symbiotic relationship,” Jared Simon, COO and co-founder of HotelTonight, said of his company’s partnerships with hotels. HotelTonight recently announced it partnered with several global hotel chains, such as InterContinental Hotels Group, Hyatt Hotels Corporation, Best Western International and more. “Hotels wanted to see some history (before they gave inventory to HotelTonight). These chains have run all sorts of pilots so they’re not going in blindly. They see that the results are additive.”
“We like to think of ourselves as a partner to hotels,” said Aaron Cooper, senior VP of global travel at Groupon Getaways. “The key difference of our consumer is that we’re driving incremental business.”
Both Groupon and HotelTonight are battling perceptions that last-minute bookings equal last-minute discounts, and vice versa. Because Groupon customers are expecting fairly significant discounts, the company can be mistaken as a last-minute channel.
“We’re about 47 days in advance, on average,” Cooper said. “That’s far greater than other distribution channels. You have to remember the mindset of these customers: it’s not a ‘drop everything’ traveler, it’s the customers that aren’t in the market for travel but have the discretionary funds available.”
HotelTonight is trying to convince naysayers that hoteliers don’t have to discount their rooms to get in front of HotelTonight’s mobile audience, Simon said.
“That’s a perception I would really love to debunk,” he said. “We don’t require any discount from hotels. There are hotels that are in the position to discount–maybe a group left early—and that’s when HotelTonight can be valuable from a discount perspective. But they can also list at no discount, and we’re allowing the hotels to use HotelTonight as a tool regardless.”
According to TravelClick, average daily rate growth in the OTA channel grew significantly stronger throughout 2013 than in the supplier channels. The OTA channel had the highest ADR growth with an increase of 8%, compared to hotel direct (up 1.8%) and brand.com (up 1.5%).
Higher ADR growth in the OTA channel can be attributed to fewer bookings in the merchant model segments and more bookings in the retail segments, said Tim Hart, executive VP of business intelligence at TravelClick, in a report.
OTAs dispute ‘perceptions’
Just as it appeared the relationship between hotel suppliers and online travel agencies had mended, stories like Cole’s are leading a contingent of hoteliers to condemn OTAs for eroding hotel business, again accusing OTAs of stealing customer control and loyalty.
Whether OTA business is incremental for hoteliers is a main sticking point in the debate. Both Simon and Cooper said the business their respective platforms drives is from consumers who would not be booking hotel stays otherwise.
“Our customers wake up and check the email we provide them. They’re not necessarily saying, ‘I want to go to a particular place on a particular weekend,’” Cooper said. “They may be inspired by a property; to inspire demand is really our aspiration and that’s what Groupon was born to do.”
Simon said by focusing on same-day booking, HotelTonight attracts incremental, tech-savvy customers without cannibalizing business from brand-loyal guests.
“Whether we’re involved or not, the world is moving toward a shorter booking window,” he said. “We thought, ‘If we could figure out how to offer a way for hotels to leverage that movement in a way that was additive then it would be a win-win for the industry. I think it took a little while for the industry to agree with us. There was a view that we were teaching customers to do what the industry doesn’t want guests to do (book last-minute).”
No shortage of players
Because online hotel room marketing and distribution requires little start-up investment, there is no shortage of partners claiming to drive demand to hotels.
Perhaps newest on the scene is a company launched late last year that proposes to help hotels attract new customers at no cost. Roomer, the self-proclaimed “Stubhub for hotels,” allows guests who have booked a non-refundable room rate and can’t make the trip for whatever reason to resell the reservation online.
Richie Karaburun, managing director of Roomer, said while hotels can still collect payment on non-refundable rates when the guest doesn’t show up, they miss out on ancillary spend, such as Wi-Fi and food and beverage. Hotels also occasionally get stuck with “chargebacks,” he said, when a customer booked a non-refundable rate but later had the charges refunded by his or her credit-card provider.
“We want to be a service to hotels,” Karaburun said.