OTAs framed

Were the Online Travel Agencies framed?

For over ten years, OTA (online travel agency) giants such as Expedia, Priceline and Booking.com have been demonized by franchise chains for being too expensive, and even leveraging 9/11 to take over the industry.

Is the rap true, or is it possible the OTAs have been framed?

Why would franchise chains such as Wyndham, Choice, Accor and IHG focus so much attention on what they refer to as the evils of the OTAs?

Before the 1990s, most hotels received business the direct way; drive by, AAA, selling direct to corporate and government segments. The only hotels receiving GDS travel agent business were generally the largest chains, such as Hilton, Marriott, Holiday Inn, Best Western and Choice.

But the 1990s brought 2 large changes.

  1. The massive franchise explosion driven by Henry Silverman on top of the go-go economy of the Clinton years.
  2. The Internet and the birth of online travel.

Franchises offered hoteliers the benefit of the CRS (central reservation system), which at the time consisted of 800-call center and access to GDS travel agencies. So they added Internet booking and marketed themselves as the one consolidated source of business for hoteliers. It made perfect sense at the time.

Then after 2000, the Internet exploded. Consumer preference for online hotel booking became massive so quickly that OTAs became the connection between guests and hoteliers, instead of the franchise chains.

When chains responded slowly to the post 9/11 travel shutdown, hotels needing to fill their rooms quickly reacted out of necessity and went direct to the newish OTAs.

So much business came directly from the OTAs to the hotel that for the first time, the question arose–Why do I need a franchise when my hotel can sell via Expedia and Travelocity?

Before the Internet, key sources of business for hotels were:

  • Direct, walk up
  • AAA guides
  • GDS travel agencies-source of 90% of corporate and non-leisure business.
  • Wholesalers, such as tour buses.
  • Direct corporate business.
  • Government business.

And the costs associated with these channels were always perfectly acceptable.

  • AAA was a 10% discount off rack.
  • For corporate and international business, we paid travel agents a 10% commission plus a $6.00 GDS fee per booking. For a $65.00 room, that was a cost of 19%.
  • Tour buses asked a 25-30% discount and a guaranteed block of 25 rooms.
  • Government and military discounts ranging from 10-25%.

So if we want to examine the actual costs of acquiring customers, it’s important to include the franchisor as a channel.

  • Let’s take a 150 room midscale WYNDHAM operating at 65% occupancy with 10% of their bookings through OTAs.
  • The hotels’ gross annual room revenue is $4.9 Million.
    • All OTAs combined deliver 10% of the revenue, less a cost of 15%, or $73,710.00
    • The franchise website delivers 18% of the revenue less a cost of 11.5% of gross, or $565,110.00
  • The cost of an average franchise is 11.5% of total room revenue.
  • So, the cost of the average Wyndham or Choice franchise is 7.7 x or 767% over the cost of all OTAs combined.

From a cost to acquire customer basis…. does any franchise deliver 7.7 x Booking.com, Expedia, Priceline and Google combined? While it is difficult to accurately calculate franchise chain contribution to hotel owners, the OTAs can.

While the OTAs have been cast as the greedy villains by the major franchise chains, today any hotel anywhere can be booked globally. And at less than the cost of a travel agent or traditional walk-in discount

Do you consider OTAs as your partners along with travel agents, and tour bus operators?

That depends, on whether you are a hotel owner or franchisor.

 

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  • Carrie Heath

    Love the article. But I have a couple of other thoughts. Working as an independent property. In order to get the larger travel agencies such as BCD travel and American express business travel and other large companies like this. You have to pay for Lanyon it is not included and then you have to be invited to bid. Which is very difficult as an independent. Then the cost to get this business is much larger then if you were involved with a franchise. More and more of your corporate travelers are using American Express Travel and other travel agencies which independents are not offered the chance to bid for the business.

  • http://www.atlodging.org David C. Taylor

    I have been a hotelier for over 30 years. OTA’s send you much more business than they charge you for. Less than one out of five visitors to an OTA web site actually rent. You probably get at least two phone calls for every OTA rental. This effectively reduces their commission by two thirds. We dropped our Days Inn flag about a year and a half ago. Our first year revenue dropped about 5%. We are now well on our way to eliminating that short fall and saving $170,000.00 a year. August 2014 we had a record month and saved over $30,000.00 in one month. The $170,000l.00 a year we use to pay Wyndham had to be earned. For this reason we believe Wyndham was confiscating over 25% of our business. We now work less and make more. In an effort to combat high hotel franchise fees I have created a free hotel franchise called Atlodging.org. AAA becomes your flag and Twitter is your loyalty group.

  • Steven Belmonte

    The truth is, the success of the internet has leveled the playing field for soft Brands like Magnuson, Vimana’s Centerstone Hotels and Key West Inns to name a few. Accordingly, not everyone needs a major Brand and the approximate 12% to 14% fees they are forced to pay on gross room revenue. Even those potential guests that don’t book online at the very least, shop online; so at the end of the day, these soft Brands that have much lower fees and franchise friendly terms can often produce the same amount of business for the owner. This means significantly more profit dollars. At the end of the day my advice to owners seeking a franchise is: DO THE MATH!