The groundswell of support for “book direct” initiatives is squarely aimed at reducing reliance on online-travel-agency production. Blindly following a course of action to simply reduce OTA transaction mix by an arbitrary percentage may not yield the best financial results. In fact, earnings before interest, taxes, depreciation and amortization may be negatively impacted by arbitrarily lowering the OTA transaction mix.
A highly simplistic and misleading calculation of EBITDA impact supporting “book direct” campaigns relies on the reduction of OTA room nights to be replaced by non-OTA production. The calculation is often based solely on exchanging OTA merchant margin expense with direct-to-property costs through the mix change without regard to the marketing (search) value of OTAs display positioning.
While certainly possible, non-OTA production replacement will undoubtedly require additional sales-and-marketing expenses to maintain occupancy. While the simplistic approach to executing an OTA-to-direct booking mix may reflect a significant increase in EBITDA, realities regarding expense and risk are often marginalized. Even if a property is successful in achieving a transaction mix change, there is some EBITDA-neutral upper threshold that should be considered before execution to include the likely changes in sales and marketing expenses associated with the mix change.
A property wanting to improve EBITDA through a shift of channel mix should take a more analytical approach. For this purpose, we have created an EBITDA impact model* that accommodates varying shifts in OTAs and non-OTA production. For illustration purposes, it is based on a 200-room limited service property running at 70% occupancy with a $100 average daily rate. It also factors the interplay between the billboard and dilution effects. The model can be applied for different size properties, ADRs and transaction mixes.
The billboard effect refers to the concept that having a presence on OTAs allows a property to remain in the consideration set for a given guest’s search and will have some positive impact on direct-to-property bookings. In other words, a potential guest may search online via OTAs to see what options are available to them. Some of those guests will not book a reservation through an OTA, but will instead confirm a reservation directly with the property call center or website. There is ample published research to suggest that this effect exists, such as “The billboard effect: Online travel agent impact on non-OTA reservation volume” from the Cornell Center for Hospitality Research Report.
The dilution effect is a term we have coined to reflect the opposite of the billboard effect. It refers to the diversion of transactions from property-direct channels to an OTA as a result of an extensive presence on OTA channels. The interplay of billboard and dilution effects points to the need to anticipate the impact that changing channel mix will ultimately have on profitability for a particular property.
