There’s a striking difference between how hotels approach their distribution channels. For their direct channel, hotels typically allocate a yearly budget for their team, marketing, and technology costs.
NB: This is an article from The Hotels Network, one of our Expert Partners
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For OTAs, however, they negotiate a commission on bookings. This seems like a straightforward approach, but it has an obvious and often overlooked implication: while the direct channel, which is more profitable, has a cap on investment regardless of how well it’s performing, the indirect channel enjoys an unlimited budget. Let me put it another way: hotels have an unlimited budget for expensive reservations.
The Root of the Problem
Several factors contribute to this discrepancy. Indirect bookings on commission appear risk-free and are fully trackable. Direct bookings, on the other hand, involve a combination of fixed costs (such as people, technology, and brand marketing) and variable costs (such as performance marketing and paid media). Attribution is also more complex: a single booking often results from multiple initiatives. Consequently, we find direct teams continually having to prove their work is profitable, whereas the profitability of indirect teams is taken for granted.
Additionally, short-term focus drives hotels to rely more on OTAs when there’s an immediate need, as direct channels cannot drive demand as quickly. This issue is compounded by siloed teams: marketing has its own budget, and revenue managers typically control OTAs, leading to a lack of collaboration. The specific expertise required for effective marketing also makes it easier for hotels to collaborate with OTAs than to build and train an in-house team.
It is also worth noting that commission isn’t the only cost associated with OTAs. There are additional expenses for placement, ads, and visibility, similar to paying for Google Ads. This makes the overall cost for indirect bookings even higher, with marketing budgets often being utilized to cover these expenses.
The main reason, however, largely stems from tradition – it’s simply how things have always been done.
Let’s Pose Two Questions:
- Cost Efficiency of Direct vs. Indirect Bookings: Research indicates that indirect bookings are about twice as expensive as direct ones (16% vs. 8%). Even if you doubled your investment in direct bookings, you would still achieve a better ROI. So why do many hotels target a single-digit cost, like 8%? The logical answer might be that the target audience for OTAs is different, potentially including guests who would not book directly. But is this really the case?
- Marginal Cost of Additional Direct Bookings: If your hotel already secures a certain number of direct bookings, the focus should shift from the cost of existing bookings to the cost of acquiring additional ones. With most direct costs being fixed, it makes sense to fight for each marginal reservation and invest up to 16% of the booking value. So, why not adopt a model that allows for paying for these additional bookings without budget constraints?
