Currently, most hotel management companies/operators earn their room-related management fees as percentage of gross room revenue, irrespective of whether room revenue is generated from OTA bookings or bookings that are direct with the hotel. Generally speaking, hotel operators are not directly incentivized to do their best to generate more direct bookings, and many of them adopt the “lazy man’s approach” by relying extensively on the OTAs for room bookings. In this scenario, owners are the sole losers, since OTA commissions are destroying profitability and return on capital, and depressing the bottom line in a downward spiral.
Direct online bookings are by far the most lucrative and cost-efficient bookings at any hotel, resort or casino. As a point of reference, across the HEBS Digital hotel client portfolio, the average direct channel distribution costs (bookings via the property website or directly attributable to the digital marketing efforts) are 4.5%, compared to the hefty OTA commissions of 15%-25%.
For owners, any dollar “saved” from distribution adds to the bottom line (Net Operating Income – NOI) and the investment return. In this sense, the more inexpensive direct bookings, the better. The fewer expensive OTA bookings, the better.
For many operators, the cost of distribution via OTAs plays an insignificant role, if at all, and in many cases, as in the case of “merchant” OTA bookings, is not even accounted for in the property P&L (Profit and Loss), since the property receives the net room revenue after the commission has been deducted by the OTA.
Conveniently for operators, “agency” OTA commissions (e.g., Booking.com, Expedia’s agency model, etc.) are accounted for in the property’s financial statement as COGS (Cost of Goods Sold) in a single line item titled “Commissions” with no differentiation from brick-and-mortar travel agents’ commissions. Merchant OTA commissions are not even accounted in the property P&L.
COGS are deducted from gross room revenue. The COGS line item (“Commissions”) and its complete lack of transparency is rarely a subject of discussions between operators and owners. Quite often, it is misunderstood by owners and completely ignored. More importantly, operators are not held accountable for the cost of distribution, and frankly do not care if the hotel is over-exposed to the OTAs at the expense of direct bookings.
Direct bookings and their distribution costs—including ongoing website technology upgrades and content optimization, dynamic content personalization, reservation abandonment programs, hosting, SEO, paid search, online media and retargeting, and more—come from the “Expense Section” of the P&L and its “Sales & Marketing” line item.
Unlike COGS, the Expense Section of the P&L is frequently and heatedly discussed at any meeting between operators and owners. Expenses are scrutinized to the penny. Which line item falls as the first victim of any budgetary downsizing or adjustment? The Sales & Marketing Expenses, of course!
So it is ironic that the most cost-effective bookings—from the direct online channel—are severely restricted by the property’s sales and marketing budget, while the most expensive bookings—from the OTAs with a cost of distribution of 15%-25%—are rarely restricted, quite often not accounted for in the P&L, and can grow exponentially.
Obviously, owners and operators have opposite interests, as far as distribution costs are concerned.
How can this misalignment of interests between owners and operators be resolved?
