To end all discussions: There is no such thing as a billboard effect and direct bookings are most profitable for hotelsDistributionPosted by Oliver Geldner Sep 12, 2016 14:24:35
OTAs, metasearch, wholesalers and traditional travel agencies can be an important part of the mix, but they are no match for booking direct
Following the launch of book direct campaigns by a few of the major hotel brands, some articles have surfaced with unsubstantiated information questioning the value of the business through direct channels. Hospitality Upgrade sought the guidance of an industry expert to find out what the industry data actually shows.
Kalibri Labs, a Rockville, Md. based big data firm maintains a growing database from more than 25,000 hotels and tracks all bookings, revenues and customer acquisition costs with a history back to 2011.
Based on analysis provided by Kalibri Labs, direct hotel website bookings continue to be significantly more profitable than OTA bookings. The findings showed that direct bookings remain more profitable for the hotel industry — to the tune of 9 percent — and when factoring in ancillary spend, profitability can be almost 18 percent better. Costs that are considered for this analysis include commissions, transaction fees, loyalty fees, and any other direct channel costs.
On top of this, the acquisition costs for customers using direct channels decrease over time while those for OTA customers remain steady or may increase as commissions rise. Hotels essentially pay the same commissions every time a guest comes through an OTA; there is no reduction in cost when volume increases or guests come back. In contrast, as loyalty rosters grow, the overall marketing costs are reduced and the entire system becomes more efficient. The added advantage of direct engagement leads to improved relationships with guests.
The other factor regarding the OTA channel is that the presumed “billboard effect” benefit, touted by third parties to justify the high commission cost of their channels, has been shown to be a myth. The Online Travel Shopper’s Journey study published by the AH&LA Consumer Innovation Forum (to be released in June 2016 as Part I of Demystifying the Digital Marketplace: Spotlight on the Hospitality Industry) will explore this in detail, but the key finding from the 2015 study is that there is only a slight likelihood (7 percent) that a consumer will visit an OTA and then return to the hotel website to book.
Further to this, early research by Kalibri Labs following the book direct initiatives reveals that when OTAs have “dimmed” hotels by removing photos and other content to de-emphasize their visibility, the hotel demand shifted to other channels, mainly direct ones, suggesting that the amount of incremental business through OTAs may be in fact less than originally thought. This raises the question of the value of paying a premium in commissions for business that will come anyway through other channels. In examining trade-offs more closely on the hotel side, Kalibri Labs reported, the higher net ADR suggests that although some loyalty guests who had previously paid full rates are taking advantage of the discounts, many are not. This metric will be carefully tracked as the campaigns are more fully deployed but this preliminary finding implies that the book direct programs may be shifting new customers into the loyalty programs rather than simply seeing trade-down pricing from existing customers.
Kalibri Labs advises that third-party business from OTAs, metasearch, wholesalers and traditional travel agencies can be an important part of the mix, but their report summarizes: striking the optimal balance between direct and indirect business sources will ultimately result in a hotel enjoying higher profit contribution, delivering better consumer experiences through higher levels of guest engagement, and yielding healthier economics for a hotel as a result of a diverse business base.
Article published by Hotelonline, May 23, 2016