Orbitz, Expedia: Stockholm Syndrome Meets the Web 15 comments
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In this economic downturn, Expedia (EXPE) and other Online Travel Agencies (OTAs) are desperately trying to generate incremental revenues, including advertising on their sites, to supplement their decreased margins. Sales pressure from the leading OTAs such as Expedia, Travelocity and Orbitz (OWW) has intensified tremendously over the past year. In addition to banner ads, in 2008 Expedia introduced TravelAds, a pay-per-click advertising program. Expedia proclaims that “similar to traditional search engines, this pay-per-click auction model is great for any budget”. The only caveat is that when users click on the sponsored listing, they do not go to the hotel website, they go to the hotel page on Expedia to make the reservation. In other words: advertising cost plus Expedia’s margin equals a total cost to the hotel of as much as 30%-40% from the booked hotel revenue.
Does it make good business sense to pay OTAs (who already make hefty profit margins from hotel’s net rates in the so called merchant program) to profit even further from hoteliers’ own inability to properly utilize the Internet and to damage even further the hotel brand and price integrity? We firmly believes that this is yet another proof of the existence of a new kind of disparity in the hospitality vertical: between smart, Internet-savvy OTAs on one hand and web-illiterate hoteliers on the other.
The OTA’s merchant model has greatly injured the hospitality industry and has done long term damages to the hotels’ brand and price integrity. You do not more proof than that; just look at the diminishing ADRs. The so called “rate parity” is in fact acceptance of the merchant-discounted rates as the hotel rack rates. The hotel’s discounted rates on Expedia have become de facto the hotel’s published rates. Though claiming to be “free of charge”, these merchant services cost hoteliers dearly. They cause long term damage and downward pricing pressures (both online and offline) beyond repair.
Paying to advertise on the OTAs, on top of these long-term damages, simply doesn’t make much sense. HeBS considers hotel-advertisers on OTAs as being the web reincarnation of the “Stockholm Syndrome” where the kidnapped victims (hoteliers) fall in love with their kidnapper: Expedia and the rest of the OTAs.
Disclosure: no positions
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This article has 15 comments:
If there is an uncommitted traveler out there searching Expedia and a hotel wishes to gain more visibility then their competition how is this any different then bidding on a keyword term and offering a discounted promotion to increase conversion? It doesn't make sense that this is "brand damaging" when in fact it is building awareness of a particular hotel / brand even when a guest does not chose to purchase.
Additionally, you mention rate parity as putting out discounted rates as rack rates. If the rate is equal to the brand rate, how is this discounted except for the contracted discount that the hotel can chose whether or not to accept when signing up for an OLTA in the first place? Those in the business know that a true "rack" rate was a rate on a card that very few guests actually bought.
As far as "diminishing ADRs" you are probably aware that all ADRs including online ADRs have been increasing throughout the years and only recently have started to decrease. When only a small portion of rooms are booked through OLTAs how can this result in an across the board ADR decrease in all markets and why is it only happening now?
Finally, you cite "long term damage and downward pricing pressures (both online and offline)". You are correct that OLTAs have increased availability of accurate and easy price information and therefore that may cause pricing pressure. However it is naive to think this was never going to happen in the Internet world. I suppose one could make the same argument regarding any other major online retailer or product meta-search site.
If OLTAs were not to exist then you may have guests doing what you envision and doing Google searches for hotels by city and then going to every website individually to find a rate. This would certainly help your business. Or maybe they would start to call traditional travel agents with only 10% commission. However, I do not see many guests wanting to go through these hassles when information is already open and readily available.
As is usual, your articles are self-serving to your own business without regard to actual facts or thinking about the customer. Please think about all the facts with as much thought as you spend designing the catchy titles for your fluffy PR pieces.
You nailed it - Max does this merely to promote his business. As a hotelier we have been running a campaign on Travelocity with HUGE results. Not only via Travelocity but due to the way it was positioned we have vision into some significant direct business that came from our having display advertising on Travelocity.
Moreover engagement on these display ads via click through was better on Travelocuty than anywhere else we placed media dollars.
Max- Perhaps Expedia or Travelocity should do a sales call on you as you obvisouly have no idea the implications nor benefits of the OTA channel as it pertains to marketing.
OTAs spur very little incremental demand, plain and simple. There is no arguing this point. What they do is creating pricing clarity for travelers (which is a great thing, holding hoteliers accountable/responsibl... but at what cost? 15%-25% margins are unacceptable in an industry where the brick and mortar is the only way to experience the product.
Successful marketing on OTAs equals share growth for single hotels, not revenue created. When the industry is being attacked by economic collapse it is of primary importance to increase demand, and not succumb to less savvy hoteliers and their short sighted strategies. Buy those ads now - we do the same thing - but this is not a sustainable competitive advantage.
A savvy hotelier needs to look beyond the results of individual campaigns and into the long-term strategy of their business. Promote on independent or meta-search channels that do not eat away at your profit margins with high commissions. Find ways to attract new customers. Re-establish the importance of customer service in attracting loyal, repeat business.
It's easy to toss Starkov's theory aside, but don't forget it when your neighbor outbids you on TravelAds or Travelocity. When do you cross the line of paying too much?
If your argument were to be carried forward almost all brands would have a problem with advertising through Google. Lets face it they do because Google has traffic and it has traffic because it offers the searchers a valuable service. I believe the OTA's also fulfill a customer need and therefore hoteliers need to present on their sites. If in fact they dont they may be at risk of not following the natrual evolution in the market place.
This article makes the same arguments from 2001; back when the merchant model was truly out of control. I will spare you the lengthy history lesson but the hotel industry saw the problem back then and responded in kind. They regained control over their brand, pricing, and inventory integrity through initiatives such as the hotel backed joint-venture Travelweb, the initiation of best rate guarantees, and through automation of the merchant model booking process. The merchant model is not the industry scourge it once was due to the collective and visionary efforts of hoteliers that I would not describe as a "web-illiterate" bunch.
That being said, in my humble opinion, one of the larger issues facing the hotel industry today is the proliferation of online marketing companies that have made an industry of convincing hotels to spend thousands of dollars plus commissions per month on PPC campaigns with no expected return on investment. I believe if we line up the cost per booking on an OTA vs the all-in cost with these SEM campaigns plus commissions on top of the other transaction fees, hoteliers may start to think differently about the value proposition these companies really offer.
So, let's distinguish between an OTAS industry that is really only interested in generating affiliate revenues and forged special agreements and kickbacks tied to online advertising on hotel brand names, and the majority of hotels that are locked into this cycle until someone proposes something better.
Maybe if you tried reading your "articles" over before publishing them, then you might be able to recall some of that trash before it makes it out to the world. "You do not more proof than that"
Commissions/margins paid by major travel suppliers to OTAs for bookings via OTA websites:
• Airlines: 0 (zero commission)
• Car Rental companies: 0 (some pay $3-$5)
• Hotels: $54.26 (ADR $108.52 (expected average ADR in the USA in 2009 x 2 nights at 25% margin)
• Hotels in NYC: $125 (ADR $250 at 2 nights at 25% margin)
Hotels are paying an average 54 to 125 times higher “booking fee” than airlines via an OTA website and 18 to 41 times higher fee than car rental companies.
Does it make sense to pay for advertising on top of this abnormally high “booking fee”?
You be the judge.