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Small hotels, OTAs and strategies for survival.
Back in 2012, there was a lot said and written about a report, by Dr. Chris Anderson, of the Cornell University School of Hotel Administration, entitled "Search, OTAs and Online Booking: An Expanded Analysis."
Anderson, a respected academic, concluded in his report that hotels that use the services of OTA's (online travel agencies) such as Expedia, Hotels.com and others, benefit heavily from this exposure in increased bookings and increased profitability.
Maybe.... up to a point.
The iHi response to this report was one of a degree of scepticism. iHi wrote back in 2012 ::
Surprisingly for a report published by an eminent academic
institution, Anderson's paper contained a number of serious
methodological flaws. To suggest, on the basis of data obtained
exclusively from online bookings at hotels of a large high-profile US
chain, IHG (Intercontinental Hotels Group), that this policy was
therefore good for all hotels, was stretching a point.
Furthermore, Anderson largely failed to take account of a
number of major considerations that ought to seriously affect any
conclusions that could be drawn from this report. These are, notably:
OTAs and small hotels
Small independent hotels do not have the brand visibility of large chains, so even if "billboard" exposure of their name on Expedia and other portals does lead to increased sales, it almost certainly does not improve these hotels' direct Internet presence, and does not therefore bring them the extra direct sales that large groups like IHG get, ( according to Anderson.). All they get is the extra sales made through the OTA's online booking portal, on which they will be paying a commission of at least 15%, often more.
The dilemma for small hotels
Is it worthwhile for small hotels to advertise on OTAs, and thus pay an agency commission on perhaps the majority of room sales they make?
The answer to this depends on the hotel's individual situation, its overall profitability, and the alternatives available in its case.
If we look at an area where hotel capacity is inadequate to cope with tourism flows in busy periods - let's take the Scottish Highlands - it is clear that OTAs bring in the visitors. Scottish Highland Hotels listing with OTAs are often booked up weeks if not months in advance, whereas those that do not use the services of OTAs fill up more slowly. On the other hand, they don't pay 15% or 20% commission on sales, so their profit margin on each room sale may be 50% greater.
So is it worth it? Hoteliers must bear in mind that commission is paid on the cost of the room, not on the profit margin. A £100 room night will cost at least £20 to service: laundry, toiletries, cleaning, wear and tear. Commission at 20% on £100 is £20: Profit before commission: £80... meaning that a room sale achieved through an OTA is actually taking at least a quarter of total profit margin, maybe more..
If the hotel is quite profitable, and also receives a good number of direct bookings on which commission is not paid, then paying the OTA commission on some rooms may effectively be a way of boosing occupancy rates and even boosting overall operating margins. On the other hand, if the hotel uses the services of an OTA simply to bring in its essential business and not lose custom to other more Internet-visible establishments, and even worse, if, to boost sales, it also slashes online room rates, then the situation may become critical. Hundreds of small independent hotels are driven out of business each year, because they can't afford the cost of competing with their rivals.
a) Large upscale chain hotels have a history of working with travel agencies, and paying hefty commission on their sales - which is often not at all the case with smaller independent hotels.
b) If large groups such as IHG were to stop using Expedia and other portals overnight, customers would still reach their websites and book their rooms, because they have a brand that is sought after, and a good Internet presence in their own right. So far from losing out by not using OTAs, they might actually gain, as they would no longer pay commission of 15% - 25 % to these OTAs on sales booked through their sites.
c) While OTAs boost occupancy rates for the hotels that use them - there can be no doubt of this - they only marginally increase the size of the total cake that is being cut up. In other words, by boosting sales to one group of hotels (those that use their services), they are taking business away from others - those that do not use their services.
OTAs and small hotels
Small independent hotels do not have the brand visibility of large chains, so even if "billboard" exposure of their name on Expedia and other portals does lead to increased sales, it almost certainly does not improve these hotels' direct Internet presence, and does not therefore bring them the extra direct sales that large groups like IHG get, ( according to Anderson.). All they get is the extra sales made through the OTA's online booking portal, on which they will be paying a commission of at least 15%, often more.
The dilemma for small hotels
Is it worthwhile for small hotels to advertise on OTAs, and thus pay an agency commission on perhaps the majority of room sales they make?
The answer to this depends on the hotel's individual situation, its overall profitability, and the alternatives available in its case.
If we look at an area where hotel capacity is inadequate to cope with tourism flows in busy periods - let's take the Scottish Highlands - it is clear that OTAs bring in the visitors. Scottish Highland Hotels listing with OTAs are often booked up weeks if not months in advance, whereas those that do not use the services of OTAs fill up more slowly. On the other hand, they don't pay 15% or 20% commission on sales, so their profit margin on each room sale may be 50% greater.
So is it worth it? Hoteliers must bear in mind that commission is paid on the cost of the room, not on the profit margin. A £100 room night will cost at least £20 to service: laundry, toiletries, cleaning, wear and tear. Commission at 20% on £100 is £20: Profit before commission: £80... meaning that a room sale achieved through an OTA is actually taking at least a quarter of total profit margin, maybe more..
If the hotel is quite profitable, and also receives a good number of direct bookings on which commission is not paid, then paying the OTA commission on some rooms may effectively be a way of boosing occupancy rates and even boosting overall operating margins. On the other hand, if the hotel uses the services of an OTA simply to bring in its essential business and not lose custom to other more Internet-visible establishments, and even worse, if, to boost sales, it also slashes online room rates, then the situation may become critical. Hundreds of small independent hotels are driven out of business each year, because they can't afford the cost of competing with their rivals.
Towards a solution
What we wrote back in 2012 remains fairly appropriate seven years later. The big difference is that the development of the OTA's since 2012 has been so massive that it is now virtually impossible for small hotels to survive without them, except in very special circumstances. OTAs have, since 2012, carved out such a massive role for themselves in the hotel bookings market, that they cannot successfully be cut out of the equation – however much some independent hotel owners would dearly love to do without them.
However small hotels can reduce their dependence on OTA's, as long as they understand that there are alternative and complementary strategies.
The alternatives to OTA's are not substitutes for OTA's: the solution for hoteliers is to work with OTA's as much as necessary, and at the same time to attempt to maximise sales that avoid the use of OTAs – given that sales that avoid OTAs also avoid their commissions, and are therefore much more profitable.
The first thing that any independent hotel must do, in order to compete with the OTAs and large hotel groups on equal terms, is to offer online booking on their website. There are dozens of software solutions available for small hotels – just google on "hotel booking engines" or something similar. Some charge a one-time fee for the purchase of the software, and setting it up, others charge a flat-rate booking fee, others take a small commission: but they are all more economical than paying a hefty commission to OTAs. iHi does not recommend any particular booking engine, as we have not tried them out.
The second thing to do is to ensure a good Internet visibility for your hotel. This is not so easy if your location is "London", but easier if it is "Banbury", and easier still if it is "Little Froghampton".... at least, for people searching on the Internet for these places. An internet presence should also be consolidated by listing a hotel with local directories, and visitor traffic can be generated as well by listing it with directories like Independent-Hotels.info which show up well on search engines, offer listings at reasonable rates, even free, and do not take any commission.
Having a website is the first condition for avoiding the hefty commissions paid to OTA's; but just having a website is by no means sufficient in itself. This is because of the way Internet search works in 2018.
When it comes to searching, the Internet is very far from being a level playing field. Internet search results favour big well referenced websites, such as OTA's, respected niche websites, and smaller but well referenced websites. An individual hotel website, to be visible, must be well referenced, that means that it must have other websites linking to it.
The art of building up links to a website is called Search Engine Optimisation, or SEO, and it is big business. There are plenty of companies and agencies offering SEO services, but many of them are a complete rip-off. The independent hotel owner does not need their services; he just needs to make sure that his hotel website has good and appropriate keywords in its titles and headings - a simple job for any moderately competent webmaster - and acquires a small number of good inbound links, notably from specialist travel sites, specialist directories such as iHi, and local tourism sites.
Basically, this is all that can be done; but it must all be done if a hotel wants to bring in as many visitors as possible directly, without the help of the hotel booking sites.
No small hotels are in a position to set up a website that will show higher in Google search results than all the online booking sites - unless they pay for advertising on Google. But that may work out as expensive as using the services of an OTA. On the other hand, with good SEO, a small hotel can ensure that it features up among the OTA's at the top of Page 1 for some appropriate Google search results – which is the only place worth being.
The future of hotel booking is certainly online, and hopefully not only with commission-based portals. But that depends on hotel owners; if they continue to rush headlong into the arms - or jaws - of large OTAs, in the belief that this is the only way to boost bookings, then they are playing the OTAs' game; it's a high-cost strategy. If they look around on the Internet for other low-cost or free alternatives, and help these to grow, then they are doing themselves a favour in the long run.
December 2019
Other articles:
Travellers: Recommend a good and calm independent hotel in France, Spain, Italy or the UK.
If you run or have stayed in a small independent hotel that you think ought to be in this directory, contact iHi with details.
Hoteliers, hotel owners
How much are you losing in commission paid to online booking hotel booking portals?
A small hotel with an theoretical annual turnover on room sales of 200,000 €uros can easily lose 20,000 € in commission. Some of this can be avoided by listing a hotel free of charge with iHi, just as long as it meets our criteria. Send us a short objective description of your hotel (no hype) and a small photo too if you want. As long as your submission is approved, all you need to do in order to be listed with iHi is to provide a short link back to iHi from your hotel website. We'll provide further details when we have approved your proposal.
iHi offers alternative solutions for hotels that cannot or do not want to link back.
Criteria for listing with iHi :
iHi is a website specialising in small friendly hotels in a quiet environment, offering good value to travellers. Good value hotels are not necessarily cheap hotels; they are hotels where prices are not above average for hotels of their category.
Maximum size: 40 rooms - slightly larger for city hotels.
No chains. Only independent establishments.
Affiliation to a referral chain (Logis de France, Inter Hotels) is no problem.
To list, view iHi listing criteria or
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