There is no FREE hotel booking

There is no FREE hotel booking

This story explains the marketing economics behind how a hotel guest finds and books your hotel.

Many years ago, when I managed a large front desk and reservation department at a 400-key hotel, I became fascinated by hotel distribution.

I wanted to understand how a guest somewhere in the world eventually found a particular hotel, which intermediaries stood between the hotel and that guest, what each participant actually did, and how everybody earned their money along the way.

At the time, much of the leisure business in the hotel where I worked came through wholesalers and tour operators.
Corporate business was sourced locally only, or occasionally through GDS.
All at static pricing; dynamic pricing was just starting to develop, and back then I embraced it fully, which caused some friction with the sales team.
Revenue Management was still developing as a discipline, technology was considerably less sophisticated than it is today, and much of my learning involved spreadsheets, experimentation, and asking people questions until I understood how the mechanism worked.

It taught me an important lesson: Distribution is a trade in itself.

Many years later, I sometimes wonder whether all the technology and sophistication we have added since then has made us understand that trade better or merely given us considerably more numbers with which to discuss it.

One of those numbers is the percentage of direct bookings.
There is nothing wrong with direct business. On the contrary, a hotel should have an excellent website, an efficient booking engine, a sensible CRM strategy, and the ability to develop relationships with returning guests.
What I have never quite understood is the assumption that a “direct” booking is, by definition, a “better” booking.

Somewhere along the way, our industry became rather obsessed with eliminating intermediaries.

Hoteliers labeled travel agents as expensive and tour operators as taking too much margin. Wholesalers and OTAs were even worse.
The general belief has been, and still is, that technology would eventually allow hotels to reach customers themselves, that commissions would disappear, that guests would book directly, and that everybody would presumably live happily ever after with a beautifully designed booking engine.

There was only one small problem.
The intermediaries ignored the hotels’ thesis and continued to produce customers.
Rather well, and sustainably.
Perhaps we should therefore remind ourselves what they actually do.

• A travel agent or travel advisor has a relationship with the customer and generally earns a commission for booking the customer at the hotel.
  Depending on the market and agreement, we might typically be talking about 8–12% of a commissionable rate.
• A tour operator performs a different function.
  It contracts hotel accommodation and combines or distributes it as part of a travel product.
  It commonly works from a net hotel rate, upon which we might see a markup of approximately 24%.
• A wholesaler or bedbank operates further into the distribution chain, contracting inventory for onward B2B distribution.
  Here we might see something closer to a 32% markup on the hotel’s contracted net rate.

These percentages are illustrative rather than universal.
Markets, contracts, seasons, volumes, and bargaining power differ considerably.
The important point is something else: They are not the same business.

A travel agent is not a tour operator, and a tour operator is not a wholesaler.
They perform different functions, have different relationships with the customer and hotel, carry different responsibilities, and are remunerated differently.
Yet I have attended enough hotel meetings where all of them were casually grouped together as “agents” or “partners” to suspect that the distinction is not always as obvious as it should be.

Nor should their cost be regarded as a problem automatically.
Imagine that our hotel receives a reservation worth €1,000 through its own website.
No commission. Everybody in the hotel is happy.
Somewhere in the commercial department, a small victory has been recorded for the direct-booking strategy.

Now imagine that a luxury travel advisor sends us another guest whose reservation is worth €1,500.
We pay a €150 commission.
The guest books a better room, stays a little longer, enjoys dinner in the restaurant, spends money at the spa, and, if we do our job properly, may return next year.

For some strange reason, our industry has trained itself to look suspiciously at the €150 rather than enthusiastically at the €1,350.
And that is before we ask what the supposedly free €1,000 direct booking actually cost us.
Because it was not for free.

Before somebody can book directly, we need a website, which comes with costs:

• The website requires design, photography, content, hosting, and maintenance
• We need a booking engine and connectivity
• We may have a CRM platform, loyalty programme and member rates
• We employ people to manage digital marketing, social media, campaigns, and databases
• We spend money on search engine optimisation, paid search, and metasearch
• We may employ an agency to help us spend some of it

Google has also, rather disappointingly, declined to market our hotel for free out of love and affection for the hospitality industry.
Instead, they charge large sums of money for this service.
All of this is the cost of customer acquisition.
More importantly, much of it is paid before we know whether the customer will book at all.

That is economically rather different from an 8–12% travel-agent commission.
The travel advisor has to produce the customer first.
No customer, no booking. No booking, no commission.
There is something rather attractive about an acquisition cost that becomes payable because somebody has actually acquired a customer.

The expensive wholesaler

The comparison becomes even more interesting when we move further down the distribution chain.
At first sight, the wholesaler is perhaps the easiest intermediary to dislike.
If the hotel provides a net rate and something approaching 32% is subsequently added before the accommodation reaches the market, the obvious reaction is to wonder why we do not simply sell directly and keep the difference ourselves.

Sometimes we should. Really.
But before doing so, it is worth asking what the wholesaler actually does.
A wholesaler may distribute our hotel through hundreds, sometimes thousands, of smaller travel companies, which the hotel could never economically contract, service, and maintain individually. Many of those agents have excellent relationships with customers in their home markets but no local presence whatsoever at the destination.

And the guest requires rather more than a bed.
Somebody may need to arrange the airport transfer, local transportation, excursions, guides, and other ground services.
Somebody needs to understand the destination, assemble those components, and make them accessible to an agent sitting several thousand kilometers away.

The hotel provides accommodation.
The wholesaler, often together with destination partners, can help provide the rest of the journey.
Suddenly the 32% looks rather less like somebody simply helping themselves to our room rate.
For a small travel agency without people on the ground, that infrastructure can make a wholesaler an extremely attractive counterpart.
Instead of negotiating separately with hotels, transport companies, guides, and activity providers in a destination it may barely know, the agency can access much of the travel product through one established commercial relationship.

Tour operators add another dimension.

They assemble travel products and, in many jurisdictions, may also carry significant legal responsibility towards the traveller for the proper performance of services included in the package.
That has value too.
A risk-conscious traveller booking an unfamiliar destination may quite reasonably prefer dealing with a tour operator standing behind the complete journey rather than independently purchasing a hotel room, flight, transfer, and various local services from several unrelated companies.

The hotel room is important.
We hoteliers are understandably rather attached to it.
But it remains only one component of somebody’s travel experience.

Currency

Currency is another function hidden within some distribution margins that is easily overlooked.
International tourism has the inconvenient characteristic that the hotel, the intermediary, and the traveller do not necessarily think in the same currency.
A hotel may set its rates in euros, while an intermediary distributes them to markets where customers buy their holidays in pounds, dollars, yen, or other currencies.
Rates may have been contracted many months before the guest actually travels, during which time currencies can move considerably.

Some wholesalers have therefore developed business models that are, in part, remarkably similar to operating a bureau de change.
They contract accommodation in one currency, distribute and sell it in another, manage the exchange-rate exposure between the two, and build that risk into their commercial margin.
If currencies move in their favour, there can be money to be made.
If they move in the opposite direction, there can also be a rather expensive lesson in international finance.

The hotel, meanwhile, may simply receive the contracted net amount in the agreed currency.
That matters when looking at a wholesaler’s 32% markup and concluding that somebody between the guest and us is making an extraordinarily comfortable living.
Part of that margin may indeed be profit.
But part of it may be paying for access to hundreds of smaller agents, destination infrastructure and ground services, technology and connectivity, administration, credit and collection risk, and currency exposure.

The wholesaler is not necessarily taking 32% for passing our room from one computer to another.
It may be performing functions and carrying risks that the hotel has consciously or otherwise decided not to carry out itself.
That does not automatically make 32% good value.
It simply means that before declaring it expensive, we should understand what we are actually paying for.

The OTA miracle

The OTA deserves separate consideration because its commission is perhaps the most misunderstood acquisition cost.
A commission of 15–18% can seem expensive when compared with a reservation made through the hotel’s own website.
But once again, we need to ask what we are actually buying.

The major OTAs have achieved something approaching a miracle in distribution.
They have built global marketplaces capable of placing a small independent hotel in front of a customer almost anywhere in the world, in the customer’s own language, displaying prices in the customer’s own currency, supported by technology, payment solutions, reviews, customer service, and an enormous body of knowledge about how travellers search, compare, and eventually book.

Booking.com and its competitors are not merely fancy websites with a great deal of hotel inventory attached.
Behind the website lies state-of-the-art technology, enormous amounts of data, and distribution expertise that very few individual hotels could hope to replicate.
They know how customers in different markets search.
They know when they search, what they compare, which information influences conversion, and how demand behaves across destinations, dates, devices, and markets.

A Revenue Manager at a single hotel can be exceptionally good at managing that hotel’s revenue.
It would be slightly ambitious to expect that person to possess the global consumer data, technology, marketing infrastructure, and distribution intelligence accumulated by a platform that processes millions of searches and transactions worldwide.

The OTAs also market. A great deal.
They invest their own capital in search engines, metasearch, apps, technology, content, loyalty programmes, conversion, and consumer recognition.
Their reach extends beyond their own websites through affiliate and distribution relationships, including airlines, loyalty programmes and other travel platforms.

For an independent hotel, reproducing even part of that network would be extraordinarily difficult.
Some distribution relationships may become accessible through a hotel brand or representation company, but that route is hardly free either.
There are joining and implementation costs, technology requirements, recurring fees, and often additional charges related to the revenue generated through the system.

The OTA offers something fundamentally different.
It builds the infrastructure, develops the technology, provides market expertise, translates and distributes the product across major languages and currencies, markets to customers, maintains the consumer platform and distribution relationships, and may facilitate payments and currency conversion.
Depending on the model and product sold, it may also assume additional responsibilities towards the traveller.
Most importantly, much of this is offered to the hotel at a variable transactional cost.
If all that technology, expertise, and marketing fails to produce a booking for our hotel, we do not receive an invoice for the unsuccessful attempt.
The OTA carries that acquisition risk.
If it produces business, only then we pay.

Seen in that context, the 15–18% OTA commission is not simply a reservation commission.
It is a combined charge for marketing, technology, distribution, customer acquisition, and access to expertise and infrastructure that the hotel would otherwise have to build, buy, or contract for elsewhere.

And yet, having achieved something rather remarkable, the OTAs have also failed rather spectacularly to explain it to their hotel partners.
For years, the conversation between the hotels and OTAs has largely revolved around commission percentages.
The hotel sees 15%, 17%, or 18% of room revenue leaving and understandably asks why it is paying so much money to a website.

The OTA then spends considerable energy explaining visibility, conversion, and ranking while somehow failing to say the much simpler thing:
We are not selling you a website listing.
We are providing you with a global distribution and customer acquisition infrastructure, and you pay us when it generates business.
That is a rather different proposition.

Perhaps if the OTAs had explained this better, hoteliers would have spent slightly less time trying to defeat them.
That does not mean OTA business is automatically good business.

Their success has created its own problems.

• Dependency can become dangerous.
• Hotels can surrender too much control over the customer relationship.
• Promotions, preferred-placement programmes, discounts, and visibility tools can push the effective cost considerably beyond the headline commission.
• And where the OTA is capturing demand that the hotel could efficiently have converted itself, the economics deserve to be challenged.

But the comparison should at least be honest.
Comparing an OTA reservation with a 15–18% commission to a direct reservation with “zero commission” tells us remarkably little.
One includes much of its marketing, technology, and distribution cost in a transactional charge payable when business has been generated.
The other sits atop a commercial infrastructure that the hotel has already paid for, hoping that business will follow.

The relevant question is therefore not:
How do we reduce OTA commission?

It is:
What would it cost us to acquire the same customer in the same market at the same moment without the OTA?

Sometimes the hotel will do it considerably more cheaply.
Sometimes it will not.

Revenue Management meets Financial Control:

Which brings me to something else I learned over the years.
Revenue Management and Financial Control should probably spend more time together.
Revenue Management has become an extraordinarily sophisticated discipline.
We measure ADR, RevPAR, room and bedding occupancy density, channel mix, booking pace, conversion, displacement, length of stay, segmentation, market penetration, and an impressive collection of other indicators.

All of them are useful. Yet, none of them pays the bills.

• A hotel can increase revenue and become less profitable
• It can increase direct bookings while simultaneously increasing the cost of acquiring them
• It can reduce commissions while adding commercial payroll, technology subscriptions, and marketing expenditure
• It can improve RevPAR while generating disappointing cash flow
• And it can achieve every KPI on the Revenue Management presentation while leaving the owner wondering where the money went

Eventually, there is one KPI which has a rather irritating habit of settling the argument: Cash

Hotels do not pay salaries with RevPAR.
Banks have shown remarkably little enthusiasm for accepting direct-booking ratios in lieu of loan repayments, and utility companies remain stubbornly attached to receiving money.
The purpose of Revenue Management, therefore cannot simply be to maximise revenue.
Nor should Financial Control merely arrive afterward to explain what happened to it.

Revenue Management understands demand, pricing, segmentation, and distribution.
Financial Control understands what remains after the revenue has travelled through the organisation.

The two disciplines belong together because the commercially relevant question is not:
How much commission did we pay?

It is:
What did it cost us to acquire this business, what did the guest contribute, and what remained?

Return to our €1,000 direct booking.

Perhaps that guest arrived after clicking a paid advertisement.
Perhaps a member discount was involved.
Behind the reservation sit the website, booking engine, CRM, commercial payroll, technology, content, marketing, and all the other infrastructure required to create direct demand.

Some of those costs are fixed. Some are variable.
Some are extremely difficult to allocate to an individual reservation.
They remain costs nevertheless.

Now return to our €1,500 travel-advisor booking.

We paid a €150 commission.
But perhaps that advisor has a relationship with a customer in a market where our hotel has no meaningful sales presence.
Perhaps the advisor knows that Mrs. Guest cares about the restaurant, that Mr. Guest wants somewhere quiet, that neither wants a complicated airport transfer, and that both are prepared to spend considerably more for the right experience.

The advisor is not merely accessing our reservation system.
The advisor is lending us something that took years to build: Trust
That trust has commercial value.
It is particularly relevant in luxury travel, where professional advisors and the networks and consortia around them can introduce hotels to customers they would otherwise spend considerable time and money trying to reach.

No booking engine can manufacture that relationship overnight.
If that customer subsequently books a suite, eats in the restaurant, uses the spa, stays an additional night, and returns the following year, the discussion about whether the original €150 commission was expensive begins to look rather different.

Of course, intermediated business can also be bad business.
A wholesaler can dilute rates, create unwanted price transparency, or distribute inventory into places where it was never intended to appear.
A tour operator can occupy rooms at a rate that looked perfectly sensible six months earlier and becomes rather less attractive when higher-rated demand materialises.
An OTA can become too dominant.
A travel agent can produce business that contributes very little beyond the room.

Every channel can produce good business.
Every channel can produce bad business. Including direct.
This is why I become slightly uncomfortable when hotels proudly announce objectives such as increasing direct business or reducing dependency on intermediaries without attaching a financial consequence to them.

Those are distribution objectives. They are not necessarily business objectives.

Imagine a hotel where direct-booking share has increased, ADR is up, OTA dependency has fallen, and commission expenditure has decreased.
The commercial presentation will probably contain several reassuring green arrows.

Now imagine that Financial Control adds another page showing that digital marketing expenditure has increased substantially, technology costs have risen, loyalty discounts have grown, commercial payroll has risen, ancillary spending per guest has fallen, and the additional room revenue has generated very little additional cash.

Some of the arrows may require reconsideration.
If increasing direct business improves contribution and cash generation, excellent.
If paying commission produces customers with greater total value and stronger contribution, I am equally happy to pay the commission.
If a tour operator provides profitable volume from a market we cannot efficiently reach ourselves, there is nothing inherently wrong with its margin.

If a wholesaler can manage hundreds of relationships, destination services, collections, and currencies more efficiently than we can, perhaps its markup deserves to be understood before it is condemned.
And if an OTA spends its own money and deploys technology and distribution infrastructure that we could never economically reproduce, finds us a customer on the other side of the world, and asks to be paid only when it has produced business, perhaps its commission deserves a little more analysis than simply appearing as an undesirable percentage on the P&L.

I have no particular emotional attachment to any route.
The guest will ultimately sleep in exactly the same bed.
What matters is whether we acquired the right guest, at the right cost, through the right partner, at the right moment, and whether the resulting business produced a satisfactory return.

Perhaps that is the part of revenue management that deserves more attention.
Not simply managing rates. Not simply managing revenue. Not simply managing channels.
But understanding the economics of the entire journey from customer acquisition to cash.

For years, the hotel industry has predicted that technology would eventually render travel agents unnecessary.
The travel agent has shown a disappointing lack of cooperation.
The tour operator remains at work, the wholesaler is still distributing rooms, and the OTAs have somehow become some of the largest travel businesses in the world while we were discussing how to reduce their commissions.

So I suggest we postpone the funeral.

Before deciding which intermediary to bury next, perhaps we should invite Revenue Management and Financial Control into the same room, explain exactly what every participant in the distribution chain actually does, put the complete cost of acquiring the guest on the table, and ask one rather simple question:
Which business actually leaves us with the most cash?

The answer may be slightly less direct than we expected.

Thank you for reading my story.

This story is part of a series—”The Banana Republic Hotel and What It Taught Me About Myself”—in which I share lessons learned throughout my professional and personal journey and how those experiences have shaped my thinking and led me to develop my own principles.

If you enjoyed reading the story and have the appetite to read another one, you are invited to visit G&A’s website, in particular its INSIGHTS page, where you can find all stories.
Alternatively, click here to be taken to the next story.

I hope it has provided some food for thought, encouraged curiosity, and inspired you to keep learning.

Curiosity, humility, and continuous learning remain among the most valuable tools we possess.

Terminology for non-hoteliers:

• SOP: Standard Operating Procedure – a documented process describing how a task should be performed to ensure consistency, quality, and compliance.
• KPIs: Key Performance Indicators – measurable indicators used to monitor performance and progress against objectives.
• ADR: Average Daily Rate – the average room rate paid by guests.
• RevPAR: Revenue per Available Room – a measure combining occupancy and room rate to assess hotel revenue performance.
• Occupancy: The percentage of available rooms that are occupied.
• DOF: Double Occupancy Factor – the average number of guests staying in each occupied room. A DOF of 1.0 means every occupied room has one guest; 2.0 means every occupied room has two guests.
• AGC: Average Guest Check – the average amount spent by each guest in a restaurant, bar, or other food and beverage outlet.
• CRS: Central Reservation System – the central booking system that manages a hotel’s room inventory, rates, and reservations across all sales channels.
• PMS: Property Management System – the software used to manage reservations, guest accounts, and hotel operations.
• OTA: Online Travel Agency – websites such as Booking.com or Expedia that sell hotel rooms on behalf of hotels.
• GDS: Global Distribution System – a worldwide booking network used by travel agents and corporate travel departments to reserve hotel rooms, flights, and other travel services.
• CRM: Customer Relationship Management – systems and processes used to manage guest relationships and marketing.
• F&B: Food & Beverage Department – all restaurant, bar, banquet, room service, and catering operations within a hotel.
• Half-Board: A hotel meal plan that includes breakfast and one additional meal each day, usually dinner. Drinks other than those specifically included are generally charged separately.
• MICE: Meetings, Incentives, Conferences and Events – the hotel business related to corporate meetings, conferences, exhibitions, and incentive travel.
• ERP: Enterprise Resource Planning – an integrated software system that connects key business functions such as finance, procurement, inventory, human resources, sales, and reporting into a single platform.
• USALI: Uniform System of Accounts for the Lodging Industry – the internationally recognised accounting standard used by hotels to measure and compare financial performance.
• GOP: Gross Operating Profit – the operating profit generated by the hotel before management fees, rent, financing costs, depreciation, taxes, and other non-operating expenses.
• EBITDA: Earnings Before Interest, Taxes, Depreciation and Amortisation – a widely used measure of an organisation’s operating profitability.
• COS: Cost of Sales – the direct cost of producing the goods sold, such as food, beverages, or merchandise, expressed as an amount or percentage of revenue.
• FTE: Full-Time Equivalent – a standard measure of staffing that converts part-time and seasonal employees into the equivalent number of full-time employees.

About the Author

Raoul Gransier is a Senior International Adviser and owner-focused hotelier with more than 30 years of operational and advisory experience in hospitality, tourism, governance, and performance improvement.

Website

https://gransier.com