OTA’s – income generators or a costly expense?
We work with accommodation providers across the North West and almost all are concerned about the level of commissions they are paying to OTA’s. We often get asked “Is it worth it?”. There are two parts to answering this question, firstly do you actually make any profit on rooms sold via an OTA? And secondly if you do, could you have sold those rooms direct and therefore kept more of the profit?
To answer the first part it is important for businesses to assess their room prices with the OTA commission in mind – that is, they need to be sure the profit in the room covers the commission, otherwise there is no point selling the room. It’s important to remember that there are mixed costs associated with rooms, some are variable, some are fixed and some are semi variable. Economies of scale exist when at higher rates of occupancy. If you can’t cover the commission fees from the profit generated on the room sale then you need to increase your prices.
If you are making a profit after the commission then it is worth while using OTA’s UNLESS you could have sold that room direct. And this is the key question – Could you have sold the room at a similar price if it hadn’t been sold via an OTA? Remember that if the commission on the room is 20% then you could effectively sell your rooms direct for 10% less and still generate more cash than using OTA’s. Knowing if you could have sold the room direct is a hard question to answer unless you are running at 100% occupancy and turning away direct bookings.
If this is the case then it would make sense to move away from OTA’s. If however you are not at full occupancy it’s important to encourage guests to book direct next time. This can be done via direct marketing campaigns (build up a database of past guests), literature or special offers at check out, and in room advertising of your website. Once the direct bookings increase you can start to reduce the reliance on OTA’s. Rate parity dictates that you have to offer the same price on OTA’s as on your own website. However, returning guests who subscribe to newsletters can be offered special offers/discounts to encourage them book direct and save.
OTA’s commission levels can be high, and over a year the charges can build up to be a significant expense in a company’s profit and loss account, but they do have their place. For smaller businesses, they allow you to compete on the same level playing field as the large accommodation providers and the public can find you without searching direct for you. They often show reviews which can place you higher up the list than some of your larger competitors. Sites such as Booking.com show how popular your accommodation is with updates like “5 other people looking at this hotel” or “2 bookings in the last 24 hours”. National chains spend hundreds of thousands on advertising as do the OTA’s. By using an OTA you are effectively spreading part of your advertising budget over each booking.
To improve the visitors experience on your own website, and therefore increase the chance that they will book direct, make sure you make it clear how easy it is to book. It’s important to have links to reviews so visitors to your site can see what past guests have thought of it. Above all make your website east to use.
In summary, for most accommodation providers, OTA’s will be a necessary evil, but the reliance on them can be reduced through effective marketing to guests as they stay.