Controlling OTA Commissions

17-Oct-2016
Business, Hotels, News, Trends

I met with the owner of an excellent hotel in London last week and we discussed the topic of controlling OTA commissions.

The owner noted that his hotel outperforms the market and is running at a very good EBITDAR. Clearly the hotel has no issues with optimisation. However, he was concerned with the increasing costs of OTA’s and felt that there may be scope to reduce these by increasing direct bookings and investing in the sales team.

It is an interesting topic. My first inkling was that there might not be an issue at all. I don’t think the hotel’s efficient RM team would squander any money unless it is necessary and the market is demanding it. However, I was surprised that the company was not able to measure and benchmark this.

A team that is able to maximise its revenues so exceptionally well, will naturally update and optimise its channel mix according to supply and demand. An increase in OTA costs may not necessary mean a decrease in NetRevPar.

For example, the good practice of open pricing keeps lower rated channels open even during high compressed periods. Instead of closing these channels out, the RM department will keep them open but raises rates above the optimum rate that the hotel is forecasting to achieve. This is good practice for two reasons: the hotel will never be closed for any customer willing to pay the higher rate and secondly, the hotel is able to take longer stays during high compression and is therefore able to fill the shoulder periods more efficiently. If OTA’s are used in this manner, their commissions are justified.

However, OTA’s remain a major issue which needs to be managed carefully and considered from a ‘net’ perspective.  We should not make a general assumption that our RM teams are super-efficient. If the real reason for an increase in OTA costs is due to under-investment in the sales team, there is indeed a problem and significant profit may be left on the table.

The issue may be the fact that the real costs of distribution are not measured correctly.  Costs may appear in various accounts and these accounts carry other costs as well and may preclude costs that should be included.

I always recommend that hotels use a uniform system of accounts where it accounts for distribution as a line under revenue in order to measure the true costs of distribution and net revenue. RM is not just about increasing revenue (RevPAR) but about minimizing the gap between price and the cost of acquiring revenue by distribution channel (NetRevPAR).

As a starting point I would recommend that a hotel establishes what each channel currently contributes net of distribution costs (i.e. channel revenue minus all costs to acquire each type of business). It can then calculate its NetRevPar per channel.

In calculating the net contribution per channel it is important that the depreciation and running costs of own website is offset against its web revenue. Direct business to the web is often considered to have ‘no distribution costs’. Not including web costs as part of the net distribution mix is wrong and will hide inefficient distribution through the web. If web merchandising is poor or the web booking process is cumbersome web booking conversion will be low and web acquisition costs will probably be significantly higher than OTA commissions!

Sales and marketing costs should also be allocated against the relevant channels.

Accurately calculating NetRevPar per channel opens the eyes and usually brings results that are surprising. It is also a perfect way of re-evaluating the business mix. To give an extreme example: The NetRevPar of direct web bookings in a hotel that has a poorly functioning website may be significantly lower than the transient OTA segment

Every hotel has to examine its own channel mix in the context of the market in which it operates, and compares it to the hotels with which it competes. Once the current mix is established it can then be used as a benchmark to test different tactical plans to steadily improve the overall contribution.

There are also limitations with respect to how much direct channels and the web can deliver. Brands with a broad reach and critical mass perform at higher levels in the direct channels. Lesser-known brands in the market with few properties in any one market and competing with well-known national brands, must set objectives for these channels with a realistic expectation of what they can deliver. Expectation of what the web can produce is usually too high in smaller hotel chains.

Being realistic about potential is an essential part of the process. However, being ambitious and choosing and testing to compete against higher end market leaders should be tried, to test and stretch potential, especially if the hotel has a unique brand and value.

Individual hotels should assess whether they are tapping fully in the opportunities that their local market presents.  It may need to refine its target market. Positioning may be too general and by trying to appeal to every visitor to the whole of the city or destination, it may appeal to few. This may be unnecessarily limiting the significant potential of the hotel and it therefore may compete unfavourably with either the lower, mid or higher end of the market they are positioning themselves against.

In controlling OTA commissions and trying to optimise the mix, reducing low contribution channels such as the OTA’s has to be the aim. However, OTA’s should not be neglected and are ideal channels to fill rooms during seasons and week parts with limited demand. Provided there is sufficient contribution to operating expenses and profit, and that a hotel is not diverting demand from higher value sources, these lower profit channels can still be a reasonable choice.

Additionally, in evaluating the use of OTA’s we should consider their billboard effect: i.e. hotels connected to the big OTA’s see direct bookings increase by an average of 20%. OTA’s are marketing power houses with a reach far larger than any branded reservation center. Higher rated OTA guests should be intercepted at hotel level and turned into loyal directly booking guests. The cost of acquisition of the first booking through the OTA is then significantly lower over the lifetime value of this guest.

In conclusion

Controlling OTA commissions requires an assessment of demand and performance by channel along with a corresponding evaluation of transaction and marketing costs applied to each type of business.  A shift away from revenue management towards profit contribution management is in order.

Calibration and refinement on the channel targets and sales & marketing spending mix may take some trial and error, but will lead to results yielding the optimal contribution to operating expenses and profit.

 

Would you like to know more?

Download our latest White Paper entitled “Why Return on Hotel Investment Can Significantly Underperform” or contact me, Lucienne Mosquera (Managing Director) for an informal conversation about your Investment.

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