How much will hotel companies pay OTAs (online travel agencies) and similar third-party distributors this year? That was the thought-provoking question on Thursday. by Max Starkov in a LinkedIn article.
“In 2023, hoteliers will pay the main OTAs and bed banks $50 billion in commissions and surcharges” Starkov wrote. “A staggering sum! »
The message went viral among retail enthusiasts. Costing third-party distribution highlights its importance.
We’ll highlight some points that many hoteliers misunderstand about distribution in a moment.
But first, is this $50 billion figure plausible?
Estimation of hotel distribution costs
Starkov — a consultant in New York who previously ran a digital agency since its merger with Cendyne – based its estimate on a “merger of publicly available data for publicly traded companies and investor presentations for private companies.”
Skift Research think Starkov’s estimate looks pretty good.
Our own estimate is that hotels – whether branded or not affiliated with major hotel brands – will spend about $47 billion this year on online travel agency commissions.
Hotel companies will spend another $11 billion on bed banks – mostly wholesalers, like Hotel beds And Webbeds (who generally distribute rooms through tour operators and package organizers).
We go further than Starkov by also estimating the total indirect distribution costs of hoteliers. We estimate it at $75 billion – a figure that represents the costs of working with corporate travel agents and traditional travel agencies.
To be clear, we are making an estimate based on educated guesses, as we lack authoritative data.
To build trust, we will show our work. A side benefit: our explanation will shed light on the contours of hotel distribution, including some nuances that are often overlooked.
Indirect distribution costs for hotels worldwide, estimated for 2019
| Hotel booking channels, 2019 | % Channel Mixing | Average channel cost, % of bookings | Channel bookings, billions of dollars | Canal cost, billions of dollars |
|---|---|---|---|---|
| Direct non-digital | 17% | 9% | $140 | $12 |
| Direct digital | 26% | 8% | $218 | $18 |
| Total Direct | 43% | 8% | $359 | $30 |
| Online travel agents | 32% | 17% | $270 | $47 |
| Offline travel agents (including businesses) | 12% | 13% | $103 | $13 |
| Wholesale | 11% | 16% | $93 | $15 |
| Indirect total | 55% | 16% | $466 | $75 |
Source: Skift Research estimates.
Key assumptions
First, we assume that 2023 will be quite similar to 2019 in terms of revenue for third-party distributors. We have good estimates for 2019, so we will use them and, after all, the hotel sector has largely returned to pre-pandemic revenue levels, and even occupancy.
Our general assumption regarding this year’s performance is not accurate. Some regional markets are underperforming, while others are overindexed. And then, the year is not over yet.
We also assume that what third parties “take” from hoteliers in exchange for their distribution services is about the same as in 2019. We will get more information on this next year after the financial reports are released annuals.
The above calculations also assume that 70% of the world’s hotels are not affiliated with large hotel groups. Thus, we assume that they pay distributors slightly more because they do not benefit from favorable volume discounts.
Hotelier surveys
For its estimate, Skift Research relies on two of its recent market reports: the Global Accommodation Industry Market Estimates 2022by Varsha Arora, and the Direct Hotel Booking Outlook in 2021 by Seth Borko.
In the 2021 Direct Bookings Report, we surveyed hoteliers for their typical distribution channel mix and their typical average cost per channel, expressed as a percentage of bookings.
On the one hand, the size of the survey was not large enough to scientifically represent all hoteliers around the world. On the other hand, Skift Research subscribers gave us feedback saying our numbers were consistent with what they observed.
Channel costs are of course different for chains and independents. Giant hotel groups can bargain for volume discounts with online travel agencies and other distributors. We simplified this problem by averaging the typical costs faced by chains and the typical costs faced by non-branded hotels, as our survey revealed.
To estimate global hotel revenue, Arora gathered data from the financial statements of major hotel and retail companies, private company presentations, government reports, and other credible third-party sources, such as CoStar STR.
That’s how we arrived at our estimates that hoteliers will spend about $47 billion on online travel agencies and about $75 billion on indirect distribution this year.
What hoteliers underestimate in distribution
Back to Starkov. We asked him what he thought of the response to his LinkedIn publication.
“My LinkedIn post generated a ton of comments from hoteliers that I can categorize into distinct groups,” Starkov said.
“First there are those, primarily independent hoteliers, who have been brainwashed by OTA propaganda and given up on their own direct channeling efforts,” Starkov said. “They think, ‘OTAs spend billions of dollars on marketing and technology, they know the online traveler, and we just can’t match that.'”
“The second group is hotel companies that realize that only balanced distribution is in their best interest,” Starkov said.
But this group disagrees on what “balanced online distribution” means. Marriott and Hilton are seeking an overwhelming majority of room nights booked online through direct channels. However, the average independent or small regional hotel group is much less ambitious.
Starkov believes that independent hotel companies need to be more ambitious when it comes to direct bookings.
Direct is not free
To be clear, hoteliers also face costs associated with direct bookings. Digital marketing, such as through paid Google ads or courting social media influencers, costs money. Metasearch auctions should be bid on, even for leads that don’t convert into bookings. If you are affiliated with a brand, some of these responsibilities may be offloaded, but operators must still contribute to the company’s marketing budget.
Even “free” channels like organic searches and loyalty stays aren’t really free. Earning those organic clicks requires investing in writers and coders who drive search engine optimization, while hoteliers still need to pay into loyalty programs if they want to benefit from customers addicted to rewards redemption.
Skift Research estimates that hotel companies could spend nearly $30 billion this year on activities related to direct booking generation. This figure would increase if hoteliers reoriented their mix towards direct.
However, direct has its virtues since these estimates show that the average cost of a direct reservation is half that of an indirect reservation. Based on the above assumptions, a 10 percentage point shift from intermediaries to direct bookings would save $6.5 billion in global hotel distribution costs.
Back to the future
A little context: hoteliers have been here before. They used to enjoy very high direct distribution.
“In 1995, 75% of overnight stays came from the direct channel, which makes hoteliers one of the best direct sellers in the economy! » said Starkov.
But online distribution has emerged, and the technologically advanced and better capitalized online travel agencies have taken their share.
Today, the typical independent hotel gets the majority of its bookings through third-party distribution. This channel is more expensive. It also makes it more difficult to build relationships with customers to personalize service and offer upsells.
“Clearly, independents don’t have the branding, technology, marketing and talent strength of large hotel chains,” Starkov said. “But they can significantly reduce their over-reliance on OTAs (online travel agencies) by investing adequately in CRM (customer relationship management software), technology and marketing.”
