Just weeks after I wondered whether the OTAs lost some ground to hotel groups in the industry’s balance of power, Expedia Inc. disclosed a restructuring of its business model, in which hotels now can bid their way up the sort order of listings. Their executives framed it as a “marketplace” where a little incremental spending can give hotels a “boost” to secure a booking.
While this clearly is a sound monetization strategy for Expedia, it’s not good news for hotels. “Boost” or not, the bids hoteliers need in order to remain competitive on Expedia mean a net increase to hotels’ marketing and customer acquisition costs on the channel. While I’m sure it’s tempting to opt out of this new pay-to-play layer of the OTA relationship and pull inventory from Expedia, I’d caution that hotels can’t just take their ball and go home.
But it is an opportunity for hotels to refocus on their value proposition to the customer and to re-examine their business mix.
Before Expedia’s change, hotels had a fairly predictable lever for satisfying the OTAs’ algorithm and moving up in the sort order on a search results page. Competitive prices were key. Of course, other factors played and still play in to any OTA’s formula—including commissions, room allotments, photography provided for listings, or preferential relationships—but hotels usually could steer their rankings upward with the right discount on a room rate.
That pressure to cut room rates isn’t going away, and now hoteliers will face higher booking costs if they need to bid up their placements on Expedia. The immediate losers in all of this would be the hotels, especially the ones competing in value-conscious segments. If they’re less able to invest in service and improving their real estate assets, they become commoditized and have an even harder time standing out to consumers. Inevitably, guests also lose when service levels drop off.
This move should be a rallying cry for the hotel industry to double down on owning its value proposition. There already was a sense of urgency around adopting new loyalty programs and investing in technology platforms that can integrate them to the hotel’s management systems. Those have escalated from being a high priority to being an absolute necessity in light of Expedia’s move.
The most important imperative to optimize your hotel’s revenue while keeping marketing and customer acquisition costs low is to not need the OTAs as much. Those channels will always remain a part of a holistic revenue strategy, but don’t be in a position where you’re one of the companies desperately bidding up your placement in Expedia’s marketplace. Then it becomes an arms race, and we all lose.
What does a diversified strategy look like? First, hotels will have to accept the fact they might lose a small percentage of profit margins they got from Expedia bookings. If that channel is a significant mix of their occupancy, now is the time to get serious about finding lower-cost or more efficient channels to backfill some of that occupancy in advantageous ways.
Hotels will still want their inventory listed on Expedia to benefit from the billboard effect, but they also should work with smaller OTAs that can help them market to certain niche audiences — and if they do so without the marketplace model, so much the better. Your brand.com site for direct booking needs to be very well optimized and fully integrated with your pricing and loyalty strategies. Corporate negotiated rates must be strong and yieldable.
Again, hotels are best served by not needing OTAs as much, especially if advertising costs are likely to rise with this competitive-bidding model. The best way to accomplish that is for the hotel customers themselves to prefer booking through a direct channel. They’re most likely going to do that with a hotel that focuses on them and finds ways to add value to their booking experience and their stay.
About the Author
Patrick Bosworth is CEO and a co-founder of Duetto, a hotel revenue strategy technology company based in San Francisco.