Back in March 2005 I published an article, “The End of the Merchant Model as We Know It,” co-written by Jason Price. In this article, we argued that the Internet was all about transparency, efficient distribution of information and inexpensive e-commerce transactions, and was by far the most efficient marketing and distribution medium ever invented. In this sense, the abnormally high merchant commissions (20%-30%) levied by OTAs constituted a temporary anomaly, not the rule.
In 2010 I published a blog post in which I argued that the OTA merchant model would inevitably disappear and evolve over the next few years as market conditions and industry indicators improved, and as major hotel brands and other smart hoteliers increased pressure on the OTAs to lower merchant commissions and tie higher commissions to higher OTA “booking productivity” and a bigger share of the OTA bookings.
In other words, I argued that the OTA merchant model would be transformed:
- From a net merchant rate model (net rate at 20%-30% below best available rate) and no commitment to room allotments and booking volume
- Into an agency commission and commission override model, where higher booking volume production would earn the OTAs better commissions or “overrides” above the existing traditional travel agency commission levels
The good news is that these commission override levels will be at a fraction of today’s abnormally high OTA merchant commissions of 20%-30%.
Here comes the Expedia agency commission model
In 2012, a mere two years after my latest industry predictions, Expedia has introduced the “Expedia Traveler Preference (ETP) Program” to the U.S. market, which works in the following manner:
- With the current merchant model, Expedia makes you pay in full for rooms when you book. Expedia then “pays” the hotel with a virtual credit card.
- With ETP, consumers can book on Expedia and pay when they arrive at the hotel. The hotel then pays Expedia their contracted commission on a Net 15-day basis.
Sounds good, right? The catch is that Expedia wants to maintain the same commission for the merchant model and the ETP program.
The ETP is the U.S. reincarnation of a similar program Expedia has been running in Europe for at least three years: the Expedia Easy Manage Program, which already has more than 15,000 participating European hotels. Expedia was forced to introduce this program in Europe to better compete with the Booking.com agency model.
In the United States, Hilton is rumored to be the first — and only, so far — major hotel brand to sign up for ETP. On the other hand, Priceline and Booking.com are rumored to be planning a major push of Booking.com’s agency model in the United States, so it could become very interesting.
What is the catch with the ETP Program?
The industry has detested the OTA merchant model since its very beginning back in 1995. So why isn’t the ETP Program a positive development for the industry and not a step toward a more palatable agency model becoming the dominant format of the OTA-hotelier relationship?
To begin with, the ETP Program is unlocking a tremendous value for Expedia:
- Improves drastically Expedia’s marketing message (you don’t have to pre-pay)
- Attempts to shift market share from Orbitz and Travelocity
- Levels the playing field with Booking.com’s agency model
So there is definite upside for Expedia. What about for the hotels participating in the ETP Program?
With ETP, the hotel has to invest considerable resources and incur real costs to manage the program. Any hotel participating in the ETP Program:
- Has to track and report on ETP bookings separately from the merchant bookings
- Has to create duplicate rate codes in the PMS (one set for merchant, one set for ETP bookings)
- Has to perform account reconciliation: accounting will need to spot check each reservation for accuracy
- Has to do manual commission check issuance on a Net 15 basis.
- Will experience customer service issues arising from guests claiming that they have pre-paid to Expedia versus having to pay at the property, etc.
- Has to correct errors because of the complicated duplicate codes, reconciliations, etc.
- Will incur higher credit card discount fees (real customer credit cards versus Expedia’s virtual credit card — the difference could be from 1%-2%)
Some hoteliers argue that the ETP Program takes away a significant competitive advantage from the hotel direct channel that comes from the merchant model requirement to pay in advance on Expedia. In other words, Expedia levels the playing field with its ETP Program at the expense of hoteliers and without any upside for the property, while maintaining the same merchant commission.
The only upside I have heard so far from some hoteliers was that by customers paying directly at the property, the hotel now gains access to this customer’s data and can solicit the customer for future direct bookings and engagements. I see definite value in this argument, but is it worth paying a merchant-level commission to gain access to the customer data? What is stopping the hotel today from gaining access to the customer data once the OTA customer arrives at the front desk and all of their information gets entered into the PMS?
What is the future of the ETP Program?
It is my belief that in its current form, the ETP Program will be rejected by the industry. The main reason is Expedia’s insistence on applying the contracted merchant commission to this new ETP Program. As discussed above, hoteliers must make real investments in resources and incur concrete costs to adopt and manage the ETP Program. Who pays for that? How would these additional costs be compensated if the Expedia merchant commission is applied to the new ETP Program?
In my view, the only way the ETP Program can work and be accepted by the industry is if there is a 3%-5% differential between the merchant commission and the ETP commission.
- If the current merchant commission is 23%
- The ETP commission should be 18%, since all the upside is for Expedia, and all the downside from the ETP Program falls on the hotel.
The additional resources and efforts needed to run the ETP Program more than justify the 5% difference in OTA commissions.
At the maximum, the ETP commission should not be higher than what the hotel is already paying to Booking.com, which successfully runs a similar agency commission program.