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Navigating the shifting post-pandemic Online Travel Agency (OTA) landscape, with Max Starkov

Max Starkov, NYU Professor and Hospitality & Online Travel Tech Consultant, chats with The Innovative Hotelier Podcast Host Robin Trimingham about recent trends in OTA travel bookings in the hospitality sector and the importance of demystifying the confusion regarding the perceived high cost of direct bookings.

In this insightful discussion, Max touches on the fact that while hoteliers cut spending on technology and marketing by an average of 50% during the pandemic, OTAs actually increased spending on marketing and technology during the same time period. Now, OTAs have comprehensive loyalty programs – making it even more important for independent and boutique properties establish a well-balanced distribution strategy that leverages OTAs and direct booking channels to their best advantage. While the cost of customer acquisition for direct bookings is traditionally considered to be high, Starkov explains why they are a good value and essential to a successful broad based distribution strategy.

Click the play button above to listen to our conversation with Max Starkov.

Highlights from Today’s Episode

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Episode Transcript

Max: It’s very expensive to acquire new customers and independent hotels, 8% to 10% of their guests on any given night, are repeat guests, that’s it. So my whole point is that by owning the direct channel, you can increase your repeat business, and, mind you, I mean, a testament for that is the major hotel chains, Marriot and Hilton, they enjoy 62% repeat customers on any given night. And the main reason is first-party data, CRM technology, loyalty programs, or guest appreciation programs.

Robin: Welcome to the “Innovative Hotelier Podcast” by HOTELS magazine with weekly thought-provoking discussions with the world’s leading hotel and hospitality innovators.

Welcome to the “Innovative Hotelier” podcast brought to you by HOTELS magazine. I’m your host Robin Trimingham, and my guest today is Max Starkov, NYU professor and hospitality and online travel tech consultant. And today, we’re chatting about navigating the shifting post-pandemic online travel agency landscape.

This podcast is presented to you by Franke Coffee Systems. At Franke, we think coffee is about more than beans and machines. It’s all about the moment when you create an amazing coffee experience for your customers. Welcome, Max.

Max: Hey, how are you guys?

Robin: I’m great. Thank you so much for taking time to chat with me today. So, it’s all about OTAs today. And we’re midway through Q2 when we’re making this recording. So when you think about the hospitality sector as a whole, how would you say that 2022 is shaping up?

Max: It depends on the region where you are around this globe, but in the United States, for example, revenue per available room, the RevPAR is the levels of 2019 to the levels of pre-pandemic, which is great news on one side on the other, due to the inflation, simply we are not far ahead in order to compensate for the negative impact of rising labor costs, utility costs, and so forth. Food costs, so in this sense, profitability cannot compensate for the rising inflation. So that’s where we are. But generally speaking, United States is a much better shape than the rest of the world due to the gigantic I would say domestic market here in the United States.

Europe is faring pretty well compared, especially to Asia-Pacific. Europe has huge intra-European travel border crossings among the various especially members of European Union, especially Western Europe, and so forth. Though international inbound arrivals expected are to be 24% below 2019, while in Asia-Pacific international arrivals are expected to be minus 65%. I would say regions and countries that can rely on domestic travel on short-haul travel, even air or by car short-haul travel and establish international markets like Europe is for the United States or Americans for Europe, I would say those are the markets that will fairly prosper in 2022.

Robin: Yeah, I agree with you. I think long-haul travel has been slower to recover as has business travel in a lot of different markets around the globe. As hoteliers scramble to try and make up for all of this, do you feel that there’s a trend in the hospitality sector towards becoming overdependent on OTA bookings?

Max: Well, let’s put it this way in hospitality there have always been intermediaries. Even in 1995, which is pre-internet, if you will, pre-OTA, mind you, Travelocity was the first established back in 1995, shortly after Preview Travel, which later merged with Travelocity. So, until 1995, 25% of hotel bookings came from intermediaries. Travel agencies, two operators, wholesalers, and so forth. So in this sense, they have always been intermediaries in hospitality distribution. The question is, to what percentage?

And then this is the key to understanding because many hoteliers kind of say, “Yeah, but they have always been intermediaries, so what’s different now?” The difference is the ratio of direct versus intermediary bookings. That’s the key to understanding the dependency on the OTAs. For example, when I mentioned that 25% of hotel bookings came from intermediaries back in 1995, it means direct versus indirect, if you will, distribution 3 to 1, that’s the ratio. Fast forward to today, many dependent hotels have a negative ratio of 1 to 4 or 1 to 3.

That’s the range, meaning that for every 20% direct bookings, they get 80% OTA bookings. Or for every 25% direct bookings, they get 75% OTA bookings. So this is the main issue nowadays is that we are witnessing exactly the reverse ratio compared to the pre-internet years. And we talk about these independent hotels, compare this to the major hotel chains like Marriot, Hilton, and Choice, and Intercontinental Hotel Group, and Wyndham, and so forth where on average, the ratio of direct versus indirect online bookings is in favor of the major hotel chains and the direct channel 3 to 1 to 2.5 to 1, depending on the chain.

So in this sense, the major hotel chains because of their, I would say rate parity discipline because of their investment in technology, in digital marketing, in know-how, and primarily the investment in their loyalty programs, basically, they control their distribution and they allocate to the OTAs only long haul markets. Generally speaking, only part of the leisure markets, which they’re not very good at, at least until the pandemic hit. And they delegate to them as I mentioned out of the 100% online bookings, they delegate to them 25% to 35%. So in this sense, the boutique and independent hotels, in general, are the ones that are suffering the most from OTA dependence.

Robin: Now that’s very interesting because I think I was reading when I was preparing for our chat today that the average cost of an OTA commission right now is somewhere between 18% and 25%. So that’s quite a lot. How do you recommend that hotel evaluate how to be dependent to become on these OTA bookings?

Max: Well, it’s interesting. I mean, in North America this year, that’s the focus they expect that 52% of online bookings will come through the OTAs and 48% will come direct through brand.com or the hotelier’s websites. So, 18% to 25% is only the beginning. And I’ll explain why as far as cost of OTA distribution. During the pandemic, while hoteliers were cutting their investments in technology and in marketing in general… By the way, during the pandemic hoteliers slashed their technology and marketing spend by 50%, 50%. while in the same time, the OTAs continue to invest in their technology and continue to invest in marketing.

I mean last year, last full year of pandemic, Expedia spent 46% of their revenue on marketing. Booking spent 35% of the revenue on marketing. While hoteliers spent half of what they usually spend on marketing, which is cap is 0.75%. less than 1% of their revenue they spend on market.

So compare this to the OTAs, I mean, just the two OTAs, the duopoly Booking and Expedia spent over $10 billion on marketing last year. And I mentioned also technology and why is it important. During the pandemic, the OTAs spent billions of dollars on expanding their loyalty programs. And from like mere reward programs, now the OTAs have full-fledged loyalty programs similar to the major hotel chains.

Expedia combined four different disparate, I would say, loyalty programs into one loyalty program. Expedia Rewards, for the time being, they will rename it next year. They have 165 million members, which is at the same level as Marriot’s loyalty program. The same is with Booking’s genius program because three levels and they have 150 million members. But why is it important? It’s important because now hoteliers, if they wanna market to the repeat OTA customers, the ones that travel the most and spend the most, which are members of the OTA Loyalty Programs, they have to pony up an additional commission.

Robin: Oh, okay.

Max: So in this sense, yes, the basic commission on Expedia is 25%, let’s say for independent hotels. You have to provide additional 5% up to 10% additional commission for Booking to market your hotel to its loyalty members. So now it’s not only 18%, it’s 28%.

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So given that it’s now so expensive, if you’re an independent or a boutique hotel to get OTA bookings, do you feel that the smaller properties are neglecting a key opportunity to capitalize on direct bookings? Because I know traditionally direct bookings were considered to be expensive because of the investment required in technology and websites as you’ve previously mentioned.

Max: Robin, first of all, I disagree with the notion that direct bookings are more expensive than OTA bookings. I believe that this is more like the lazy hotelier marketers’ excuse not to invest in digital marketing and their website. So, in this sense, at my company, NextGuest, which is now merged with Sendai, we have tracked the cost of direct bookings for over 20 years now, among more than 5,000 hotel clients of ours. And the average cost is between 4.2% to 4.5% of the phase value of the reservation. And compare this to, as we mentioned, 18% to 25% to 30% OTA commissions. So it’s 5, 6, 7 times cheaper than distributions for the OTAs.

But there’s a caveat here. And the caveat is, first of all, you have to invest consistently. Second, you have to invest in a comprehensive digital marketing strategy, which includes your website, which includes SEO on the website, ongoing SEO, includes content marketing. It includes social media marketing. It includes, of course, paid social engine marketing, focusing on your brand keyword terms on your geotargeting in the main feeder markets of your hotel. Of course, online media and display targeting retargeting, metasearch, and so forth.

So, in this sense, it’s a very comprehensive strategy that generates the revenues and that generates, first of all, significant revenues and that generates the lower cost of distribution. If you invest in a single one-off campaign, of course, the results will be unsatisfactory, if you will, but consistent and comprehensive, that’s the key word here.

Robin: That’s actually very insightful what you have to say about that. We have a couple of minutes left here. Talk to me about why it’s so important to consider who ultimately owns the customer when you’re doing a cost-benefit analysis of these direct booking channels.

Max: Well, I mean, first of all, what does owning the customer means? It means owning first-party data with all of the new privacy restrictions introduced by Google, Google Apps, Apple apps, Apple email, and then the Google browser, the Chrome, eliminating support of third-party cookies. It means that any marketing campaign, digital market campaign, if you don’t own first-party data, you will be operating in the blind. You will not know where your bookings came from, what was the return on investment, and so forth.

So that’s why owning your customer means owning your customer’s first-party data and zero-party data, which is the data that the customers have voluntarily given you. And once you have this data, then you can structure a very robust direct marketing to those customers. You can personalize your offering and you can generate above and beyond revenues from your existing customer base. And most importantly, when you own your customers, you can increase your repeat business.

And here is the main issue in our industry. Repeat the direct online channel is the gateway to repeat business. No doubt about this. There are many studies that we have done many studies in industry clearly show that the more direct customers you have, the more repeat business you have. And why repeat business is important, it’s five to 15 times cheaper than acquiring new business. Especially now with the consolidation in media, I mean in online media, who is left? You have Tripadvisor and you have Google, that’s it? There’s nobody else that really matters. “New York Times,” “Boston Globe” travel sections long gone.

So, my whole point is that it’s very expensive to acquire new customers. And let’s face it, in independent hotels today get 8% to 10% of their guests on any given night, a repeat guest, that’s it. Eight percent to 10%. Think about this, if you are the general manager of an independent hotel, you wake up in the morning and you say, “Oh, 10% of my guests tonight, I know who they are, I know their preferences, I know what they like, I know what they don’t like. And 90% I have no idea who they are.”

So my whole point is that by owning the direct channel, you can increase your repeat business and, mind you, I mean, a testament for that is the major hotel chains, Marriot and Hilton, they enjoy 62% repeat customers on any given night. We’re talking about network-wide not for some particular property, but for Marriot and for Hilton. Sixty-two percent compare this to 8% to 10% for independent hotels. I mean, this is where the power of the major hotel chains is. And the main thing is, and the main reason is first-party data, CRM technology, loyalty programs, or guest appreciation programs.

Robin: I have to say, I completely agree with you because when you have the first-party data, you can provide your guests with experiences that surprise and delight them and generate the ratings and reviews that drive the further bookings. Because as you say, what these people are looking for and, you know, how to help them have an experience that they wanna talk about.

Max, I have to thank you so much for taking time to chat with me today. You’ve given everybody a huge amount of information to digest. You’ve been listening to the “Innovative Hotelier” podcast brought to you by HOTELS magazine. Join us again soon for more up-to-the-minute insights and information specifically for the hotel and hospitality industry.

Max: Thank you. My pleasure.

Robin: You’ve been listening to the “Innovative Hotelier” podcast by HOTELS magazine. Join us again soon for more conversations with hospitality industry thought leaders.


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