Why OTAs are your best friend

The OTA / Operator relationship seems to be the hot topic at many conferences and webinars, as well as taking up a fair share of space on blogs. Most people accept that the hotel industry is a few years ahead of Tours & Activities. Many point to the current situation over there, where the market is dominated by two huge OTAs (Booking and Expedia), who have massive leverage, leading to unsustainably high commission rates.

It’s been like this for a long time.

There’s a lot of talk about this being a recent development in the industry. A new problem we are dealing with. The only thing that has really changed though, is that with online and especially mobile, old concepts of pre-arrival and in-destination are no longer the borders of territories. Previously, most resellers ONLY had access to pre-arrivals. In-destination sales belonged to concierges and operators-direct. The mobile phone cut right through that, and made all customers fair game, right up until they jump on that boat, bus, bike etc.

In terms of share of distribution, in 20 years, only the names of the players have changed. It’s gone from TUI and Thomas Cook, to Travelocity and Orbitz, and now Tripadvisor, Expedia, GetYourGuide and Klook.

It's not going to stop.

There’s nothing natural, or even optimal about cutting out the middle-man. The future is platforms, not direct B2C. That’s not my opinion, it just follows the laws of economics. The future (at least for a while) is Amazon, Uber, Airbnb and other similar businesses which take a commission to facilitate transactions between businesses and consumers.

The channel you call direct, your website, is not direct. The traffic comes from Google. It'll come as a surprise to some, but Google is a platform. Through their endless generosity, we've had a great free channel to find customers for the last 20 years. Google Ads should be costing you 15-25% (if its not, you're probably leaving money on the table). Reserve by Google is sort of free for now, but one click away from being part of Google Ads. If you want an example of something that’s on a one-way path to 25%, look no further. Facebook, same story.

You don’t want it to stop.

Some people say they don’t need the extra business. They would ‘rather not deal with it’, whatever that means. We probably won’t hear that again for a while. But even when things get back to normal, the only people who don’t need the extra business are those who are serious when they say they want to stay small (nothing wrong with that), or those who can’t increase capacity AND can’t change their price. Unfortunately you can’t argue with the basics of supply and demand. Increased distribution (demand) allows you to sell more tickets, increase price, or both. Both of which lead to higher profits. Maybe you’re special. Maybe supply and demand doesn’t apply to you. I’d love to hear how.

In general, there are 2 types of operators. I think maybe its 50/50. 

“OTAs give me 75% of my full retail rate”

“OTAs take 25% of my money”

I’ll never forget a comment that I heard once from somebody at a large global bus company. We were at the Expedia Partner Conference and he likened the situation to having Stockholm Syndrome (where, after a while, you develop feelings for your hostage taker). For many operators, I can’t think of a more accurate description for the relationship. It feels like many want to leave, but few ever do.

So what’s the problem? The arguments I hear most are:

Commission. “I can’t afford to pay the 25% commission” (Yes, its sometimes 30%)

• Despite what some say, it’s not continually going up. When I started 20 years ago, we paid 25% to standard resellers, and 30% to receptive operators. Where I live, concierges get 20-40%.
• It’s not a crazy number across industries. In retail, the mark-up is 50%. Amazon charges by product type - from 6% to 45%
• If you can’t afford to pay 25% marketing costs then you have your pricing wrong. Forget any other pricing model you’ve read about. You NEED to be able to pay out 25%. If you think it prices you above your competition, then discount it where you compete directly. If they are listed on the same OTA, they have the same commission you do. Maybe your costs are too high, or maybe you need to differentiate your product more.
• Many people don’t stop to calculate their true marketing costs, except when it comes to OTAs. If you added up all of your print and design costs, offline advertising, Google Ads, Facebook Ads, marketing agencies, website management, credit card fees, all of your marketing staff, all of the time you and non-marketing staff devote to marketing… does it really add up to less than 25% ?
• You should factor in the direct business you get after somebody discovered your product on an OTA. If they don’t display your company name, get creative with photos. Even if you don’t get your brand awareness, there’s concept awareness. If every OTA is full of ‘Beer tours of Prague’ then pretty quickly everyone thinks that’s what you should do in Prague. For every person who bought your product on an OTA, assume another 20 viewed it and didn't buy it. That's a lot of advertising.

Bidding on Keywords. “The OTAs bid against me on my keywords”

This one is tough. Unfortunately, OTAs can naturally afford to pay more than a single operator for the same keywords on SEM (Search Engine Marketing).

- They have more products to attract a conversion, so they can bid more on broad terms.

- Usually, as a larger brand, they have the advantage of trust. Trust = higher conversion.

- Because of volume, they can do far more website testing. Testing = higher conversion.

Those are just plain economic benefits of scale and efficiency. They are difficult to counter. Unfortunately, there are 2 bigger factors though:

- First, they count Customer Lifetime Value (CLV). For a single operator, in a single destination, in the travel industry, that's just not worth much. OTAs can pay twice as much if that customer is expected to come back in the future for just one more purchase (in a different destination).

- Second, which is just really bad news, is that many of the funded startups don't need to make a profit at all. Their goal is market share and top line revenue, not profit. If it costs them $50 to make $40 in commission, that's not broken. Just like Uber losing billions of $ each year. It's not broken, it's just a different (potentially very successful growth plan). They didn’t get a $500m investment to grow the company profits from $10m to $20m / year. If that was the plan, they don't need the $500m.

The goal is to increase sales from $500m to $2b. To do that, they plan to lose $100m / year. Unfortunately, that $100m is being used to bid against you on Google. What can you do about it? Deal with it. If you boycott, they don't all of a sudden wake up and stop their master plan. They'll just bid against you anyway and sell your competitors product. How would that feel? Better, or worse?

The argument about bidding on specific keywords is outdated. That’s not how Google works anymore for most advanced users. I'm happy to explain that further if anyone wants to know.

Owning the Customer. "I don't own the customer"

I don't understand this argument at all. I don't care how the customer gets to you. Once they are experiencing your product, they are your customer. You can ask them for an email any time you like. That thing of value you were offering on your website to persuade them to opt-in to your email list? Offer it to them now. If you don't have anything of value to give, then you shouldn't be emailing them anyway, no matter how they got to you.

Communications 1. "I can't communicate with OTA customers"

This is a problem. I understand it from an OTA perspective. They can't just hand off email addresses to 100,000 operators and let them run wild. They have to protect the brand, and part of that brand is their communications process. This needs to be (hopefully) consistent, of a certain quality, and of course include their brand message. I don't see a short term way around this. The proper solution is a messaging API (if I wasn't so focused on content right now at Magpie, I'd jump head first into that). The Chinese super-apps are probably doing it correctly, where operators communicate with customers, but it remains on-platform, and therefore remains controllable by the OTA.

Communications 2. "They make changes to my contract whenever they feel like it"

They do. And they need to stop. Recent communications have been abysmal. "We are changing your commission to a new rate, according to market conditions, at some point, maybe soon". "Your rate will go up immediately from 25% to 30% and we're changing the cancellation policy as we see fit" This needs to change. I'd say the communication more than anything is the cause for so much distaste. Get that part right, and many of the other factors will go away.

Payments. "They only pay me after the travel date"

It’s true, almost all of them pay after the travel date. There are reasons for that (aside from the fact that they like the cash-flow), and especially after recent events it’s not ever going to change considerably. Until the customer has traveled, the risk is 100% on with whoever charged the customer credit card. Think about your last 60 days, if you'd been prepaid. Would you have refunded the OTAs first? Or last?

Most larger OTAs these days pay extremely consistently, on time, based on booked (not redeemed), and don’t require invoices. There’s a LOT to be said for that. 

Maybe they should pay more promptly. Tripadvisor already said they will - probably just to annoy GetYourGuide, who pay every 2 weeks for a fee (its free, temporarily). Others will probably follow. 

Competition. "They operate in my market directly against me"

Let’s blame this one on Travelocity many years ago, and then Viator with 'VIP' products. Now joined by GetYourGuide Originals, others are about to follow. So now ‘your best friend’ who you’ve trusted for many years has gone and set up to compete directly against you. Tricky one. (kind of makes a mockery of my title about OTAs being your best friend. Truth be told, I never really meant it - it was more a bit of click-bait) You’re fine if you’re the chosen one. If your listing just got buried because they made a deal with your competitor, it’s not so great. 

It’s the best reason to work with as many OTAs as you can. I’ve twice lost my biggest OTA partner because they signed a global branding deal with my competitor. It’s the same result. 

The answer here is actually nothing to do with OTAs. The answer is to diversify. Many people have 20% rules. My only 20% rule is that I can’t have more than 20% of my revenue from one single source. It’s too easy to lose that single source. That single source could be an OTA, or it could be a cruise company, Mary the concierge, Bobby at the visitor center, Google, Facebook.......

Any of those can change an algorithm, switch to sell your competitor, de-list you, go out of business, or any number of things that critically are not under your control.

So next time somebody tells you just to focus on 'direct' business, you can just tell them they are wrong. Yes, you should work on your on direct business. Your website is your most important marketing tool - and will probably remain so for a long time. You need to get that part right, It’s worth spending a lot of time on, and getting help where you need it. Do your social, create content, work on email marketing.... those are all valuable.

But that should NEVER be at the expense of widening your distribution. If you want to reach more customers, you need OTA help. I doubt you can reach Indonesians as well as Traveloka, market to the locals as well as (new) Groupon, or sell to Expedia customers as well as…. Expedia. 

It seems counter-intuitive, but the hotel industry is not a good analogy for this sector. It’s often the same companies we’re talking about, but the products and economics are not similar. I don’t care how fancy your hotel room is, it’s still a commodity. It’s just a fancy commodity. The best tours and activities are far from a commodity. That’s the difference. There’s no evidence that the market is consolidating to two OTAs. We will not follow the same path. Generally, as long as there are more than 2 competitors in a market, you get a more or less free-market, where nobody can control prices. That’s all we need. (OPEC and cartels are exceptions - that’s a different discussion).

So embrace it. Be happy with your 75%. You need those 75%s more than ever now - from any direction you can get them.

Now that I’ve vented for so long, I have no space for action items. Looks like I’ll have to do another post for that - as well as a post about pricing: Average revenue, marginal cost, equilibrium profit ….. doesn’t get much more exciting than that!