A recent Deutsche Bank Research Report published July 13, 2016, highlighted hotel owners’ creeping concerns. Something just isn’t quite right when it comes to the proliferation of loyalty rates.
NB: This is a guest viewpoint from Peter O'Connor, professor of information systems at Essec Business School in Paris, and European online analyst for Phocuswright.
A close examination of hotel property financial statements reveals the truth: for many branded hotel properties, online travel agency (OTA) channels are now driving more value, and increasingly more room revenue, than brand.com!
How could this be? Let’s take a look at an interesting case study. (Editor's note: Tnooz has agreed to not name the brand for confidentiality, but we confirm that the data is for one of world's most recognized brands.)
I examined the Franchise Disclosure Document for a leading global lodging brand and discovered a dazzling array of fees that owners can expect to pay for their distribution. (See footnotes for sourcing at the bottom of this article.)
• Franchise Fee: 6%
• Reservation Fees: $4.24*
• Transaction Fee: $0.0895*
• Marketing Fee: 1%
• Loyalty Fee: 4.5%*
• Large Global OTA Commission: 13%*
• Commission Processing Fee: $0.16 + 2% of commissions paid*
• Paid Search Fee: 9%*
• Credit Card Fees: 2%
Other key data points:
• ADR: $153.43*
• Average Loyalty Discount: 4%*
Figure 1, above, demonstrates that an OTA with a primarily merchant based model can expect to drive $119.81 to the bottom line of an owner.
This represents a 1.2% increase or $1.37 more than a brand.com Loyalty Member on a standalone booking!
Note also that the loyalty discount offered by this brand is relatively conservative, with several of its competitors offering far more aggressive ‘savings’.
The economic delta might seem narrow. After all, what’s a $1.37 to build a relationship with a customer and truly own that customer?
But what this model doesn’t show is the dilution caused by offering a loyalty discount to customers who would probably have booked directly anyway.
In this large brand’s case, they estimate that in 2015 in North America, room nights from their channels (brand.com, GDS, voice, and OTA) were as follows (Room Nights figures are per a Franchise Disclosure Document March 2016):
In addition, in 2015 this brand’s rewards program contributed about 53% to occupancy in 2015 in North America and 62% of total revenue.
Even taking a hugely conservative estimate that 10% of the rewards bookings were diluted by the lower rate, this equates to a substantial amount of revenue lost by owners.
It further supports the comment in the Deutsche Bank report, “Hotel owners are grumbling that discounts for loyalty members are simply discounting bookings that would have previously paid full price.”**
It is also important to note that chasing a finite pool of potential brand loyalists requires large media and awareness campaigns that threaten to cause owner fees to rise further in the future.
And there is compelling evidence to show that OTAs are increasingly driving value greater than just a dollar and change over brand.com. Keep reading to find out why...
During Expedia Inc.’s most recent earnings-related quarterly call with investors, CEO Dara Khosrowshahi said:

“We attract brand-agnostic travelers, as far as what hotel or chain they’re staying at. If you look at Hotels.com on a global basis, the biggest chains in the world get less than 0.5% of searches.
Of all the consumers searching Hotels.com, fewer than 0.5% are searching for specific large brands.”
This quote validates that OTA shoppers are more likely to be looking for options when considering where to stay in a destination.
Examining comScore data is even more eye-opening. ComScore looked at over half-a-million unique visitors to property pages of a major leading hotel brand on a leading global OTA and they found that more than 1/6th of those visitors later visited brand.com sites before completing their hotel booking.
More than 60% of this segment of shoppers later booked a hotel in the same month!
Clearly this indicates that consumers are utilizing OTAs as a primary research tool to guide them on where they might next go in their online shopping journey.
OTAs are delivering major amounts of free, highly qualified, downstream traffic to brand.com sites, which the latter seem incapable of converting except by using short term focused, owner-funded, loyalty discounts!
Clearly, despite brands’ self-serving claims, OTAs play a valuable role in our $1.4 trillion industry. Consumers are planning and self-organizing their travel much more intensively than ever before and find OTAs an invaluable resource to help them navigate the bewildering array of choices available today.
Ironically, consumers are not the only beneficiaries of OTA platforms.
Thus maintaining visibility in OTA search rankings creates a ton of value that both brands and owners cannot ignore. Many OTAs allow hotels to compete with one another for visibility to consumers visiting their sites.
OTAs want consumers to find offers that best meet their needs as efficiently as possible, so hotels that treat their consumers well will find themselves beating their competition for higher placement on these pages.
A recent Expedia.com analysis shows that 75% of customers buy from the top 15 hotels in their search results; 33% buy from the top 5 search results; and only 10% buy from page 2 and beyond.
Not only does lower visibility and search positioning mean less free, qualified referral traffic, but just when the hotel owner might have a need to fill rooms, they might also find themselves losing out to competitor hotels competing for the customer’s wallet. Consistently working with OTAs to find a win-win relationship is thus more necessary than ever before.
Misinformation and media speculation mean that hotel brands’ current ‘loyalty’ program based initiatives are being seen as highly positive for the industry, finally giving cash strapped hotels an effective means of combating the supposedly expensive OTAs.
In reality, whilst good for brands, as they artificially boost both loyalty club membership and brand.com booking percentages, both vital metrics when it comes to convincing hesitant owners to sign up for franchises or management agreements, these initiatives are, in effect, being financed by hotel owners who are receiving a lower net revenue per booking than they would receive through the supposedly hyper-expensive OTAs.
Of course this analysis only examines the situation at the transaction level but the longer term implications for owners are even more worrying.
Many major consulting companies use a multiple of room revenues as a key component of their asset valuation model, and thus the $1.37 net revenue difference, multiplied by thousands of transactions, could potentially have a dramatic effect on the real estate value of the hotel property.
And of course the increased power of the hotel brand, strengthened by higher loyalty club membership and better controlled distribution statistics means that franchise contract negotiations will be that bit more difficult.
Overall, despite how they are being presented by hotel brands, current loyalty club based initiatives are bad for the industry, artificially driving down room rates and demonstrating that hotel owners need to develop a far more comprehensive understanding of how exactly their property is being, and should be, distributed.
Without a thorough understanding of the real costs and benefits of using each alternative channel of distribution, they will continue to be shortchanged by brands pushing their own self-interests and leaving owners to pick up the rapidly growing tab!
Summary:
- Increasing brand related costs and new brand mandates are a sign that global hospitality brands are increasingly tone-deaf to their owners’ needs and concerns.
- Historically touted as offering the lowest cost of distribution, recent brand initiatives mean that brand.com can no longer claim to be the superior channel for bookings.
- New dynamics including loyalty price discrimination, new brand fees, and OTAs providing greater value for their transaction-based commissions than ever before have created a tipping point in the industry: for the first time ever, leading global OTAs are driving better room revenue than hotel chain Book Direct strategies.
- OTA shoppers are not brand loyal but have appreciable potential to later become interested in a brand based on their OTA visit. In fact, there is significant evidence that OTAs drive a significant volume of free, qualified, referral traffic directly to brand.com.
NB: This is a guest viewpoint from
Peter O'Connor, professor of information systems and dean of academic programs,
Essec Business School, Paris, and European online analyst at
Phocuswright. He writes here in his own capacity.

FOOTNOTES*Reservation Fees: $2.50 per guestroom/month. In addition, for reservations made using the central reservation system: $4.24 per guestroom reserved for non-resort hotels and $4.34 per guestroom reserved for resort hotels.
Transaction fee: $0.0895 per transaction (including each transaction that affects inventory at the hotel, such as creating a new reservation, canceling an existing reservation, or modifying an existing reservation to add or delete room nights, and each transaction that changes the rate).
Loyalty fee: 4.5% of the total guest folio, including an average room tax component, generated by guests earning rewards points or miles.
Large Global OTA Commission: Deutsche Bank Market Research: A look at Loyalty Pricing and RSS Conference Takeaways; 2Q16 Preview, Page 4, Paragraph 4, “The issue boils down to the fact that they are providing fairly steep discounts of up to 25% on a distribution channel that is as high as 25% of rooms, all in order to drive down their exposure to what is merely 11-13% take-rates for large chain hotels, who claim that OTAs make only ~10% of chain room nights.”
Commission Processing Fee: $0.16 per intermediary-sourced system transaction which supports development, enhancement, and ongoing support for the CTAC system, as well as postage and accounts payable processing costs associated with commission payments; and a processing fee of 2% of the total annual commissions paid by us on your behalf.
Paid Search Fee: Pass-through fee for brand direct bookings sourced from paid on-line market channels. Model assumes 35% of brand direct bookings include a Paid Search Fee.
ADR: Based on 2016 Franchise Disclosure Document.
Average Loyalty Discount: Deutsche Bank Market Research: A look at Loyalty Pricing and RSS Conference Takeaways; 2Q16 Preview, Page 8, Figure 4.
**Deutsche Bank Market Research: A look at Loyalty Pricing and RSS Conference Takeaways; 2Q16 Preview, Page 4, Paragraph 3, “Hotel owners are grumbling that discounts for loyalty members are simply discounting bookings that would have previously paid full price. As we show in Figure 1, assuming hotels discount loyalty members at 10% on weekends and 2% during the week, for a blended 6.3% discount on 25% of bookings that come in through direct channels, they would need to see more than the entire OTA channel bookings switch over to cover the cost of providing discounts. This, of course, is impossible. To make the math work, hotels would have to see about 30% of bookings from all third parties including OTAs and offline travel agents carrying a blended 11% commission switch over and this unit economic analysis does not even include the cost of the awareness/TV ad campaigns.”
NB2 Illustration of a hotel room by BigStockPhoto