Finance journalist Michael Lewis recently published a detailed exposé about high-frequency trading.
This is a world in which the "market is rigged" by traders who employ cutting-edge algobots to gain knowledge of large stock trades in advance of the rest of the market - by mere microseconds.
An adaptation of his book Flash Boys, which featured in New York Times Magazine, illustrates how this razor-thin margin of time earns these brokers millions per year.
Although not illegal, these practices clearly give high-frequency traders an unfair advantage, creating a market of "haves" and "have-nots" - those who have the technological tools and those who don’t.
NB: This is an opinion by Gautam Lulla, chief operating officer at Travel Tripper.
In the hotel industry, a similar unbalance is occurring between online travel agencies (OTAs) and hotels - also caused primarily by technology. Initially welcomed with open arms by hotels, OTAs allowed hotels to reach new global markets and delivered a healthy volume of business as well.
But success has since spawned many more OTAs, each with varying business models and concepts, from opaque booking sites like Priceline to "last-second deal" mobile apps like Hotel Tonight.
The market is now so fraught with OTAs that it has given rise to metasearch sites such as Kayak and Google Hotel Finder, which aggregate rates from all OTAs and hotel sites.
With bigger budgets and better technological platforms, OTAs continue to find new ways reach customers and gain market share away from hotels.
Unfortunately hotels do not have the financial resources or the right tools to keep up, allowing OTAs to chip away at their direct booking revenue.
The market may not be “rigged” per se, but the advantage is definitely tilting in the OTAs favor, particularly in two ways: traffic acquisition and rate parity.
The competition for eyeballs between OTAs and hotels
The increasingly high cost of traffic acquisition online has been a sore point for hotels, particularly for smaller hotels that do not have global brand recognition.
These hotels must allocate precious advertising budgets to bid against OTAs. With companies like Priceline and Expedia alone spending around $2.5 billion dollars annually on ad spend, this is more than an uphill battle for hotels—it’s next to impossible.
Metasearch sites, which originally made their revenue from affiliate commission fees paid by OTAs for completed bookings, have now introduced a bid-for-placement model in which they now receive payment for delivering traffic.
Hotels have to bid against behemoths such as Expedia, Travelocity, and Booking.com to get a link on a site like Kayak and TripAdvisor. A single click on TripAdvisor for hotels in New York City often approaches a cost $6.00!
OTAs also dominate in search engine marketing and audience retargeting as well, often spending good amounts of money buying branded keywords of most of the independent hotels and smaller brands with whom they do business.
Even though this is not strictly ethical, Google turns a blind eye to this because of the advertising revenue they earn from the travel industry.
Even organic search is highly competitive—because of their sheer size, OTAs dominate search engine results on general keywords such as "hotels in new york".
Even after implementing necessary SEO strategies, the small independent hotel still faces difficulty making it onto the coveted first page.
OTAs argue that their sites have a “billboard effect” for hotels, exposing consumers to brands that would otherwise remain unknown.
Indeed, it has been proven that hotels do see an increase in traffic when listed on an OTA (as consumers will often visit the hotel website directly from an OTA), however, the cost of acquisition of this traffic remains high due to the percentage commission that the hotel needs to provide the OTA in order to be listed on the site.
The hidden costs are massive!
The daily battle of rate parity among various online channels
Because the metasearch sites allow consumers to compare rates with ease, it’s become crucial for hotels to maintain consistent pricing across all online channels, as price-sensitive customers will generally book the lowest rate available.
But due to disparate data models in various distribution channels and insufficient integration between systems, rate parity has increasingly become a major problem for hotels.
Since then, a new family of products called channel managers has emerged to assist hotels in pushing rates, inventory, and availability data to the multitude of OTAs, wholesalers, and tour operator channels online.
Though channel managers have improved over time, the problem of rate parity still persists for a number of reasons, including human errors, technical errors, and excessive transaction load, among others.
On top of this, the current system allows OTAs to deliver reservations to the hotel at a “net rate,” meaning that they can and do reduce their prices below minimum contracted margins by reducing their commission margins.
If hoteliers paid close attention, they’d notice that the OTAs sell lower rates on mobile than they do on web browsers because they know hotels mostly check their prices on desktops. This gives OTAs the edge to the price-shopping consumer, while satisfying their pricing agreements with the hotels.
One of the "solutions" to this problem has been the introduction of B2B rate shopping software robots, which are used by both hotels and OTAs to ensure that rate parity clauses are not being violated and to also provide competitive pricing intelligence.
However, rate shoppers are expensive and charged on a "per shop" basis (per 1000 shops), with one shop being defined as the result from one availability search for one length of stay on one website.
Hotels need to perform tens or hundreds of thousands of shops to get effective results. Even then the rate reports can be somewhat meaningless because of price changes throughout the day, and hotels often do not receive alerts on price parity with enough time to adjust pricing.
Furthermore, OTAs are known to price differently according to geography, device, and any other number of creative ways, adding even more inaccuracy to the reports.
Funnily enough, it’s the hotel CRS that bears the brunt of rate shopping robots, which request the data and then turn around to sell it back to the hotels.
That leads us to Best Rate Guarantee (BRG) programs, a sort of "last defense" self-styled insurance policy for hotels to ensure that customers can get the cheapest price directly through them.
But the program policies are often complex and onerous for the hotel and consumer—just try reading the “rules” around these programs from IHG, Marriott and Hilton!
Usually BRG programs require customers to either submit an online claim (with 24-hour turnaround) or call a hotel booking agent in order to match a better price found elsewhere on the web. Not only is this process cumbersome and time-consuming, the "conditions" that hotels set to match rates are often too stringent for consumers to care. Ultimately, these Best Rate Guarantee programs have proven ineffective at driving direct bookings.
The Pollution Solution: How technology can level the playing field for hotels
In Lewis’s investigation into high frequency trading, he spoke with man named Brad Katsuyama, a banker who was frustrated with the way that certain traders were able to “front-run” his trades, meaning that they were able to see his buy/sell orders at one stock exchange and could race ahead of him by mere microseconds to the next exchange to snatch his remaining order out from under him.
With the help of some very talented programmers, Katsuyama built a system—and eventually an entirely new stock exchange—in which he could prevent these unfair advantages from happening.
His company, Investors Exchange (IEX), did not want to vilify Wall Street banks or brokers. Rather, he wanted to create fairness in the marketplace. By providing traders with the right technology, investors could rest assured their buy/sell orders were not being undermined by algobots.
This same technological innovation is needed in the hotel industry. Hotels need the right tools to compete fairly with OTAs, which have the financial resources to invest heavily in digital advertising and to build advanced platforms that can manage complex pricing and distribution across geographies and devices.
So what are these tools? Hotels should consider both front-end and back-end web solutions. First, improving the online booking process and increasing conversions can help to mitigate the high cost of traffic acquisition.
Secondly, utilizing innovative CRS tools that take advantage of the wealth of data that OTAs provide can help revenue managers gain more control in managing online distribution again.
Improving the direct online booking process
After spending significant money on PPC campaigns and SEO to bring potential customers to a hotel site, converting “lookers into bookers” becomes crucial for ROI. But conversions suffer when the actual booking process is not smooth and effortless
Usability is a huge issue for many central reservation systems, which are often clunky and not well designed.
Hotels should consider the following elements when it comes to improving the usability, functionality, and user flow in their booking engine:
The look of the booking engine plays a huge role in consumer confidence. Aesthetics goes far beyond matching up logos and colors, however.
It means creating a seamless visual integration between the booking engine and hotel site, as well as making use of optimal whitespace so that the eye does not get confused—there is never a need to jam all information “above the fold’ (a rather dated design notion).
An Entrepreneur article on marketing recently proclaimed, "Photography cannot be an afterthought". But it feels that way when room photos appear as small thumbnails on a booking engine, only to enlarge slightly when they are clicked upon.
Imagery should be large and front and center—any smart CRS should make it easy to do this.
3. Optimizing decision points
Although it seems counterintuitive, having too many choices can be a source of friction in the booking flow. Most booking engines will present a very long list of price points (all of the possible room/rate combinations) after the request for availability.
This is often overwhelming to potential customers, who will often abandon the booking process rather than navigate countless options. Smart CRS systems will split the decision points of rooms and rates into separate steps—it reduces choices and increases conversions.
Also important, make sure the most popular room/rate options are always selected as the default, as this also helps to simplify the booking process.
Equipping revenue managers with the right innovative tools
If there is an upside to the growing number of OTAs on the market, it’s that there is an incredible wealth of data now available for hotel revenue managers to make better pricing decisions.
However, many hotel CRS systems don’t make this data easily available to them. Consider the following tools that could give a revenue manager more fine-tuned control over online distribution:
1. Geographic pricing capabilities
Expedia is rumoured to be launching a feature in which hotels can now list offers for rooms based on geographic region.
Thus, a hotel in New York can specially target California travelers with a special offer that is not available elsewhere in the U.S. If Expedia can do this, so can a hotel CRS system.
2. Best Rate Guarantee (BRG) automation
Why should we leave it up to the consumer to notify the hotel when a better rate is found on an OTA? With APIs and other technology available, hotels can reverse the tables and notify the customer when better rates are found elsewhere.
With each availability search, an automated BRG program on a CRS would pull current prices from the major OTAs and display them alongside the hotel’s best rate—if prices are out of parity, the hotel site could instantly match the rate and offer a discount or extra night right then and there.
3. Rate shopping prevention
There is nothing to be gained from making it easy for OTAs to rate shop hotel sites—these tactics are meant to force compliance with hotels’ promise of rate parity, while OTAs themselves flagrantly violate their own side of the bargain.
Hotels can and should make it difficult for rate shopping robots to crawl a hotel site—with the right software programs in place, CRS systems can identify these robots (usually by IP addresses) and return “no availability” errors or higher prices.
4. Future demand data
Hotels should be able to take advantage of search data from both OTAs and their own booking engine—by tracking and analyzing all availability searches, a hotel CRS should be able to clearly and easily map out a future demand forecast, which would give revenue managers a huge edge in pricing rooms by date and geography to maximize revenue.
What is a hotel’s next move?
Hotels are not blind to what has been happening in the industry—they are well aware that OTAs have been gaining heavily on market share and revenue and leaving hotels behind.
And despite the OTAs being well funded, hotels also seem willing to invest in new technology. The missing link is hotel technology companies.
These companies, which are responsible for providing the distribution platforms and booking systems for hotels, have been slow to provide the analytical capabilities and software tools that hotels need in order to compete fairly with OTAs.
Now is a time for change and innovation.
- It’s time for hotels to start demanding these products from their hotel technology providers—or find the providers that have these products.
- It’s time for hotel technology companies to catch up to the current digital landscape.
- It’s time for hotels and OTAs to compete once again on a level playing field.
This is an opinion by Gautam Lulla, chief operating officer at Travel Tripper
NB2:Technology reconsilitation and pollution technology images via Shutterstock.