The true cost of hotel brand participation online

As I’ve highlighted before, there’s a common misconception in our industry that brands are cheap and online travel agencies are expensive.

I’m not sure where this notion first developed. It may be possible that since some OTA commissions started off greater than 20% that this perception has simply lingered.

However, increased competition in the OTA space, as well as the growth of alternative channels such as meta, have driven OTA commissions today down into the low teens for most hotel companies.

On average, I believe most hotels now pay about 15% to OTAs for distribution, and more importantly only pay for the actual bookings that these travel marketplaces deliver.

Of course there are hotels paying more and those paying a little less, but like in any marketplace, true supply and demand driven economics account for these variances in pricing. 

What about the cost of having a hotel brand?

Many people think brands charge low single digit fees,while at the same time touting free or very close to free distribution through their proprietary channels (such as for example their brand website or mobile app).

Having been surprised by some of my investigations in the past, I wanted to look objectively at these fees, both to act as a benchmark andto try to bring some transparency to the issue.

To achieve this, I dug deep into the very lengthy Franchise Disclosure Documents of 48 leading hotel brands. 

What I found was that there are a lot of different fees and that brands charge their members for just about everything they do.

In fact there are so many fees that I could not keep track of them all or standardize them into some sort of analysis that would actually be useful to anyone.

So instead I ignored all of the minor fees, including even the credit card fee (often 2-3%) and decided to focus on the bigger ticket items.

How these fees stack up and compare with each other depends to a large extent on where the booking is coming from and whether the person booking is, or is not, a member of the brand’s loyalty program.

To try to add a layer of clarity, in general hotels pay four primary fees when working with a brand:

1. Base Fees which are sometimes split into royalty or franchise fees plus a system fee of some sort. The median of these fees for the 48 brands studied was 8.5%.
2. Loyalty Fees which cover the cost of running the brands’ loyalty programs and paying for guest point accruals. The median of the 48 brands studied was 4.8%.
3. Loyalty Discounts which are a direct reduction to the room rate typically given to loyalty members who book directly. I assumed a very modest fixed discount of $3.00, which has a larger effect on lower ADR properties. The median for the 48 brands was 2.6%.
4. Performance Marketing Fees which brands charge for bookings that originate from marketing or search channels like Google or TripAdvisor. The median of these was 9%.

Thus, when considered together, the median of the major fees of the 48 brands summed up to over 24%!  As can be seen from Figure 1 below, in certain cases, in some cases they even approached 30%!

That is higher than what most OTAs charge hotel for bookings and interestingly exactly the figure that many people so disingenuously accuse OTAs of "stealing" from hotels. 

However, you could argue that loyalty fees and performance marketing fees make up a large component of this total, and that in these case the fee are charged solely to recoup the costs of the additional marketing effort to drive more and better business.

However, when you think about it, that doesn’t sound very different from how hotels work with OTAs, where they typically paying a basic commission rate to be on the system and can, if they wish, add additional merchandising efforts to boost business when they need it. 

True cost of brand fees (click to expand the image)

A true cost?

In theory, at the most basic level branded hotels could pay around 8.5% for distribution.

However, I suspect this is very rare these days since the major hotel brands have attempted to ramp up their loyalty programs by proposing "instant" membership, with the result that a larger proportion of bookings are from loyalty club members (although where these new members are really loyal is a question for another day).

Assuming a very modest loyalty discount and already fees add up to 15.9%, which is highly comparable with most OTA fees. And when you layer in those pesky performance marketing fees you’re now in the mid 20’s. 

Now personally I would have assumed that marketing was the core part of what a brand is supposed to do.

But somehow hotel brands have managed to position modern marketing techniques such as search engine marketing and loyalty marketing as extra services, for which they then reallocate the costs back to hotels and recoup their spending.

Compare this to the simplicity of working with an OTA, where you’ll generally pay one fee with everything included even if the OTA loses money to market your hotel or reimburse loyalty points.

Despite industry perceptions, in reality, OTAs aren’t making all that much money as they invest most of it back into driving business for their suppliers as I demonstrate here.

Diving further into the figures

Although reading lengthy franchise disclosure documents is not something I’d recommend to anyone except as a cure for insomnia, the most outrageous finding wasn’t buried very deep in these documents.

In order to really understand the true cost of working with a brand, you need to realize that branded hotels charge their fees on total room revenue, and this are in effect hotels are in many cases being charged twice for the same booking.

Once by the OTAs for the distribution services they offer and then again by the brand in the fees they charge on total room revenue through their base fees, irrespective of how this business was generated.

With OTA bookings in particular, quite exactly what the added value brought by the hotel brand that might justify such fees is unclear.

For example, Expedia claims that less than 0.5% of their customers search for specific brands on their consumer websites.

Thus we can reasonably assume that brands have less impact on such customers’ purchase decision than things like price, reviews, photos, location, star ratings, and amenities, but brands still charge their full quota of fees on such bookings. 

Understanding the real impact of brands takes a lot more work and a conjoint analysis to really isolate, which is a project for another time.

But for the sake of this analysis, I wanted to try to really understand the true cost of working with a brand.

It’s no secret that, because justifying their relevancy to owners depends on it,hotel brands are currently pushing direct channels very hard.

But there’s actually another important reason why this so-called ‘controlled distribution’ matters for brands- because the less a brand directly contributes, the more likely it is that this property will rely on OTAs to deliver bookings.

And because hotels charge twice for the same business, in such situations this means that the actual cost of having that brand on your hotel is astronomical!

We need a formula in order to reallocate those gross rooms’ revenue expenses (base fees) back onto the bookings that a brand actually generates. This formula, which I am calling the brand contribution penalty, is represented by:

As I will demonstrate below, this formula helps you to understand the true cost of working with a hotel brand.  In the formula x represents the base fees and y represents the brand contribution (the percentage of overall bookings delivered by the brand).

The function is non-linear, which means that as the brand produces less contribution, the penalty fee rises astronomically.

For example, the recapture of the 8.5% base fee on OTA bookings adds an additional fee ranging from a high of 19.8% (for 30% brand contribution) and a low of 3.6% (for 70% brand contribution), clearly demonstrating that a brand that doesn’t actually deliver a ton of bookings is an extremely expensive proposition for an owner. 

And remember that this is just the brand contribution penalty recapture fee.

To understand the total cost, you still need to add the original base fee, loyalty fees, loyalty discounts and performance marketing fees where relevant, transforming that supposedly ‘free’ booking into an absurdly expensive proposition for using a brand that is charging you even when it doesn’t deliver.

The reality, then

My experience shows that most brands typically deliver between 30% and 70%in contribution, although of course this is going to vary considerably by individual property.

To calculate the brand contribution penalty for yourself, look up your base fee from table 1 below (or your own source) and plug it into variable x.

Then take your best estimate for what percentage of business the brand actually delivers to your hotel and enter it into y.

The resulting figure represents the additional brand contribution penalty cost that you would add to your total cost in table 1 below to represent your true cost.

Owners should be far more demanding of brands in terms of their expectations for business delivered and unjustifiable double billing practices.

Until now, largely thanks to archaic bank loan covenants, many owners have not had a choice as to whether to submit to a brand or not.

But as the market matures, an increasing proportion are seriously considering its real utility.

Brand fee reference guide (click to expand the image)