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[Music] This is believed to be the oldest running hotel in the world, opened in 705 AD. This traditional Japanese hot spring inn has been owned by one family for over 1,000 years. You can bask in its warm waters the same way samurais and emperors did. Just booked your room on Expedia, booking.com, Agoda, or one of the Japanese booking websites.
The nuanced relationships between hotels and online travel agencies dictate the present and the future of the hospitality industry overall. These relationships are built both on mutual support and competition, but one party is eager to change that. Here's what's happening behind the scenes of the invisible battle over the hospitality market.
Many of the oldest running businesses in history are hotels. Running an inn in rural England and a B&B in Niagara Falls has been pretty similar for the biggest part of history. It was always about personal communication and a lot of phone calls—wait, confirmation code XVII to RDM. That was before the internet showed a better way.
Flight booking was actually the first to digitize. Automated booking systems were available to travel agents by the late 70s, and in the 90s, if you were a proud owner of a PC connected to the internet, you could book the tickets via a command line. Hotels were different. People had a clear preference for a hotel chain, often phoned directly to check availability, and valued the personal touch for their hospitality needs—or they thought they did.
Travelocity, the first online travel agency as we know them today, launched in 1996. Expedia followed. OTAs chased hotels for access to their inventories, offering a small commission of 2 to 10%, and hotels agreed. Most of them didn't have a website, and this was their chance to occupy the vacant rooms. But once travelers discovered online booking, they didn't go back, and the tables have turned on hotels. Hotels ended up being trapped by OTAs.
Today, hotel owners run the unofficial war against OTAs. What was a convenient way to make their rooms discoverable transformed into a real threat—massive commissions. It's estimated that Expedia takes up to 30% commissions from independent hotels and around 15% from large brands. That wouldn't be a big deal if the commission was included in the OTA price, allowing hotels to distribute using base rates. But OTAs know that to grow they need an advantage, and price is a big one. To guarantee the lowest price, OTAs hold hotels to rate parity.
Rate parity means that hotels have to keep the price the same across all distribution channels. The conditions can differ depending on the involved parties and the country. Some European states prohibit rate parity overall or for chosen OTAs, but in Australia, the UK, and the European Union, something called narrow rate parity is used. Narrow parity allows hotels to offer lower prices on other distribution channels except their own.
But if hotels lose money because of OTAs, why are they still signed up? Because if they aren't, they lose customers. Hotels spend around 6% of their revenue on marketing. OTAs can invest up to 50%, and that doesn't include product development and engineering effort they put into a booking platform. Most independent hotels are smaller chains, have simple websites, often without any booking capability. They are also hard to discover, both thanks to primitive SEO strategies and no brand awareness on the internet, while OTAs push recommendations and emails, post personalized ads you can see immediately after you check prices on booking.com, and attract traffic via content marketing. Hotels still rely on word-of-mouth and phone calls. And even if they did realize the value of digital marketing, many wouldn't be able to pursue it—the price tag is too large, same about technology.
Studies show that 55% of travelers who find hotels on OTAs check the hotel website hoping to get better rates. The problem is that they don't often stay there. Even if a hotel has a booking engine, the website is not adapted to mobile design, is confusing, and rules and conditions are not clear. Besides, customers feel safer making payments on good ol' Priceline than on a hotel's clunky site. Basically, for hotels, paying a 25% commission is cheaper and more reasonable than investing hundreds of thousands in marketing and product development.
Competing with OTAs and marketing is useless. What could work is cultivating loyal customers instead of attracting lots of new ones. Loyal guests visit often, stay longer, and splurge on dinners and drinks, and they book directly, bypassing OTAs. As long as loyalty rates are offered privately, hotels abide by the narrow rate parity and can expand the database of true fans.
The thing is, there are not many loyal travelers left. Millennials and Gen Z travel the most today; they are on a budget, stay for shorter periods of time, and actively use OTAs. And they're not very good guests business-wise; they book cheap rooms, don't spend on extra amenities, and don't dwell in hotel bars. They are so-called free agents who don't have a brand preference; they choose based on location, price, and reviews. Even if they belong to any hotel loyalty program, they're not inclined to actually use one. This is why hotels feel trapped for now.
The only ones who managed to get out of the vicious cycle are global chains. Direct bookings for Hilton, Marriott, IHG, Wyndham, and Hyatt keep rising. How do big hotels fight back? Stop clicking around. Book direct at Hilton.com for the lowest price online. Hilton spent more than a million dollars on producing and airing this commercial on TV. A few other chains followed suit. It's like, when people don't use Marriott.com to book a Marriott hotel, booked. I rent and will take you away from scary second thoughts. So if, like this family, you like to fit direct, you should also book direct.
Recognizable hospitality brands have budgets to respond to OTAs. They try to make everything exclusive, from the booking process to the room service. Like, if you're a member of Hilton's Honors program, you can book the exact room you want and see your window view on Google Maps. Marriott has an app that allows you to check in remotely, open your room with your phone, or message your requests. When Las Vegas has put Amazon Echoes in all hotel rooms, allowing guests to control lights, temperature, shades, and more. Exclusivity is the hotel's response to the OTA automation.
The historical hot spring inn joined booking.com only in 2018. It's located far from civilization, doesn't have Wi-Fi, and hosts speak only Japanese. It's not easily discoverable, even using detailed OTA searches. Traditional properties like this are already exclusive; for them, direct bookings come easily. Guests' loyalty to, but a modern hotel in, say, Berlin's city center doesn't have that singular advantage.
For a small family brand, OTAs are indeed a convenient way to keep the rooms continually occupied, but more ambitious properties have to be creative with their revenues. Some post their rooms on meta-search sites; the commission there is usually lower, though you have to compete with other listings in an ad bidding battle. The rest must adapt; they invest in user experience, employee property management systems, and offer complimentary services. This is the modern take on the personal approach that appealed to customers before the digital age. For now, it seems travelers prefer having a choice.
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