Online Distribution – a case for third party and direct bookings

One of the ongoing debates in hospitality, is how a hotel should think about direct sales, vs. third party sales, in their online travel mix.

So let’s start with three pretty obvious thoughts:

  • Direct bookings allow you to present your property in a highly customised way, and build a relationship with the traveller from the first interaction
  • If you can fill your hotel to 100% occupancy, with market-leading ADR, purely from direct sales… then firstly, your hotel is a rare beast, and secondly well-done
  • Third party online sales – Booking.com, Expedia, Agoda etc. – can look expensive, with 15-20% commissions, and if you can avoid paying those commissions by driving these bookings through direct channels instead, that’s a great saving

That leads to a simplistic rallying call to drive the share of bookings a hotel receives from direct bookings up, and from third party channels down. And there are hundreds of articles articulating how to do this, so this won’t be one more!

But now let’s start to go deeper to think about that goal. Most hotels can’t achieve 100% occupancy, with market-leading ADR, from their direct sales channel (and even if they can, there may be potential to push that ADR even higher if demand was coming from more channels). What third party channels do, is give your hotel a platform to market to a huge number of travellers, most of whom have never heard of your hotel before. Yes, you pay a fee, but let’s model out the alternative.

If a traveller has never heard of your hotel before, they are not searching you out. They are instead going to be going to a site like Google, and typing in something generic like ‘Hotels in Bangkok’. To be somewhere near the top of the ad results (and all the volume goes to the top few places), you’ll need to pay between US$1.32 and US$5.73 per Google Ads Planner.

Taking the middle of this range at $3.50 per click, if your ADR is $100 a night, then you’d need to convert any traffic to your direct site at 20% in order for this to be cheaper than paying an OTA channel with 17.5% commission:

ADR of US$100 * 17.5% channel commission = US$17.50 cost of acquisition through a channel

$17.50 cost of acquisition through a channel/ $3.50 cost per click as an alternative = 5 clicks

Converting 1 in 5 clicks = 20% conversion

Does your direct site convert at 20%? Possibly for some, repeat customers, who really know and love your property. But that’s not who we are talking about here, for someone who has never heard of your property before, and is coming through a generic term like ‘Bangkok hotels’ they are not converting at 20%.

If you convert this sort of traffic at 15%, 10%, 5%, etc, the cost as a percentage of revenue could be 23%, 35%, 70%, far above a third party channel commission.

So if you take the above, then what third party channels, such as Booking.com can do, is deliver you incremental bookings, from travellers who aren’t seeking out your hotel directly, at a much more cost effective rate than you could do yourself.

So where’s the issue….

Well, not all travellers that a third party channel delivers meet this ‘incremental bookings, from travellers who aren’t seeking out your hotel directly’ criteria. So let’s think through a couple of examples.

Property name bidding

Perhaps most antagonistically, third party channels sometimes bid on the brand name of your hotel, grabbing traffic that was clearly looking for your hotel, and funnelling it through their site. That clearly fails the ‘incrementality’ test. But… we shouldn’t overstate this as an issue. Online third-party channels, typically get 20-40% of their rooms from channels such as paid search (where you pay for clicks from Google), and of these only 10-20% will relate to bidding on property names, so that’s only 2-8% of their bookings from bidding directly on a hotel’s name.

And as a tactic, there are ways that a hotel can counter it. A single independent hotelier is unlikely to be able to force an online channel to stop bidding on their brand name (and you’d need to stop all channels to have the desired impact), however, Google’s Ad algorithms don’t just take account of the amount your bidding, but also the relevance of your site (through a factor they call the Quality Score). Your site, if its well-built, with interesting content, and a solid booking engine, should be able to outscore an OTA on this factor, allowing you to rank above them on a paid search query, without having to bid more than the OTA

You may not like having to spend the money to run ads against your own brand name, but its normally a sensible investment to ensure you recapture some or all of the non-incremental bookings that a third party channel would capture.

Repeat visitors

Another source of potentially non-incremental travellers are repeat customers. If a traveller has already been to your hotel, and then books a 2nd, 3rd or subsequent time through a third-party channel, there is an argument that they are not incremental business, and you could therefore be over-paying vs. direct. However, I emphasise that this is only a potentiallynon-incremental traveller:

  • A traveller could have forgotten your hotel in the interim between trips, and then been reminded again
  • A traveller could do 20 annual trips to your location, and your only getting 2-3, based on their preference to search a third-party, and find the best value at any particular moment

However, there is a case to be made, that if a traveller is coming to you a 2nd, 3rd or subsequent time through a third-party, then you are overpaying for your distribution here. So it’s important to track to understand which channels are bringing you new customers vs. repeat customers and to factor that in when considering the real cost of a channel.

It’s also worth considering where is the issue is here? I’m not sure we can blame the channels in this case, but rather, I think we need to point to ourselves as hoteliers, and ask why this traveller is not booking directly:

  • Is our direct channel poorly constructed, with weak content, or a poor booking engine
  • Is our retention marketing approach to travellers who’ve stayed with us before weak
  • Is our property unmemorable or indistinct

So in conclusion…

  • Direct bookings are great!
  • But… whilst third-party bookings with 15-20% commissions are a large part of a hotel’s expenses, they look comparatively cheap when we consider the alternatives for sourcing incremental business
  • Therefore, the key is to understand the incrementally of a booking
  • Bookings that come from third-parties bidding on your property name, clearly aren’t incremental. But these don’t represent a massive share of the third-party pie. And this can be countered by bidding on your own name
  • Then you need to look hard at the overall share of new vs. repeat travellers that a channel delivers, and focus on working out how you could shift more of those repeat travellers to drive direct

Taking all of this together , we need to move on from the simplistic rallying call to drive up the share of bookings a hotel receives directly, and instead think of direct vs. third party as being two different types of marketing – retention vs. acquisition.

Direct needs to be at the core of your retention marketing plans, where you work out how to retain travellers who’ve stayed with you, or shown a preference for your brand in some other way.Third-party channels should be at the core of your acquisition marketing plans, where you introduce yourself to new potential travellers in as cost effective way as possible.

…and so ZUZU

This is the approach we take at ZUZU Hospitality Solutions. We don’t instinctively love direct and hate third-party. Conversely we don’t love third-party and hate direct. We know that direct is critically important in a hotel’s retention strategy, and third-party is critically important in its acquisition strategy. You’ve got to get both of these things right to have a great hotel business, and you’ve got to make sure each is doing the job that it can most cost-effectively do, which will be a little different for every hotel.

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