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The Commission Controversy

The Commission Controversy

It’s a pretty common occurrence; when revenue managers see that their property’s occupancy has hit a specific, pre-determined percentage, they decide to shut off the channel with the highest commission rates. This percentage could be 50% or it could be 90% depending on a property’s specific revenue management goals, but in most cases, the end result is the same: revenue managers shut off the OTAs with the highest commission rate, which are often also the sites that generate the majority of a property’s bookings.

While I understand the desire to earn as much money as possible from each booking, it is very counterproductive to shut off your highest performing sites at any time ­ even if they are charging you a 30% commission for each booking. The majority of consumers use OTAs to find and book a hotel reservation, and the sites with the highest number of visitors are often the ones who charge higher commission rates.

While I know that many hoteliers feel resentful of the OTAs because of these high commission rates, it’s important to look at the ROI of each channel as a whole – not simply the per-unit price obtained for each room (after commissions have been paid). While you do make 100% of the dollars earned on all direct bookings, the average hotel may only secure a small percentage of their bookings from the direct channel. In contrast, the average hotel secures a large majority of their business from OTAs (and the majority of those bookings come from the sites with the highest traffic AND the highest commission rates). So by shutting off the channels that earn you the most of your business, you greatly decrease the chance of selling the remaining percentage of your rooms for that particular day.

I always suggest that revenue managers think about revenue in a different way. Instead of thinking about how much money that you’re “throwing away” on OTA commissions, think about how much total revenue they are earning your property – even after paying out a commission. When you think about the total revenue and the total number of bookings (instead of only the sky-high commission rates), it makes much more sense to keep your highest performing channels selling until you reach 100% occupancy.

In case you’re not quite convinced, let’s look at a similar example from a different industry. Imagine that you are a retailer, selling jeans and t-shirts from your own retail storefront. To increase your revenues, you decide to sell your wares at other stores as well. You sign contracts with a few small mom-and-pop stores in your city, as well as one contract with Walmart. For every item sold from your own store, you would earn 100% of the total value; the mom-and-pop shops charge a 15% commission and Walmart charges a 30% commission on each item sold.

If you followed the logic used by most hoteliers, when you’ve sold a certain percentage of your inventory, you would stop selling your items at Walmart because they charge a higher commission rate. But like with a hotel, it would be a mistake to stop selling your merchandise through Walmart, because the number of shoppers that visit the store on any given day is much, much higher than the number of shoppers who visit each mom-and-pop shop. So although you are paying a higher commission to stock your wares at Walmart, the number of items sold through the store will be higher and therefore, your overall revenues will be higher in the long run.

Like Walmart, the big OTAs can charge a higher commission rate because they create better visibility and more bookings for hotels. By shutting off your highest performing sites before you reach 100% occupancy, you are cutting your property’s visibility with an entire country ­ or even in some cases, to an entire continent ­ which can result in a significant loss of revenue. So ignore the commission rates that you are paying to the big OTAs and remember how many bookings they actually generate for your property. Keep your most profitable channels selling until you reach 100% occupancy each day and you will see a dramatic increase in your occupancy levels and revenue earned.

20 thoughts on “The Commission Controversy

  1. Albert…

    Great article, exactly what I was looking for….

  2. This article Gives a very good aproach to the curent situation at the hospitality industry, I totally agree on the fact That OTAs are our best partners on distribution ever, the levels of sophistication in technology displayed on their sites is gift; giving to the customer enourmus possibilities of seen the prices in their own currecy codes; almost covering all countries in the world withoption of multilanguage sites, definitly paids the effort.

  3. Very smart perspective. Hotels need to look at a holistic view of the traveler.

    Not only should they consider the Net Revenue, but delving deeper into Gross Operating Profit is even more beneficial.

    Marketing expenses by channel also need to be considered so the hotelier can get a clear perspective, not just on the commission, but the true revenue, cost volume and profit associated with each channel.

  4. Very True,

    Its really a smarter way of earning the revenues. Just need to shift the focus from Commission payable to Revenues Earned.

  5. This is exactly what I believe and do as a revenue Manager with my property as the article matches exactly how most of revenue Managers thinking about OTAs, meanwhile if they just go a little back to the nearly past and think how we were independent from the travel agencies regarding the rates and allotments and them marge at least 25% above the contracted rate, we’ll find out that 30% commission from our BAR rate has a better profit and GOP at the end of the day!

  6. While this is true for hotels that do not occupy their inventory regularly, for hotels that have an average occupancy above 90 per cent it is not. I appreciate the fact that OTA’s are our best marketing tool, and it should be used most of the time, but it wouldn’t be smart not to yield hotels profit when possible, and for a high occupancy hotel this yield have to happen, because it is very hard to increase revpar by the occupancy, so there is two options: Increase average room rate or increase direct bookings when possible by closing OTA’s.

  7. Sorry to bother you, but may I bring a different vision.

    The comparison with a jeans’ maker/reseller is wrong by definition. There is potentially no limit at the number of jeans you could sell. It would be stupid to limit the number of jeans any partner or reseller could sell. The more you sell, the more revenue you make and at the end the more profit you earn.

    Your comparison would be right if a hotel had 73.000 rooms to sell at once (eg 200 rooms hotel * 365 days). The problem is that you can’t do that. A hotel has a limited inventory with a few tens or a few hundreds rooms to sell every single day. Why would you limit your revenue, and BTW your profit, when you know that you can sell at a higher net price for one night, two nights or even more, and when you know that you can get this new customer loyal and/or when you know that a past customer can come back direct?

    I agree with you when you say that it is essential to keep in mind the customer’s view. Again if 100% of the customers booked on OTAs only, without reading/visiting/searching/metasearching/…, it would be stupid to close down inventory on OTAs, wherever they are “cheap” or expensive.

    Customers use OTAs for many reasons and for the same reasons can switch between OTAs, can switch to hotel brands websites, can switch to hotel direct: is the price good, can I trust the website, can I trust the property, is it easy to get a price, is is easy to book, can I get a better deal here, what are the (*) conditions, do I feel comfortable booking that way…

    In the true world, customers become “bounty hunter” (please forgive me if the meaning is different to what Google translation gave me). In those circumstances, why would a hotel try to be more expensive direct than thru an OTA? In other words, why can’t a hotel compete with an OTA when it comes to a similar customer price but with a better value and a better customer experience (free upgrade, loyalty program, free HSIA, more flexibility…) ?

    1. This is my exact thinking. We work with an inventory that expires daily and thus have to make the most of each sale. Just to add a bit of my thoughts. In my experience OTA customers are not usually loyal to one specific OTA, but use the OTAs as a go to for information and research, chose their hotel and then book wherever that hotel is the cheapest or offers the best value. As long as the hotel direct is offering as good or better of a deal as an OTA hotels should see a huge increase in direct bookings when working with OTAs in a way that is beneficial to the hotel.

      It can’t be denied that OTAs will push your property out there to millions of people, but now with meta search sites and countless places like Kayak and Trip Advisor that combine multiple OTAs in the same place it is easier to shop around. I also take issue that the writer of this article seams to say that the highest cost OTAs are the best, when I have not found that to be true. at 15% commission is now the largest player worldwide and the biggest producer, at least for all of my hotels. It’s not only the net rate that should be considered. With OTAs like the HOTEL has more control by having direct guest contact, the guest’s billing information, etc. With higher cost “legacy” OTAs such as Expedia the hotel gets a name and nothing more until the guest arrives, leaving it impossible to contact the guest prior to arrival, to welcome them, possibly sell an upgrade or add on, and start that relationship before the guest ever arrives.

  8. I know this in my heart, but it is still difficult to do. 25% hurts me to inner being

  9. Inherently to “yield” an item, you have a finite number of said item… i.e., hotel rooms. Your jeans analogy just does not serve to make your point set well with hoteliers. I do agree that profitability is the measure of success in allowing OTA’s to share access to your inventory.

  10. Good article and interesting comments.

  11. Hotels (Motels in Australia) are getting very tired with travel agents (AOT’s you call them) because they don’t do anything at all except have an automated website with a few staff to handle ‘guests’.
    Even 10% commission is too much in my view, particularly if the guest stays for a few nights. In Australia is probably the highest at around 15%. – As a hotel operator they are pretty crappy to deal with.

    The guests these days have have this perception that they are getting a ‘good deal all the time’, but the fact is they are hurting the industry with this price orientated view. – AOT’s have every one listed and every one is screwing around with prices just to get the room.

    Most hotels are struggling to pay increasing power, wages, taxes, etc and as soon as they increase the prices slightly, other bigger chain motels take advantage of this with mountains of ‘freebies’ etc.

    Ofcorse then the guest rants on about the place with a ‘review’ in most cases they all seem to be developing this chip on their shoulder about paying for a nights accommodation, but they ALL EXPECT the ‘perfect room’, always new, with modern room and fittings etc. Places like tripadvisor are horrible for motels, they make money from all the guest’s gossip, thats all, they have NO care what so ever about the hotel, particularly mum and dad motels that clearly are not the Hilton or 5 star etc.

    The travel agent does not care at all about hotels full stop. They just milk them all and have this pretend association with hotels. None of the staff at or have any clue about the industry and the whole hotel world, they just sit in air conditioned offices and watch all the money come in. But the hotels have to deal with all the guests and their demands 24/7. Commissions are increasing all the time and they expect parity in tariffs.

    I can’t wait until google improves the current listings for accommodation providers, in the end the guests just want to see a directory from the location they are travelling and filter by price.

  12. Greetings! Very useful advice within this post! It’s the little changes that will make the largest changes. Many thanks for sharing!

  13. For the reasons outlined in the article I very seldom close out OTA’s at all.
    But even if you do close certain portals, commission alone should not be the basis of your decision.

    I have one that costs me 10%, but statistically I know that people booking there will spend vey little extra.
    I have another that costs 25% but guests coming through that portal tend to spend money on dinner, a bottle or two of wine, etcetera.
    So if the theoretical question comes up of choosing between the two, which portal still to give availability to were I to close one, the result would be surprising: because F&B turnover important for my ROI as well.

  14. I think this article is very interesting… possibly a little one-sided. (And this is coming from someone who works for an OTA)

    The comparison of the jeans vs hotels is completely inaccurate. Jeans can sit on shelves for weeks. Hotel room nights expire each and every day. There is absolutely no way to make that revenue back. Hotels have a limit of sale-able inventory per day.

    Most Market managers from OTA’s come from Hotel Revenue management backgrounds (Myself included) & find it funny to work for the devil. I came into the role thinking that OTA’s had way too much bargaining power, and charged WAY too much for what they offer. My view has since changed quite substantially.

    A hotel revenue managers’ job is 95% statistics and forecasting, and 5% pure luck. (Along with a tonne of variables thrown in the mix of course) The OTA’s in my opinion serve more as a marketing channel than of a revenue generator in the long run. Any hotel that has a fantastic front desk and customer retention will learn that OTA’s do not normally have loyal customers. It is extremely easy to pull the share of this business towards you, and to gain these initial OTA customers as future direct bookers.(Which you may have paid 30% commission on)

    This 30% also does not take into account the direct business that OTA’s push to your direct channels. I for one will search a meta or an OTA for rates/deals, and then always check the brand site. If it is the same price (which with 80% of properties it is) I will prefer to book directly with the hotel as there is more chance of getting an upgrade, and they are usually much more flexible with reconciliation.

    Many hotels think the smartest option is to close all OTA’s during high compression periods. Wrong. That is when you have the most visibility. Instead of shutting them off, try and set inventory restrictions on just your high demand days (not weeks) so that your visibility remains open to the public consumer, and the chance of gaining incremental business on shoulder dates or low periods increase. Completely closing out=0 visibility.

    One final tip- Use your OTA Market Managers. They aren’t all out there trying to get you 😉

  15. Thank you to everyone for reading the article and offering your valuable feedback. It’s always great for us to find out how our readers feel about different topics in revenue management, and it helps us to ensure that our articles are helpful and informative for hoteliers and revenue managers worldwide.

    A few comments brought up very valid points that we wanted to address. First, the issue of a hotel room’s perishability (compared to a pair of jeans or a t-shirt) – Using this oversimplified example, we were trying to demonstrate the error behind the common practice of stopping selling through a high-performing channel because of principle (not wanting to pay commissions) alone (based on a somewhat similar concept in the retail industry). Trust me, we know that there are huge differences between the two products, but in this case, it made sense to provide a comparison to illustrate our point from a similar industry (in terms of sales distribution channels and inventory management, not in terms of perishability or commoditization).

    Our intention with this article was not to recommend that you offer better deals through OTAs or that you always keep your OTA inventory available; however, we are recommending that you keep your high-performing channels actively selling until you don’t need to (because you’ve reached 100% occupancy). That being said, if the OTAs are not a high-performing channel (or if the big OTA sites aren’t bringing you the business that you are looking for), by all means, stop using those sites and focus on the channels that are bringing you business and earning you the most revenue.

    Secondly, a few commenters have mentioned the issue of commoditization of the hotel industry. We are not advocating that hoteliers use the OTAs if they are not profitable sales channels and if hoteliers find that they must offer large discounts in order to win OTA business, it’s doubtful that those channels are highly profitable. In that case, we agree that continuing to use the OTAs would not be a sound business strategy. As former hotel industry professionals and revenue managers, we understand the importance of upholding your property’s specific value proposition and brand name, because it should be an important selling feature and a differentiating factor for your business.

    We do, however, recognize that customers do not think the same way as hoteliers. Because customers are using the OTAs as a search engine to find out what properties exist in a particular destination, a large percentage of direct business actually comes from people who found out about a property from the OTAs and then visited the property’s own website to book. Approx. 30% of consumers regularly visit a property’s own site because of the info that they found on an OTA, so by shutting down your OTAs before 100%, you are also shutting down your visibility to these high-value customers.

    In short, the key message that we wanted to deliver with this article is: do not close your biggest source of sales until you reach 100% occupancy because if you do stop beforehand, you will also stop the majority of your sales as well (which will prevent you from reaching 100% occupancy).

    With my best regards,
    Jean Francois Mourier

  16. Woah this blog is magnificent i love studying your posts. Keep up the great work! You understand, many people are looking around for this info, you can help them greatly.

  17. Good Article – I read that it emphasizes clearly not to “shut off your highest performing sites at any time”.

    On one hand where the OTA’s are offering any property best exposure why would anyone think of closing any dynamic channel, not only OTA at any given time unless they reach a 100% occupancy or the desired occupancy?
    What I see the article does not mention is the relationship between rate v/s occupancy. I would like to read more on this in relation to occupancy, pricing and channel management specially OTA’s.

  18. Interesting articale, However, this can be an OTA point of view as every Hotel or Motel has it’s own vision for closing out an OTA or stopping sell.

    Some Revenue Managers are closing and some others are just keep increasing the room rate until they close 100%.

    If I have a forecast of 94% for one month and you do have your loyal customers who you know well they are coming to your Hotel at a higher rate.why should I keep the OTA on if i’m able to save.

    Some people might say, why should you take the risk and I say it’s a matter of experince and every Manager knows his hotel history and his loyal customer and how best he can sell his hotel online or offline.

    still the articale is great since it gives one more viewpoint can be studied and we should think about.

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