03May

How to Understand the True Costs of Your Hotel Distribution Channels

Author: Ellis Connolly

According to Travelport, out of the $2 trillion in annual travel spend in the U.S., $810 billion is booked through indirect channels. And with choices ranging from global distribution channels (GDS), travel agents and consortia, multiple online travel agencies (OTAs), and direct bookings, determining when and through which channels to sell your hotel rooms can be a daunting task.

Many elements factor into the true costs associated with your hotel’s distribution channels. And it’s crucial for your hotel’s success to accurately calculate and analyze those costs. Here we examine the most common distribution channel pricing models, key fundamentals to understand when it comes to effectively managing your hotel’s distribution strategy.

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Commission-based Model

Commission-based distributors are often travel agents and OTAs, such as Booking.com and Priceline, which list hotel inventory on their websites. Channels using the Commission-based or “Agency” Model charge hotels a set commission based on a percentage of the room rate, typically ranging from 15 to 30 percent. Hotels may pay a higher commission for greater visibility on a site, such as being listed among the “top 10 properties” for a specific location.

In the Commission-based Model, a hotel provides the distributor with a final “sell rate.” The guest pays the hotel directly, and the hotel pays the distributor’s commission after the stay occurs. This model is generally beneficial for hotel cash flow since the hotel doesn’t have to await payment from the third-party distributor.

Merchant Model

With a Merchant Model, a third-party distributor purchases hotel inventory in advance, and then resells it to travelers. The hotel gives the distributor a “net rate,” a negotiated rate that doesn’t include commissions. The Merchant Model distributor is then free to markup the price or create promotional packages – bundling flights and car rental with a hotel room – to generate demand. With Merchant Model providers such as Expedia, guests pay the distributor, rather than the hotel, at the time of booking. After the guest stays, the distributor then pays the hotel the net rate, keeping the marked-up difference for themselves. One advantage of this model is that cancellation rates tend to be lower, likely because guests feel more secure when they pay in advance and are less inclined to cancel.

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Opaque Model

There are times when it may be worthwhile to sell rooms through lower-margin channels, such as those in the Opaque Model. Opaque sites, such as Hotwire, are booking channels where the hotel name remains hidden from the customer, i.e. “opaque,” until after the booking is complete. Prior to booking, guests only see the destination, star rating, and room rate. This option gives hotels the ability to unload distressed inventory to price-sensitive customers without jeopardizing their brand integrity or established pricing structure. Low-margin channels can be strategically used to create a base for compression, or for reaching an occupancy threshold that permits a hotel to receive reimbursement from their brand’s loyalty program.

Going Direct

When calculating the costs associated with different channels, hoteliers must also remember to include the distribution costs associated with generating direct bookings. These may include website maintenance, search engine optimization (SEO), email marketing campaigns, loyalty programs, and labor costs. And if a hotel decides to offer value add-ons to entice more direct bookings, the cost of the add-on should also be incorporated in determining its overall impact on the hotel’s bottom line.

In the end, finding the optimal channel mix for your hotel requires thoroughly calculating, tracking, and analyzing the costs and revenue of each channel. Carefully evaluate how much contribution goes toward operating expenses and how much toward profits.

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