In summer 2018, after graduating from my Bachelor degree in Italy, I started an internship in Expedia. At that time, I knew very little about the travel industry and even less about OTAs (online travel agencies). But, in a few months, I quickly realized that I ended up in a very interesting, dynamic and competitive business. I loved it.
As my colleagues from the account management department told me, you cannot get bored working in Online Travel because every few months a new tool, competitor or technology arrives and reshuffles the cards on the table (just imagine what happened when Airbnb arrived and reshaped the whole market offer), so everyone needs to be flexible and ready for the next change. In short, the online travel industry rocks!
During my time in Expedia, the new raising fashion was “commission cutting”. OTAs normally work on commission, taking around 15% of the total booking rate (i.e. if you book a room for one night in a hotel at 100 €, the OTA will get 15 € and the hotel 85€). With this new “commission cutting” technique OTAs were now able to offer lower rates than the ones agreed with the hotels, so even lower than competitor OTAs. But why would they want to offer lower rates and reduce their revenues per booking? The question is legitimate if you are not familiar with the industry, so let me explain further.
At that time the Online Travel word was very focused on rate parity. All major OTAs were given the same rates from hotels. So, if a customer was looking for a room in a specific hotel on Trivago, or directly from Google Hotel Search, he saw the same rate offered by all OTAs for that hotel. In this way, he didn’t have any specific interest in choosing, for example, Booking.com over Expedia. The only incentive would have been if he was subscriber of an OTA member program (i.e. Expedia offers 10% discount to its members), but this applied only to active customers. So, OTAs only had two ways to grow the number of new customers:
- bidding on Google, Trivago or TripAdvisor to be shown higher in rankings and hope the customer would click and book through them
- Run marketing campaigns to advertise how their service was better than competitors (bigger inventory of hotels, quicker refunds, better and faster customer service)
These are both pretty expensive ways to get new customers.
All this changed when, with technology advancements, OTAs became able to show different rates to different customers (IP addresses). They were able to offer the normal rate to some IP addresses and a lower rate (with commission cut) to others. It was the “commission cutting” technique. Finally, they could effectively target new customers giving them a real motivation to choose them over competitor OTAs, because they offered a lower rate for the same hotel room.
A big advantage of “commission cutting” was that it was pretty cheap from OTA side too. It only costed a reduction of a few commission points, instead of gaining 15% per booking they would gain, for example, 13%. But the potential was huge, because a new customer can quickly be turned into a frequent customer in this business, with the member programs, as explained before.
Another huge advantage, coming from offering a lower rate is that metasearch website, often used before booking an hotel room (Trivago, TripAdvisor), will always show you as the first result (and usually with a “best price” tag) if the customer is looking for the specific hotel where you apply “commission cutting”. That is definitely jackpot!
Of course OTAs, always hungry for new business, took full advantage of the new technique and, as it usually happens, it quickly became a problem. It started a price fight, it created a heated debate on the fairness of the practice (is it fair offering lower rates than the ones agreed with hotels?) and, later, fights with hotels (especially big hotel chains) that considered this behavior penalizing for their pricing strategy on the owned website. For brevity’s sake, I won’t go over all these topics, but I hope this is enough to understand the hectic and exciting vibe of the online travel world.
The funny thing is that Hotels didn’t even realize what was happening at the beginning. In fact, the rate cut was applied on the OTA commission and the hotels still received invoices with the correct amount that was due to them.
It could also happen that, by chance, from the IP address of the Hotel Manager the commission cut was not applied, so he would always see the full correct rate, while from another computer at the reception an employee checking saw the lower rates. OTAs, in the beginning, didn’t inform hotels about the new practice and how it worked so, as you can imagine, in the hotels everyone was going crazy checking the online differences and not understanding why they had lower rates online but still got paid correctly by OTAs.
A last important thing to say is that “commission cutting” is still used today. I am not aware of the last improvements but, if OTAs are now able to show lower rates (with commission cut) and target per device, per country or even per past booking history, this would have a great impact on Digital Marketing strategies of the industry. As I said, the Online Travel Industry Rocks!
Unfortunately, it hasn’t been the case for the last year. It’s been a very tough period for the travel business in general, probably one of the worst hit industry by the COVID-19 crisis. But I am sure that, like every good rock singer, it will come out of the crisis stronger than before and its rhythm will soon be even more hectic, vibrant and fun than before.
- Oliviero Carnavali