Would you ever go to the other side of the world to make a hotel reservation in your own country? A proximity trip, to use a term that has become a buzzword in recent times.
Or, again, would you ever ask a friend of yours to call his dad to call his brother to call her wife to book a hotel… for you?
Likely your answer would be a loud “No”. First of all, logically, if you need a hotel you will either book directly via website/booking engine, phone, email, chatbot, or you will use an OTA like Booking or EX as the only intermediary between you and the hotel.
And secondly, clearly, in the internet era, there is no need to physically move anywhere to book any hotel, no matter where you and the selected hotel are.
Yet, this is exactly what virtually happens in the crazy jungle called Hotel Distribution. Every. Single. Day.
No one is excluded, nor you. And neither if you believe you’re 100% in control of your distribution.
In this co-written article with colleagues and friends Alessandro Crotti and guest Osvaldo Mauro, we’re going to reverse-engineer (or how we prefer to say: peeling the onion) what exactly happens behind the scenes, most times unbeknownst to you and most hoteliers all over the world, with real examples and taking into account different possible scenarios that make this whole magic happen.
Ready? Let’s dive in.
Infographic: from Italy to Italy via China
In order to make the whole concept crystal clear, let’s start with a real example. Following is a recent real reservation that we reverse-engineered (peeled the onion) to reconstruct who got the room from whom… and how did the final guest make the hotel booking – or better, the hotel received the booking!
It’s a bit (lot) crazy (if it wasn’t, we wouldn’t be talking about it 😊), so we’ve created a small infographic that visually represents each step of the booking process:
The uncontracted OTA was Chinese (we mean, literally a Chinese website). What makes this above scenario even crazier is that the hotel is in Italy… but so was the Guest: an Italian booking from Italy.
But let’s recap, from the perspective of the Guest:
- The guest booked via OTA, more precisely what we refer to as dual-mode OTA: This is typically an OTA that gets rates both directly from the hotel and from other agencies, at the same time;
- The dual-mode OTA bought the rate from a retail agency in China;
- The retail Chinese agency bought the rate from a Bedbank;
- Bedbank bought the rate from the Travel Switch;
- Travel switch bought the rate from the Hotel’s contracted OTA;
- The Hotels’ contracted OTA passed the reservation to the Hotel via Channel as a “normal” OTA reservation.
Notice though that this is just one of many different possible combinations. And certainly not even the most extreme one.
But before getting into each of these points, let’s quickly talk about an important premise that will lead us to better understand everything that will follow.
Travel connectors or switches: what’s in it?
Travel Connectors or Switches or Hubs are IT companies that created an intersection of all the connectivity links (boomers would say XML) amongst all the players of the online distribution.
In a way, they are nothing new. Connectivities existed also before but these companies can run “deep queries” in a blink of an eye.
For deep queries we mean, not a company A that is requesting something (link availabilities and prices) to a company B, but a spider that can crawl all the possible options to find a better deal, amongst all the connected companies.
It’s like spidering the web for a solution but in the world of travel b2b connections. Bed Banks, Wholesalers, Intermediators, Channel Managers, Consolidators, OTAs, GDS, Tour operators, Corporate Offices, and others are all connected in such ecosystems.
Palma de Majorca, Wroclaw, Beijing, New York are the main headquarters of the connectors companies. They aim to create marketplaces where all the travel players can TRADE their services and products paying them (the hubs) a small fee for every query.
The tech advantage of these companies is that they can supply a deep query result to the applicant (ex. an OTA or a Meta) in the time between the press of the search button and the fill of the results.
They do it mainly by elastically scaling their IT infrastructure in the cloud and with the use of NoSQL databases, hybrid databases, and smart-caching the previous search results. Something much less complicated than your home voice assistant.
Everyone can open an OTA, in 0 time.
It became very famous in the industry, despite no one even knowing who they were, where they were based, or who was behind this ghost OTA.
As we know Amoma doesn’t exist anymore, yet their ashes are still heavily among us, just with other names and in an even more complex hotel distribution scenario.
The most important aspect of the ghost-model is quite simple: anyone in the world can open an OTA with basically no costs and without a single contract with a single hotel, yet selling a worldwide portfolio of properties, of any sort of type, shape and category.
Translated: anybody on Earth can sell your hotel.
How bad can it be? In fact, in theory, this would be awesome for every hotel. It’d be like an affiliate-marketing model in which the hotel has an endless list of sales representatives all over the globe, ready to maximize its reach.
But, as we all know, hotel distribution is such a dangerous minefield that it’s almost impossible not to get hurt at times. In fact, the problem is not in the model, but in its (lack of) regulations and transparency (we will dig in further later on in the series).
However, from a technical and operational standpoint, opening an OTA has become extremely easy. If, for example, tomorrow we decide to open our very own EasyGhostTravel, all we need would be connecting to an API listing a list of hotels we want to resell, gently provided by some OTA hotels have a direct contract with… and voilà, EasyGhostTravel would be ready to sell.
And that’s exactly the problem: when the Entry Commandment makes it soooo easy for everyone to get into this (or any other) business, the level of opportunities shrinks, whilst the probabilities of problems skyrocket.
So, let’s start digging into each of the players of this fantastic scenario, starting with…
The margin game
The question is: how can a reseller make a profit from a reservation that has multiple touchpoints like the messy one highlighted earlier?
Assuming that the hotel is in parity rate and sells at 100 dollars (gross rate) and the OTA commission margin is 20%… In our example, in between there were:
- a Travel Switch
- a Wholesaler
- a Chinese Travel Agent
- a Dual-mode OTA
Every seller needs to make revenue out of this 20 dollars margin coming from the original OTA, one would therefore ask if that’s really worth it, considering the profit dilution caused by 4 intermediaries.
To understand this, we need to stop thinking about the single commission logic but factor the profit amount in economies of scale. We do have experienced reservations being booked by the customer with a value of 1 euro margin for the reseller. As crazy as it sounds, at first sight, we just need to acknowledge that a small margin contribution is multiplied by X thousand of sales that make, in the end, a crazily huge profit for the OTA. OTAs can rely on wide distribution and economies of scale, Chains in a way, single Hotels just cannot.
The business model of Travel intermediations is much different from that of hotels.
First, the profit stream is not only linked to booking transactions. The value of a tech company is more and more in its revenue growth (how fast it can increase its revenue) rather than its fundamentals (Ebitda).
The community of users of an OTA can be monetized in alternative ways (third-party cookies, advertising, to make an example). Any automatic positive transaction is a good transaction, even if the margin for the Robo-Ota (we trademark this too!) is 1$ per booking.
- Robo-Ota rule n1. Cps positive. Create a positive flow of transactions buying customers from advertising with a granular CPS (Cost Per Sale) lower than the cost of the rooms supplied by the market (via trading switch).
- Robo-Ota rule n2. Scale it up. Once you’ve built this machine, let’s send it #2themoon (make it produce more transactions possible) before some other smarter robot comes to town.
- Robo-Ota rule n3. No hassles. Pass the responsibility for the actual fulfillment of the transactions (the bookings) to the other players. Robot OTAs remain just “external facilitators” or promoters of the booking process.