OTA (Online Travel Agent), Friend or Foe?
Updated: Mar 1
The Role of Online Travel Agents (OTAs) in the Hospitality Industry: Friend or Foe?
In today's hospitality industry, the role of Online Travel Agents (OTAs) has grown rapidly. OTAs seem to be the "best solution" for attracting guests to a hotel. But is that really the case?
It seems that from the moment hotels connect with an OTA, they believe everything will be fine. They expect a steady flow of reservations to fill their rooms. However, over time, many hotels have become overly dependent on OTAs. A significant portion of their reservations now originates from these platforms.
The Cost of Dependency
Furthermore, the commissions charged by OTAs are quite high, ranging from 17% to 30%, depending on specific circumstances. With such a large number of reservations and substantial commissions, the cumulative costs can become overwhelming. This situation raises an important question: are OTAs a friend or a foe?
To answer this, we first need to examine the sales methods in the hospitality industry. These methods are principally divided into two categories: direct distribution and indirect distribution.
Understanding Direct and Indirect Distribution
Direct distribution refers to sales conducted without an intermediary. This means hotels sell directly to customers or guests planning to stay. Since these sales are direct, there is no commission included in the sales price. In practice, direct distribution occurs through various channels such as the hotel website, hotel app, telephone, WhatsApp/Messenger, email, or chatbot.
On the other hand, indirect distribution involves sales conducted through an intermediary or third party. In this case, customers purchase from the intermediary, which receives a commission from each room sold. OTAs fall into this category of indirect distribution.
Both direct and indirect sales channels must operate effectively. A healthy ratio of direct to indirect distribution within a hotel is when direct distribution constitutes the majority. Empirically, a 20% indirect distribution portion is considered healthy. If direct distribution isn't functioning well, indirect distribution may become the majority.
Market Segmentation in Hospitality
In terms of market segments, sales can be divided into at least four categories:
Corporate
Government
FIT (Free Independent Traveler)
Travel Agent/Wholesale
Guests from OTAs typically fall into the FIT category. This illustrates that even if all four market segments operate optimally, it is unlikely that FITs will make up the majority of the overall market segment.
The Balance of OTAs: Friend or Foe?
The brief explanation above provides insight into the question: Are OTAs friends or foes? When something exceeds a healthy dose, it becomes harmful. In the case of OTAs, they can be friends when used in moderation. However, they become foes when hotels become overly reliant on them. Even a potent medicine can turn into poison if consumed in excess. A good management principle to follow is: "Don't put all your eggs in one basket!"
Strategies to Reduce OTA Dependency
So, what can hotels do if they find themselves overly dependent on OTAs? Here are some actionable tips to address this issue:
Examine the Production Portfolio: Review the existing market segments and strive to maximize each segment's production. This can help identify areas for growth outside of OTAs.
Activate Direct Booking Infrastructure: Prepare and activate the direct booking sales infrastructure. This includes optimizing your website and ensuring that your booking process is user-friendly.
Convert Indirect Bookings to Direct Bookings: Consistently and significantly work on converting indirect bookings to direct bookings. This can be achieved through targeted marketing campaigns and loyalty programs.
Conclusion: Finding the Right Balance
Is the OTA at your hotel a friend or foe? The answer lies in how you manage your distribution channels. By finding the right balance between direct and indirect sales, you can ensure that OTAs remain a helpful ally rather than a detrimental foe.
Remember, a healthy distribution strategy not only boosts your bottom line but also enhances your relationship with guests. So, take charge of your bookings and make OTAs work for you, not the other way around!
Written by:
Ojahan Oppusunggu, Director of Technical & Technology – Artotel Group
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