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Every business faces the same basic question when designing products and services: buy or not. Few companies can do everything themselves, and even for those who can, it is often not the best choice. Other companies are typically more efficient at a specific job, so division of labor makes everyone better off.
This is especially true when it comes to sales, marketing and distribution. Few businesses have the expertise and reach to serve every customer on their own. This is why Nike sneakers are not only sold in Nike stores and farmers sell their products to wholesalers and deliver to many local shops instead of handling each customer themselves.
Of course, this is not a binary decision, and in practice companies use a variety of distribution channels, including selling directly to consumers. The internet has made the latter much easier, and many businesses now have their own online storefront.
The hospitality sector is no different. Hotels can advertise in travel magazines, sell rooms to tour operators such as TUI or ThomasCook, work with travel agencies, promote their own website on Google or social media, partner with national or local tourism marketing organizations and increase word of mouth marketing. Providing an unforgettable service. Indeed, direct sales to consumers remain the most important sales channel for hotels.
The Internet has spawned online platforms such as Booking.com that integrate product offerings and consumer interests. This will be of great benefit to everyone. First, consumers find it easy to search, compare and book a hotel or other accommodation. And hotels, for their part, would otherwise be difficult to access for many users around the world.
In short, this is the modern version of a traditional travel agency but with a much higher standard and reach. While in the past a travel agent could only serve a limited local audience within the area where they are booked, online travel platforms offer unlimited global reach and are available in dozens of languages. And users are always just one click away.
Despite technological advances, the modus operandi remains essentially the same: online travel platforms, like their physical counterparts, operate on a pay-for-success basis, the so-called agency model. If and only if a consumer books their hotel room with a travel agent, that agent gets paid. This procedure has long been valued by hotels because it is completely risk-free, with no upfront costs. Travel agencies provide the necessary services, and hoteliers maintain full entrepreneurial freedom.
The hotels set the room rates and decide on the terms and conditions. For example, you can charge high fees and off-season prices during peak periods, and change it whenever you want. Online travel platforms are also often cheaper than other forms of distribution, for example, standard commission rates for Booking.com are 15%. In contrast, tour operators require a 25–40% discount on the hotel room rate as their own sales margin.
However, the Internet has created new challenges for this business model. The agency’s business model is based on trust. It is the implicit assumption that the travel agent or travel platform’s efforts will be rewarded when they generate more business. This trust is undermined when hotels attempt to free-ride consumers by encouraging them to find their hotel on an online travel platform, but (again) hold them directly to avoid paying the commission. While free-riding has always been done to some extent, the convenience of the Internet, where everything is just a click away, has increased the scale of this problem.
In the past, consumers would have had a lot of trouble if they first used a travel agent but then turned around and tried to book the hotel at a discounted rate. Since there were no real-time online reservation engines, one had to call the hotel to inquire about rates and availability, or send an email or fax and wait for a response. The level of effort often did not justify the level of benefits, thus eliminating most potential free riders. Now, what is needed is instant booking functionality on hotel websites and a concerted effort to change consumer behavior.
According to a study by EY-Parthenon, 41% of customers who book directly at small hotels come from those who find accommodation on the platform. Therefore, online platforms contribute an additional 15%–20% of bookings to accommodation. These are places where hosting providers do not pay commission for the platform. In other words, free-riding has become a common practice. It harms the business model of online platforms and reduces our incentive to invest in technologies and services that bring significant benefits to consumers and hotels.
Online travel platforms have greatly improved the choice and transparency of offerings for consumers, ensuring consumers get the best value for their money. EU consumers saved €20 billion in 2019 alone.
On the other hand, hotels benefited from 133 million more room-nights in the same year. Even in two of the toughest years for the travel accommodation industry, online platforms continue to drive more bookings for our accommodation partners. The biggest challenge a hotelier faces is the highly perishable character of the unsold room. In other words, the key driver of income is the level of occupancy. This is true for all properties, and doubly true for small and independent hotels.
Free-riding undermines all these benefits and destroys trust between the platforms and accommodations listed on them. Hotels make an active choice to partner with the platform for sales and distribution. This partnership requires fairness and mutual trust. Without online forums, everyone would be worse off. Let us all work together and maintain this mutually beneficial business model.
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