How to work with OTAs (including tips for negotiating fair fees)

You fancy a short city break in Prague. You don’t know anyone there and are unfamiliar with the destination and its accommodation landscape, so what do you do?

Put your non-hotelier hat on for a moment and, assuming you’re looking for a hotel – rather than camping, short-term rental, or other bed and breakfast – the chances are you’ll go to your favorite search engine and type in “hotels in prague” or similar.

When we do this on Google, the top two results are Expedia and Booking.com. Below the sponsored panel, there’s a cluster of further results, including both of those sites again, as well as Hotels.com, Kayak and TripAdvisor.

With the exception of the latter, which is an aggregator, these are all online travel agents – or OTAs. This highlights the importance of establishing appropriate channel management to ensure your fair share of bookings.

OTAs attract huge volumes of traffic and transactions for the hospitality industry, with estimates of around 80% of travelers using OTAs before making any purchase.

So if you don’t have a well-defined strategy for when and how to work with them – or your policy is out of date – now’s the time to (re)appraise your operations.

When you should partner with an OTA

The heading above begs the question that you do need to partner with an online travel agency. Technically, you don’t, and certain enormous chains, particularly those in the budget market, make a point of taking only direct bookings on your own website, a.k.a. Brand.com.

But even they are a very small minority among their peers, and for smaller chains and independents, not partnering with OTAs is almost certainly a false economy on the basis that you can never achieve the marketing reach, increased visibility and reputational advantages that they offer, and, as a result, occupancy will suffer.

OTAs attract huge volumes of traffic and transactions for the hospitality industry, with estimates of around 80% of travelers using OTAs before making any purchase.

When the relationship is finely tuned and tailored such that OTAs don’t become your only channel, the cost of these relationships in the form of the fees can be more than compensated for by significant bookings.  

We’d refer you back to the search engine scenario above; the majority of hits were for OTAs, and it would take a bold traveler to book one of the handful of actual hotels that were returned without conducting additional price comparisons. 

So the case for working with online travel agencies is clear.

But this doesn’t mean that you can’t reserve some of your best offers for Brand.com, the ones you promote through your own channels. 

While OTAs can be a useful tool for visibility and reaching a broader audience, direct bookings offer hotels greater control, improved profitability, and the opportunity to build stronger relationships with your guests.

Direct bookings allow you to avoid commission fees charged by OTAs, which can range from 15-30% per booking, which can significantly improve your bottom line.

Understanding common OTA fees

Fees – the basic way that OTAs charge for their offering – and contractual details vary from one OTA to the next but, to remain competitive with their hotel partners, the differences tend to sit within a recognised range, which we’ll look at below.

We’ll also discuss the other key factors that revenue and distribution managers need to assess alongside commission.

Commission

Fee, commission, cut, charge… These are the words most commonly associated with OTAs and the basic payment model by which they operate, and they all amount to the same thing: a percentage of each transaction.

There’s nothing new about this concept, which was inherited from high street travel agents, but because it’s all done digitally, keeping track of it and factoring it into your strategy is easier if you have the right channel manager, revenue management system (RMS), customer relationship management system (CRM), property management system (PMS) and other software in place to facilitate and monitor your transactions.

You might expect the OTAs with the biggest reach – the likes of Booking.com, Expedia and Priceline etc – to take a cut of somewhere between 15 and 30%.

Consider also that it’s in an OTA’s interest to work with hotels that offer a good guest experience, because they’ll want to book through them again. So this gives you some leverage in future negotiations.

Like so much in business, the laws of supply and demand play a big part – there are a lot of online travel agencies competing for market share. And seasonality and location can affect these percentages.

Commission on upsells

It’s not uncommon on some providers’ contracts for fees at a similar level to apply to upselling that forms a part of the transaction on the OTA’s site. This is down to your contractual negotiation. You might, for example, be asked for a slightly lower percentage if you include upselling.

Whether to accept that quid pro quo is a judgment call, and the existence of upsell commissions is a driver for promoting direct bookings or reserving upselling for follow-up emails.

Rate parity

One of the thorniest issues in the OTA landscape is that of OTA commission rate parity – or disparity.

Though it might surprise travelers who are in the habit of seeking – and expecting – bargains and discounts, most OTA-hotel contracts demand parity between hoteliers’ own sites (Brand.com) and OTAs.

In other words, to the potential guest, the price must appear to be the same whatever the platform.

Whoever you’re working with, check that the contract doesn't undercut you – and then monitor it, bearing in mind that arrangements with wholesalers can sometimes contribute to this problem.

Cancellation fees

Beware the hidden rise of cancellation fees.

Some OTA websites will attract guests by offering free cancellation. This could play to your advantage. It is, after, a numbers game. But, given that Phocuswire found a higher cancellation rate among rooms booked through OTAs than those booked direct, it’s worth monitoring what this does to your bottom line and reviewing those channels where this becomes a repeat problem.

Renegotiating or canceling your contract is always an option.

State and goods taxes

Before we move on, we should flag up the often complex matter of state and goods taxes, and who’s responsible for collecting these monies.

The tax regimes of some US states or locales could impact hotels that partner with OTAs. For example, Virginia requires OTA providers to collect taxes when they facilitate bookings. But not every state has these requirements. 

So when scrutinizing contracts, weigh them up against the regulations and make sure that everyone knows who’s responsible for what and has the mechanisms in place to deliver.

How to negotiate a better price with OTAs

First off, make sure you only use OTAs when you know they are bringing in business that would otherwise not be possible for you to attract. That will save you a great deal of money on commission.

When you do end up working with OTAs try and negotiate as best you can. If you can demonstrate that you’ll bring them a lot of business and you’re willing to work with them on exclusive offers to attract a customer base, then they might feel tempted to reduce their commission.

If there’s a lot of competition in your immediate market, you can only push this so far; there’s no getting away from the laws of supply and demand in a popular destination, so accepting a comparatively high commission might be the right choice to maximize sales and beat your rivals. But keep an eye on the bottom line.

The same applies in the high season.

But if you establish and maintain a good relationship with your OTAs and can offer them an attractive proposition for visitors to their site, or possibly even volume discounts, there’s no reason you can’t end up on top (in a way that doesn’t give your OTA counterpart the impression that you’re taking advantage!).

You could also consider asking for a contract in lieu of commission, then monitor performance and ask for lower rates if and when bookings dip. This should incentivize the providers to up their game.

Other ways to minimize OTA commission fees

Let’s be frank. Though you often will, you may not have the option not negotiate to any great degree with OTAs. Sometimes, for whatever reason, it simply isn’t realistic. So, what can you do to minimize OTA fees?

There are two broad strategies, which we’ll summarize in turn:

• Identifying and working with niche OTAs

• Eradicating OTA fees altogether, at least for some transactions, by driving up incentives to book direct

Shop around to find the best OTAs for your hotel

Not all OTAs are created equal. We’ve already established that their commissions vary. And, given the complexities of revenue management, and profit and loss economics, some potential relationships just aren’t worth pursuing.

So when you’ve exhausted the obvious list of OTAs – your Expedias, your Booking.coms and your Pricelines – which of the niche players can you set your sights on?

The short answer is that you’d be surprised by how many there already are and how many more are trying to break into this space. Booking and marketing software company Xola recently estimated that there are more than 400 on the market.

Why not take advantage of their eagerness to do business with you? They’ll all have their own USP, so weigh up which might dovetail best with your marketing strategy.

While it’s sensible to maintain friendly relations with the household names and use their services where possible, it’s sometimes better to choose – or focus your efforts on – a niche OTA. One of the most compelling reasons for this is that it increases your chances of finding travelers that will become repeat guests at your hotel.

Prioritize direct booking on your hotel website and reduce your dependency on OTAs

Profit-wise, direct bookings through your own booking engine are the way forward.

As long as these activities don’t preclude you from improving your OTA relationships for maximum reach, consider the following tips for encouraging direct bookings alongside your general marketing efforts and promoting loyalty programs. Below is a list of strategies that you can use to encourage guests to book directly, rather than through OTAs.

• Loyalty programs: Create a loyalty program that offers exclusive benefits, such as free Wi-Fi, room upgrades, late check-out, or dining credits to guests who book directly. This not only incentivizes direct bookings but also encourages repeat business

• Best rate guarantee: Assure guests that they will always get the best rate when they book directly through your website or reservation team. If they find a lower rate elsewhere, match it and offer an additional discount or perk

• Direct booking discounts: Offer special discounts or incentives that are only available to guests who book directly. This could be a percentage off the room rate, free breakfast, or a complimentary service like airport transfers

• Personalized packages: Provide personalized packages or experiences that guests can only get when they book directly. These could include spa packages, golf getaways, culinary experiences, or local tours

• Ease of use: Booking abandonment is a big problem in the hotel industry. Make sure your website and booking engine are user-friendly, intuitive, and mobile-optimized. A seamless booking process can greatly encourage direct bookings. If it’s even smoother, transparent and more secure on the channel you control, you can expect an uptick in reservations

• Effective marketing: Use social media, email marketing, and SEO to reach potential guests and highlight the benefits of booking direct

• Great customer service: Offer superior customer service before, during, and after the reservation process. This can include a dedicated reservation team available via phone or live chat to answer questions and assist with bookings.

• Rely on other local businesses: Finally, explore your options around local partnerships rather than OTAs. These can help hotels attract guests by creating a mutually beneficial relationship. For example, a museum could recommend your hotel in return for you recommending them as an attraction for guests. Take a look at Meow Wolf’s Guide to Hotels in Denver by way of example.

• Flexible cancellation: Offer more flexible cancellation or modification policies for direct bookings, giving guests peace of mind and a reason to book directly

Beat competitors and OTA websites with the best rates for your hotel rooms

As shown above, the hotel distribution landscape is a convoluted one and it’s near impossible to manage manually. This is where a hotel channel manager comes into play.

A hotel channel manager assists you in effectively marketing, managing and selling hotel rooms online through multiple third-party sites and direct on your own website. This enables you to effectively control pricing and availability across all your online channels. 

With Lighthouse Channel Manager you can manage prices and availability of all your online booking channels through one central dashboard. Modifications are updated in real time on all channels. Saving you time and reducing the chance of overbooking.

While this article is premised on the notion that you can’t and shouldn’t omit OTAs from your mix, it should go without saying that you will always be keen to maximize direct sales where possible.

And, other trends notwithstanding, this starts with getting your pricing strategy right.

To maintain competitive dynamic pricing and complement your channel manager you should also include a pricing recommendation tool which unlocks new revenue opportunities with data-driven rate recommendations.

Pricing Manager by Lighthouse tracks billions of data points to automate a dynamic pricing strategy across the room inventory at your hotel, so your prices are always fully optimized to match market conditions.

With these tools in place – and adopting the strategies outlined above – you have a fighting chance of maximizing profits by managing your channels correctly and attracting direct sales with the best room prices.