Direct vs Indirect Bookings – Yes or No and Why

direct vs intermediary bookings

In the travel industry, every time someone speaks about booking directly, you´re in for a good argument!

I have been in dozens of travel fairs, conferences and meetings and nothing fires up the room the most…

If you´re a hotel owner or manager, chances are you´re very pro direct bookings. On the other hand if you work for an intermediary, travel agency or tour operator, direct bookings are your worst enemy. After all, if 100% of the travel related bookings were direct, you´d be out of job, right?

In this argument, “we” from the travel industry business very often forget about the 3rd part in this equation: the customer!

 

Customer´s opinion on Direct vs Indirect Bookings

From a customer´s point of view, there´s no difference between booking directly or via 3rd parties. The difference lays somewhere else and can basically be summarized in 3 points:

  • Is it cheaper?
  • Is it safer?
  • Is it easier?

Let’s explain that a bit further:

Is it cheaper?

  • Is this the best deal I can find?
  • Are these the best conditions I can find? Refundable rates are way better than non-refundable rates on account of flexibility, and a rate including a free upgrade is always better than a normal rate even if price is the same between them.
  • Are there taxes, hidden fees or other non-accounted expenses I need to worry about?

 

Is it safer?

  • Will I get tons of spam after submitting my personal information?
  • What about credit card details? Is my credit card safe with them?
  • Are they established and well known or shady, obscure, without references?

 

Is it easier?

  • Is the information accessible in my native language?
  • Do they present rates in my local coin?
  • Can I easily access information to decide what/why to book?
  • Is it easy to book in just a few steps?
  • If something happens, will I have a hard time solving my problem(s)?

 

Being able to acceptably satisfying the answers above is what really matters to the end customer. Knowing if they´re booking directly your hotel, tour, cruise or holiday package isn’t the customer primal concern!

 

Why should you care from where your customer comes from?

The 3rd party side is self-explanatory: if people book everything directly you´re out of business! From the business owners the perspective is actually not very different.

The true is that more often than it should, indirect bookings threaten your business.

If you don´t take the appropriate time and effort to manage your finances and pay close attention to your bottom line, very often your CAC or Customer Acquisition Cost (commissions payed to an intermediary are exactly that) will rise very fast.

Take for example the hotel industry:

In Europe, where independent hotels have the majority of the market, it´s not uncommon to see intermediaries asking for as much has 30-35% on your gross sales.

This means that for every customer they send to your hotel or accommodation unit, they´ll charge you 30 to 35%! Basically they´re using a customer acquisition model to charge you for customers they thrown at your door.

 

Hotel industry has one of the highest customer acquisition costs across all regulated industries Worldwide

And in America – although hotel chains have a much higher market quota, 20-25% commissions are very usual. In fact, until recently, Expedia, a very well know Online Travel Agency, was known as “Mr. Quarter” in a clear allusion to they´re breathtaking 25% commission cost on gross rates.

Take that into account and the fact that lots of hotels have operating costs of 40-50% before EBITDA (Earnings Before Interests, Taxes, Depreciation and Amortization), and those 20 to 35% on commissions can hit you exactly where it hurts the most, on your bottom line / net earnings!

 

This sets the tone to answer the above question: Why should you care from where your customer comes from?

Answer: You should care because of its effect on your business. The more you pay to acquire a customer, the less your net earnings. The less your net earnings, the harder for you to pay better salaries, to improve your product / service quality and last but not least, your shareholders.

 

What about tomorrow?

Stop and think for a second. Can you say the customer is yours when:

  • He/she pays to another entity and not you?
  • He/she is enrolled is someone else’s loyalty program?
  • You don´t even have they´re complete personal information making it very hard to reach them directly?

Even grimmer than the sky rocket customer acquisition costs, is the possibility of entirely losing the contact with “your” customer.

A customer acquisition cost isn’t supposed to be a fixed charge every time a customer walks in your door. It´s exactly the opposite! When you acquire a customer and ponder on customer acquisition costs you should always consider it´s lifetime value.

 

Let’s run some numbers here:

Imagine that your direct marketing campaigns have a CAC of 20% every time they first pull a customer for. And just to simplify things, lets suppose that the average customer spending is 100€ every time he stays with you. And the average life time of your customer is 2 years (on purpose way below average), on which he repeats his stays three times a year.

This means that for the first time he stays with you, you´ll have 20€ of CAC (100€ * 20%). It´s unarguably high, but wait because it gets better.

Since on average your costumer life time is 2 years, and he repeats his stay three times a year, his simple lifetime customer value for your business his 580€ (table 1). Even if you attribute and additional average 6% of cost per booking due to operational costs (website costs, call center costs, etc…), you´re looking to a customer that is worth 544€ net out of 600€ gross values (table 2). The same customer via a 3rd party would cost you 20€ per booking, accounting for 120€ in commission, and a net worth of 480€ by the end of its lifetime value (table 3).

Table 1 – Simple Customer Lifetime Value

Direct Bookings– Simple Customer Lifetime Value 

Table 2 – Customer Lifetime Value with Operation Costs included

Direct Bookings – Customer Lifetime Value with Operation Costs included

Table 3 – Customer Lifetime Value via 3rd parties with 20% commission

Indirect Bookings – Customer Lifetime Value via 3rd parties with 20% commission

 

This very simple exercise means that on this example, per customer (and using a very scarce average customer lifetime in years), you´d get an extra +13,3% (+64€) if he booked directly with you and not via an OTA.

If you were to multiply this by 1.000 customers, it would be worth an extra +64.000€…well, you get the idea!

No wonder hotel chains such has Hilton Worldwide setup digital campaigns enticing the customer to book online directly with them and stop wandering around clicking in other websites (it´s fair to assume they´re aiming Expedia and Priceline group):

 

But the scariest part about this is that there is no way to calculate lifetime value with a 3rd party!

Remember that the customer is not directly engaged with you on the booking process. He / She is engaged with the travel agent or the tour operator and they can easily present them with different hotel choices at their will or interest.

 

Why should this also matter for the customer?

On a cold analysis, this normally wouldn’t matter for the end customer. They normally seek the best rates (searching rates online is easier then ever with Trivago, Kayak, TripAdvisor and others), and as long as they have confidence and easy access to book, it´s the business (in this example the Hotel) problem…right? NO!!!

If a business or industry is not profitable, guess what normally happens to rates? Sometimes they tend to go up and make up for the losses. Other times, business keep low rates but make up by laying off employees and/or delivering bad service and product…which eventually always reflects negatively on the end customer.

Even from a customer´s perspective, its better to have a healthy thriving industry.

 

Does this mean that there is no space for intermediate or indirect bookings?

No, there is. Most of the times 3rd parties thrive from the lack of experts on the business side. This is especially true and visible with the online business and is always evolving marketing approaches, but we´ll tackle that on another article. In the meantime you can read this article about increasing online sales.

 

Cheers,

Rui

 

Updated 18.02.2016

3 Replies to “Direct vs Indirect Bookings – Yes or No and Why”

  1. Rui, thank you for the insightful and articulate blog post. I’d also add that not only is the near term CAC significant but the long term strategic threats are really material. If you can’t engage directly with customers how do you know who the target is, why they chose you, how to improve, where to invest in the hotel etc.
    Alexandra

    1. Dear Alexandra, you are absolutely right!
      Get to know your customer is invaluable and decisive, not just for hotels, but for all business alike. Customer actionable data is one of the biggest drivers for growth and if you´re getting cut off by intermediaries chances are that RIGHT NOW you´re not reaching your full growth/profit potential.

    2. Alexandra, congrats on your Price Check Widget. Saw it last year in Dublin @ Phocuswright when it won the European Travel Innovator of the Year Award. It´s a very interesting tool to help website visitors trust your rates are accurate and on parity without them living your website. Hope your quarrel with Booking.com gets solved quickly!

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