Choice charges each of its franchised hotels about 8.5% of their total revenue (regardless of source, even if they don’t refer the business to the hotels) in fees and royalties. In other words, if you operate a Choice-franchised hotel, 8.5% of the money you take in goes straight to them. For most hotels in their system, required purchases and other charges bring the total closer to 12%.
At a Quality Inn that we ran, 12% of our rented rooms are Choice reservations referrals — and half of those originated from online travel agencies.
Any hotel can, with a property management system that costs $1000, give or take, can access a reservation feed from OTAs and GDS (Global Distribution System) sources.
Bottom line: we were paying Choice just under 12% of our revenue, and getting in return only 6% of our business.
No, I’m not surprised that any Choice-franchised hotel that can get away with it might leave the Choice system. The only reason a lot of hotels nowadays have any kind of franchise is because the mortgage lender who holds the note on the hotel requires a franchise as part of the mortgage agreement.
(Theoretically, this assures the quality and stability of the hotel operation, and makes the loan more safe. Eventually, mortgage lenders might start noticing that this isn’t necessarily true: most franchises don’t help the hotel. Nor do the franchise organization in a lot of cases really enforce quality standards on inspection — they don’t want you to flunk the QA, they want you to stay in the system and keep paying fees and royalties. Also, perhaps the practice of banks requiring a franchise, or the continuation of a franchise, for a hotel mortgage loan should be looked at by antitrust lawyers — it may be permissible for banks to be biased in favor of a franchise, but the legality of requiring one as part of the loan agreement is questionable.)
So . . . now that your newly independent hotel is out of the Choice, or Wyndham, system, you’re home free, right? 6% of your business is going to come from the OTAs and you save the 8.5 to 12% of your revenue?
Not so fast. Those OTAs charge a travel agent commission that’s exorbitantly high — 20 to 25%. (Their ‘rate parity’ policies definitely need a look by antitrust lawyers: they insist as part of your agreement with them that you make available to their customers your ‘lowest publicly available rate’. Since you deal with multiple OTAs and your ‘lowest publicly available rate’ can only be one number . . . I think they call that ‘price fixing’ — and courts in the European Union have already climbed on them about it.)
Nobody wants to pay that high commission. Once the OTAs in the U. S. get busted by the Federal Trade Commission for their ‘rate parity’ scheme, the hotels will have tremendous leverage: either cut my commission rate, or I will no longer list my rooms on your website, or if I do, I will make them available to you only at a rate high enough to cover the exorbitant commission that you charge. Charge me a fifty percent commission if you want — I don’t care: all it will get you from me is rooms priced at about 50% more than my rack rate, and your competitors among the other OTAs will be able to offer them much cheaper, and eat your lunch.
Meanwhile, if the OTAs want to use me, I’m going to use them right back. I’ll list my rooms on their sites, and I’ll pay the commissions when the guests show up . . . but I’m going to be working on having those guests, in the future, become my customers instead of Expedia’s customers, or Hotels.com’s customers, or Booking.com’s customers. Even if I have to give them a break off the rate, charge them twelve percent less than what Kayak charged them on future stays, I’m still better off — at least I’m not paying that 20–25% commission.
Hopefully, that explains why (and in our case, how) hotels are ‘stepping up our game’ against the OTAs.
It’ll work itself out.
As far as Choice and the other franchise organizations ‘stepping up their game against the OTAs’ goes, it’s not working, and it’s not going to work. Booking directly with the hotel, or the Choice central reservations system, has always been an option for the guests . . . and the OTAs came to be anyway, and are still now what half the traveling public uses rather than any chain’s central reservations system. The biggest thing to come out of any hotel chain’s attempting to ‘step up their game’ against that is Roomkey.com, operated by a consortium of franchise organizations who went after the OTAs by creating a site that presumably offers the same advantages — you get a discount if you have the loyalty card for the hotel brand where you’re trying to book a room. They’re making you work for it. Priceline and Hotwire don’t require anyone’s loyalty card.
Choice’s ambition exceeds its capabilities. For another example of how so . . . even Google got out of the hotel ratings and reviews business, and conceded the field to TripAdvisor, but Choice soldiers on with theirs. If you stay at a Choice hotel, you’ll get the e-mail inviting you to write the review. Or you’ll get the comment card from the front desk when you check out, and they’ll post it for you — if it’s positive. No, I don’t know where the not-so-positive ones end up. I don’t empty the wastebaskets in the g.m.’s office, the housekeepers do: presumably they take it out back to the dumpster, and who knows what you’ll find in there . . . But if you’ve ever looked at the one- to five-star ratings of the hotels on the Choice website, did you ever notice how a Choice franchised hotel’s ratings and reviews tend to run just a little higher than that hotel’s TripAdvisor bubble score? Why, certainly, people are going to trust and rely upon those rather than TripAdvisor! . . .
Hotel franchising, as an industry, has been riding too high, for too long . . . and within the next few years — sooner or later it must be — that someone will notice that the horse went out from under it several years ago, and gravity will do its thing . . .
It’ll work itself out.
Originally appeared on Quora
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