Monday, April 17, 2017

How do online travel agencies offer such low hotel prices?

They don't. We do. It comes out of our hide. Online travel agencies charge high commissions to the hotels. charges 20%., Travelocity, Expedia, Priceline and others charge between 22 and 25%. And that's if you have a franchise affiliation and let your franchise organization negotiate it for you.

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And those are the ones where you -- the consumer -- don't get that much of a bargain. A contract between a hotel and an online travel agency provides for 'rate parity': each OTA wants a promise from the hotel that the rate provided to it is the lowest publicly available rate, and provides stiff penalties to the hotel if a lower rate is found elsewhere. Likewise, every franchise organization offers some version of a 'Best Internet Rate Guarantee', and holds their franchisees to it. (I should have listened to my dad and made it my goal to go to Duke Law when I was a kid: I smell a lucrative opportunity here for a mass tort lawyer to file a class action suit on antitrust and price fixing claims . . .). Since the 'lowest publicly available rate'/'Best Internet Rate' can only be one number, and that number can't be any lower and still be either the 'lowest publicly available rate'/'Best Internet Rate' ; what you pay on any of those websites is going to be very close to the hotel's 'Best Available Rate', the rack rate (see Michael Forrest Jones' answer to What is and why do hotels have a rack rate? )

Moving along to the sort of OTA that is probably more the subject of your question, the deep discount, 'opaque' sites, and the Priceline 'name your own price' gimmicks. You 'name your price' on Priceline, or pick one of several lowball prices posted on Hotwire (we didn't post it), and they pick the hotel for you: they make a reservation for you at the hotel whose rooms they are selling at that price. You don't know which hotel which you'll be staying at until your reservation is confirmed (beware, it might not be ours), you 'pays your money and you takes your chances'.

With those websites, we make a lowball rate available to the OTA for a limited number of rooms of a certain type, and they sell the rooms for whatever they can get for them. We don't know how much they get, and we're contractually prohibited from telling you what we're getting for the room if you rent one. But the preceding paragraph about the full-price OTAs isn't just me going off on one of my famous tangents: it probably gives you some idea of the markup for the discount OTA, or at least the markup they're shooting for. (Hopefully - unless something so terrible happened to you there that I wouldn't wish it on anyone, even someone too cheap or stingy to rent a hotel room at what I charge for them - you've got some vivid memory of the fleabag voodoo hellhole of a motel you ended up in if you bid a price on Priceline's 'name your own price' or Hotwire that was too low, and you learn from your mistakes.)

Bottom line: if you call me, I'll give you a better rate than you're paying the OTA, and I'll get to keep more of the money I ask you to pay for your room for myself. That amount of money might be more than you'd pay Hotwire, but the room will be clean and your heat and TV will work and you won't see the local drunks and druggies hanging out in the parking lot or wandering the halls.

We're developing our own hotel brand ( ), and there's an opportunity in that for us. Hotel franchising is in its death throes, the only thing keeping it on life support is banks who like to see a franchise on any hotel for which they write a mortgage loan (at least a loan where they accept an 80% loan-to-value ration rather than something closer to a 20% loan-to-value ratio); and I wouldn't want to be sitting on too much Choice Hotels or Wyndham stock the day the banks get wise to the fact that half the referral business provided to the hotels by the franchise organizations is referred to them by an OTA. (Effectively, hotels pay 8-12% of their total revenue to the franchise organization for fees and royalties, but many of them get maybe 6% of their referrals - referrals not originating from an OTA - from the franchise organization in return. Talk about Paul Ryan's 'nation of takers' . . . On balance, franchise organizations don't do about half the hotels in the country a bit of good: they just give them an artificially high value.)

Our strategy is to use the OTAs, but do it with the goal of making each guest referred to us our customer for future stays, rather than the OTAs customer. If you get signed up for our loyalty card and call us (or log on to our website) for future trips; that gets you the lower rate than you pay the OTA for future stays (and we get to keep all the money, not just 75-80 percent of it), that gets you the discount for staying more than two nights (it's our planned pricing structure, but we can't give it to you unless you sign up for our card, because we can't give it to just anyone - rate parity, remember?), that gets you any entitlement rates we might offer (these won't include AAA and AARP), and that gets you the free upgrade when your birthday rolls around (we get it off your Facebook page) like the one we gave you on your first night, when sent you to us for the first time, as a bribe to get you signed up.

And all of this is in addition to the point system - like those that come with the HHonors, Wyndham Rewards, Choice Privileges, Marriott Rewards, and Priority Club cards - that works in ways no one can figure out. We want our loyalty programs to have 'real' value attached, not just a promise of, "keep staying with us and you'll keep piling up who knows how many points, and maybe, someday, based on however whoever does the math, get a free night" . . .

Because the value of any hotel brand is directly proportional to the number of people who walk around with the corresponding loyalty card in their pocket or purse. Those guests who have these cards are the people who are . . . well, loyal. When they need to call or go online to make a reservation, that hotel brand is the one they choose, either because they have a free night coming or want to pile on some more 'points' until they do. (We're going to throw in some actual, 'real' benefits in addition to the funky point system that no one can figure out.)

Nearly everyone else logs on to Expedia, or, or one of the other online travel agencies. Next to no one plans a trip and thinks, 'maybe I'd better call the Sleep Inn 800 number', or surfs to the Days Inn website, unless they have the corresponding card.

Originally appeared on Quora

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