And the OTA Dependency
Nowadays the OTA is very rooted to the world hotel management and hospitality business, as a fad the first ones who adopted this system were getting rid of it, or there must also be those who have never adopted it once it is a matter of culture and those who have the good habit of supporting their results in numbers, more specifically in costs, wouldn´t have entered, and if they did enter, it will not be drastically affected by it, once it is has a strong foundation.
This system was first started in the US and once things usually are well-founded, for a matter of education and culture, they also seem to be the first to work on getting rid of evil that this “good” should do, and does, but when we use it and not when we´re used by it.
It is known that 42% of the daily or “room nights” of independent hotels today come from OTAs. – The very famous online travel agencies – the rest of the revenue with daily ranges in 24% (US data from HSMAI Foundation) And as a professional and expert consultant I can ensure this is catastrophy. Don´t agree, so, answer the question: what happens to you if the OTAs stop selling your product? Interested? I can answer, but I may warn you, according to the most specialized colleges in hotel management in the world the equilibrium point of a Hotel occurs with an occupancy of between 29.7% and 33.2%. Did I answer the question about the 24% that don´t come from the OTAS? The data that refer as Academic is true and I´ve proved it myself a dozen times, and I know 5 stars hotels that remain in these parameters, although I admit that in my case I normally use 34-35%, but a hotel project under my administration will monetize by least 40% more than the same project in a standard course, and it’s not because I know more than everyone, but because of “how” I use the knowledge I gained. But there are ways to minimize the OTA-reliance and in my case I can say that I can neutralize this effect.
In old times “room nights” were sold through traditional travel agencies and I used to joke that they were our best employees, they looked for the customer, sent them to us, and then we received them and paid the agencies for their competent and tireless workers. The math was simple, the cost was 10% when we paid agents and 15% when we paid operators.
I do not know exactly why, when the OTAS appeared this was turned upside down when the OTAs accepted reservations, they started taking their share before repassing the money to the hotels, they had the “internet charge”, perhaps with the claim that their costs were increased, some believed and started supporting this practice. So, what happened was that a decline in the ADR was observed, but the paying was throught the internet and was not in the costs (wrong, but was a normal practice) – it decreased the average revenue per day – but if you increase the number of sold dailies in some cases one situation canceled the other, take a look at the numbers below.
We have a hotel of 175 IUs the OTAS sell 42% RN = 2205 X = 180.00 396,900.00 – If the OTA initially would charge you about 12% on the daily rate you need to sell: RN 2506 – 47.73% for us not to lose in Billing. In this case your accupancy coming from OTAS would have to increase if this increase does not check your invoicing of R $: – 396,900.00 it would be R $: 349,272.00 then we have: = 396,900.00 -349,272.00 40268.00 / 396,900.00 = 0.12 or 12% less in revenues.
We then depend on the sale of 2506 dailies not to miss IN BILLING.
Following with the aggressive sales system substantiated in these OTAS started charging in many cases, 17% instead of the old 12% and found those who paid, then things got much worse.
In this case not to lose in sales over the amount originally billed of 396,900.00 we need to sell: 2,657 dailies or 50.6% of our inventory. But we have in the market OTAS charging 29% and the worst part is that there´s always someone willing to pay.
As stated earlier not to lose in revenue, we would then have to beat 3,105 Daily. Or 59.15% of our stock of apartments.
Some may say, “well I just need to increase by 17.15% occupancy”. All I have trouble understanding is why the entrepreneur or even managers do not know or do not want to separate operational Accupancy of Financial Accupancy. These are very different things and the difference between them is exactly the difference between profit or loss. “Yes, so if it’s that easy why didn´t you increase it before?” In the last case (29%) for a hotel of 175 rooms, the amount charged per unit may not even cover the costs. At least for this number of apartments maybe you can maximize with the other 24% of your inventory.
You may have noticed that I emphatised in all cases the expression (by revenue), exactly because in case you can increase occupancy to maintain the same revenues you will still be struggleing with LACK OF PROFITABILITY. Let’s skip from the 1st to the 3rd case, and we have a difference of 3105-2205 = 900 dailies which require to be sold at cost at least of washing bedding and bathing, maid of UH amenities and breakfasts, as the accupancy of an executive hotel is in average 1.2 * Pax / UH terms at least 1,080 breakfasts. Summing up, if the accupancy would have increased: Increased occupancy – maintainance of RevPAR – revenue does not increase if the occupancy doesn´t, maintaining ADR – and breaks profitability.
* This is a known number by the most respected consultancies in the world and of course it is a knowledge we possess with the experience of over 40 years in hotel management.
But the increase in sales or in RN employment is unlikely, so we are heading to the sharp fall in profitability and a consequent financial setback. What interests me most as a manager? The REAL AND SUSTAINABLE INCREASE OF PROFITABILITY OR GOPPAR.
What happens now if your hotel is not sold by OTAS? Probably you will not be able to pay expenses unless you count on your savings. This takes you you to a whole new situation: the OTAS have control of your inventory, and once they knowit, you are a hostage and soon you will find yourself being compelled to pay new commission. That is, a distribution cost that should never pass the 15% today may be nearing 40%. There are statistical consulting attesting that, and the tendency is that it will grow bigger, unless the entrepreneur does something to stop this process, what is feasible and absolutely indispensable. But but yourself in your client´s shoes and answer for him: “Would you stay if I increase the daily price?”
There are several sustainable ways of doing this and I’m always in favor of the more sustainable ones that depend on me and what I can improve on my teams.
I will reproduce below a graphic of an independent US consultancy:
(NB: This is an analysis by Martin Soler, vice president of marketing at World Independent Hotels Promotion (WIHP).
This year the survey consists of more than 12,000 guest replies.)
Story shows that in the US, things have started to change and it is surely inevitable.
It is about an unavoidable change that needs to be consciously initiated, and if we talk about the mechanisms that may promote the short and medium term changes sustainably this is inevitable not to lose the focus on technology, but at first it is good to know that the good old efficient promoter who knows what he is doing, he will do much better grounded in technology, but not if it means addiction, like most businesses today have created regarding OTAS.
Understand for example that if you have an occupation of 59.15% but this gives you average rates very close to their cost you should not exceed 35% we need to reverse this, and how do we do it?
Increase all your average taxes and let occupancy rates fall to be based on spreadsheets serious costs and very well prepared, because what you do is bring, for example, the occupation from 59 to 47% and the average daily which should be $ : 145.50 (this is a number for an examplify, but it is the average of the three cases above placed) It would have to go to 190.00 to bring you some comfort. It is a process that, if initiated correctly takes no more than 90 days to implement and prove itself consolidated.
Despite not being part of our counsel, but since we have 175 IUs let´s calculate for the case of being able to transfer all bookings of OTAS to your own channel. And this will bring you a saving of about 900 000 / year – but if this economy falls to 50% of the value and the company leaves the OTA-dependence, it is simply a great victory.