At industry events, including VRM Intel Live, industry experts often talk about what hotels learned from working with OTAs and how vacation rental owners and managers can leverage this hindsight to gain an advantage and not repeat mistakes. They explain that hoteliers gave up needless percentage points, began paying and offering deeper discounts for higher placement, and became unnecessarily reliant on OTAs for bookings.
What is not often examined, however, is what lessons OTAs learned from working with hoteliers.
With short-term rentals, OTAs are getting somewhat of a “do-over.” These online giants have had a chance to reexamine how they aggregated, distributed, and monetized hotel inventory, and they are applying the lessons learned to short-term rental inventory.
Five Lessons OTAs Learned from Working with Hoteliers
1. The agency model is preferable to the merchant model…in all ways but one.
First, let’s look at the difference between a merchant model and an agency model.
With the merchant model, hotels give OTAs a net rate, to which a mark-up is applied to determine the sell rate to consumers. Consumers pay the OTA, and the OTA pays the hotel the net rate after check-in. With the agency model, the OTA charges the hotel a percentage “commission,” the guest pays the hotel, and the hotel pays the OTA their commission after check-in.
The hotel industry, especially in international markets, reacted better to the agency model, giving Priceline Group Inc (NASDAQ:PCLN) a competitive advantage over Expedia Inc (NASDAQ:EXPE).
However, OTAs preferred carrying the money between the booking date and the arrival date.
When Airbnb came along, it decided to take the best of both worlds, adding an agency-style commission—split between the guest and the supplier. It also became the merchant of record, taking payments, carrying the money, and remitting net payment to the supplier 24 hours after check-in. TripAdvisor (NASDAQ:TRIP) followed suit in 2015 for its performance-based listings, and Expedia-owned HomeAway (which also owns VRBO.com) now uses this model for its PPB listings.
2. Once suppliers are reliant on an OTA, the OTA can make changes to monetize supply.
OTAs learned that once hoteliers were reliant on the channel, the OTA could adapt policies to further monetize the platform. As a result, Airbnb, HomeAway, and Booking.com have found ways with their core supplier base to facilitate reliance with massive online ad spends, delivering a number of bookings to the vacation rental supplier without which they cannot operate.
This strategy has been even more effective in the vacation rental industry because a significant number of homeowners and managers got into the rental game as a result of the exposure provided by OTAs (including VRBO.com, HomeAway, Airbnb, Booking.com, and FlipKey). For these managers and owners, their primary—if not only—booking activity comes from one or more of these channels, with little to no direct bookings. In these cases, the OTA is not merely delivering supplemental revenue, but it is actually generating the majority of revenue.
This dependency enables the OTA to make drastic changes to its terms and conditions to further monetize supply without losing inventory.
3. Consumers will go where they can find the largest selection at the best price.
One way OTAs captured market share from hoteliers was by aggregating supply on a mass scale at a lower rate for travelers. Using net rates and rate-parity agreements, OTAs were able to undercut pricing, which proved to be key in gaining a following among consumers.
OTAs learned that establishing pricing levers is paramount to establishing a market-leading position, and it is even more important when creating barriers to entry for newcomers.
As a result, Airbnb, Booking.com and HomeAway have launched and are further developing revenue-management systems. In addition, OTAs are adding “offer strength” into their ranking algorithm, which rewards discounting with higher rankings. HomeAway even implemented a “pledge” a supplier must sign to become a Preferred Partner. This pledge says the supplier will “keep their rates equal to or lower than rates listed on other advertising websites for the same property.”
By maneuvering pricing, OTAs can swiftly gain market share and a substantial competitive advantage
4. Own the guest.
Over time, OTAs learned that hoarding guest contact information from the hotelier led to less communication between the hotel and the customer and reduced the hotel’s ability to make direct marketing offers and run loyalty promotions. OTA contracts often stipulate that hotels can’t market to customers who booked directly with the OTA. Last year, Booking.com stated that they will no longer provide hotels with customer emails. Neither Airbnb nor HomeAway share customer information until after the booking has been confirmed.
In addition, HomeAway recently announced a “match-back” policy for vacation rental managers using integrated software solutions that charge the management company 10 percent for any booking done with a guest who previously searched for a rental with similar dates on HomeAway’s family of sites.
From working with hoteliers, OTAs learned that if they can control the ownership of and communication with guest, the guest is less likely to move away from the OTA platform.
5. Don’t just aggregate brands; become the brand.
OTAs found out the hard way that a strong brand name is hard to replace. In the last two years, Hilton, Marriott, Hyatt, and the AHLA have worked to educate consumers about the benefits of booking directly with the property. In turn, OTAs began offering their own loyalty programs, rewarding guests who make repeat bookings regardless of the hotel—competing directly with hotel loyalty programs.
When it came time to look at how to display vacation rental brands, OTAs decided they have a unique opportunity to eliminate the supplier brand altogether and actually become the brand. Brand names, external links, videos, and any mention of the owner or manager contact information are being eliminated from the platforms.
Note: OTAs now know if they can keep the supplier market fragmented, their ability to grow is unlimited. Repressing the potential growth of big brand names in the vacation rental industry is in their best interest. While we’ve seen no direct evidence of OTA activity that seeks to squelch the growth of big brands, it will be an interesting area to watch for movement in the coming months.
OTAs have learned other lessons, as well. They have learned to leverage their high ad spends on Google to create extensive barriers to entry, and they’ve learned that smart acquisitions can move the needle to gain market share. They’ve realized that Instant Booking that is integrated across channels is necessary, and that gaining global market share is key to sustainable growth. They’ve also been testing revenue models and have found that there is a 15–30 percent take rate on the table—even if they have to split their cut between suppliers and the guests.
Most importantly, OTAs have the freedom to act—and act quickly—on the lessons they have learned to further advance and monetize their platforms.
Vacation rental managers and owners must do more than study the mistakes hoteliers made using OTAs along the way. They will also need to find a way to come together as an industry to collectively push back on changes that harm their businesses.
Is the brand of the hardworking local PM of any worth? To the limited degree I have visibility, we have among the top guest review counts of any PM in our local market. Do we go quietly into the night and just treat each listing as its own standalone representation of our brand, and count on the massive guest counts we’ve built up on the platforms that publish them, and count that as our sole differentiator?
p.s. has anyone heard of the extension Staysavr? We’re trying it!
Thank you for summarizing this so well. WE do need to act together. What is our next step?
Christoina, it’s coming soon.