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The Commission Controversy

June 22, 2013 Corporate, Headline News 1 Comment Email Email

It¹s a pretty common occurrence; when revenue managers see that their property¹s occupancy has hit a specific, pre-determined percentage, they decide to shut off the channel with the highest commission rates.

This percentage could be 50% or it could be 90% depending on a property¹s specific revenue management goals, but in most cases, the end result is the same: revenue managers shut off the OTAs with the highest commission rate, which are often also the sites that generate the majority of a property¹s bookings.Sidebar-Banner-GTM_Specs--250x250-A

While I understand the desire to earn as much money as possible from each booking, it is very counterproductive to shut off your highest performing sites at any time ­ even if they are charging you a 30% commission for each booking. The majority of consumers use OTAs to find and book a hotel reservation, and the sites with the highest number of visitors are often the ones who charge higher commission rates.

While I know that many hoteliers feel resentful of the OTAs because of these high commission rates, it¹s important to look at the ROI of each channel as a whole – not simply the per-unit price obtained for each room (after commissions have been paid). While you do make 100% of the dollars earned on all direct bookings, the average hotel may only secure a small percentage of their bookings from the direct channel. In contrast, the average hotel secures a large majority of their business from OTAs (and the majority of those bookings come from the sites with the highest traffic AND the highest commission rates). So by shutting off the channels that earn you the most of your business, you greatly decrease the chance of selling the remaining percentage of your rooms for that particular day.

I always suggest that revenue managers think about revenue in a different way. Instead of thinking about how much money that you¹re ³throwing away² on OTA commissions, think about how much total revenue they are earning your property – even after paying out a commission. When you think about the total revenue and the total number of bookings (instead of only the sky-high commission rates), it makes much more sense to keep your highest performing channels selling until you reach 100% occupancy.

In case you¹re not quite convinced, let¹s look at a similar example from a different industry. Imagine that you are a retailer, selling jeans and t-shirts from your own retail storefront. To increase your revenues, you decide to sell your wares at other stores as well. You sign contracts with a few small mom-and-pop stores in your city, as well as one contract with Walmart. For every item sold from your own store, you would earn 100% of the total value; the mom-and-pop shops charge a 15% commission and Walmart charges a 30% commission on each item sold.

If you followed the logic used by most hoteliers, when you¹ve sold a certain percentage of your inventory, you would stop selling your items at Walmart because they charge a higher commission rate. But like with a hotel, it would be a mistake to stop selling your merchandise through Walmart, because the number of shoppers that visit the store on any given day is much, much higher than the number of shoppers who visit each mom-and-pop shop. So although you are paying a higher commission to stock your wares at Walmart, the number of items sold through the store will be higher and therefore, your overall revenues will be higher in the long run.

Like Walmart, the big OTAs can charge a higher commission rate because they create better visibility and more bookings for hotels. By shutting off your highest performing sites before you reach 100% occupancy, you are cutting your property¹s visibility with an entire country ­ or even in some cases, to an entire continent ­ which can result in a significant loss of revenue. So ignore the commission rates that you are paying to the big OTAs and remember how many bookings they actually generate for your property. Keep your most profitable channels selling until you reach 100% occupancy each day and you will see a dramatic increase in your occupancy levels and revenue earned.

Currently there is "1 comment" on this Article:

  1. Andrew says:

    What a load of rubbish.

    Anyone with experience as an accommodation operator knows that by the time you have paid a 30% commission, your profit is cut to such a point that you are almost in business for the exercise, not to make money.

    Comparing accommodation to Walmart (which shows this article is from the USA) just goes to prove that the writer isn’t an accommodation operator, probably an OTA owner. Walmart has almost infinite selling potential. A “hotelier” (what about the rest of the industry, which isn’t hotels????) has a finite and limited number of rooms. There is a massive difference in product availability and customer base.

    OTAs are just the internet version of freeloaders – someone trying to cream off the profit of those who are actually doing the work and taking the business risks = us.

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