Booking.com grabs the cash, but will it impact sales?

Booking.com, the world’s largest OTA in terms of hotel nights sold, recent accounts highlight a major pivot in strategy, in terms of the importance of cash.

Booking.com built its business based on the “Pay at Hotel” agency model, because it believed hotels would sign up faster and give better rates to an OTA who delivered payment on arrival, compared to payment many months after departure in the case of the leisure beach market. Analyst in part, credit this stance as one of the reasons they expanded globally faster than arch rival Expedia, who primarily operate a “Merchant model” where customers pay them directly.

However, Bookings latest accounts show a marked shift towards the Merchant model with revenue jumping 53.4 percent to nearly $1.05 billion, while its agency revenue grew less than one percent to $3.54 billion.

The obvious advantage of the shift is the cash flow gained. Unlike ATOL bonded holiday revenues,  the cash does not need to be held in trust accounts and can be invested into more acquisitions or higher levels of brand advertising, to drive a virtuous circle of increased sales and cash flows.

Ironically, there also appears to be a “commission” advantage in the Merchant model with average commission being 20% compared to 18.6% for the pay at hotel model, but this may be down to mix issues, as it’s hard to see why Hotels would pay more to receive cash later.

Hoteliers reaction to the shift will clearly depend on the payment terms being offered by Booking.com under the Merchant model, but there unlikely to be better than payment of arrival and a lot likelier to be worse.

Interestingly the major European bed banks like Hotel Beds operate a very different cash flow model to gain their commercial advantage.

Bedbank’s operate “B2B2C” models, where the hotels they offer are sold via third party OTA’s who act as merchants, retaining the customers cash and only pass it to the bed bank on customer departure. The bed banks then pay most hotels 60-90 days after departure, to create a cash pot that they use to “pre-pay” and give turnover guarantees to other hotels. These “Castles”, as they are known, in return give the bed banks “Exclusive Rates” that allow them to dominate the price driven beach sector, whilst still allowing them to make higher than average margins.

Historically, this practice allowed booking.com to gain rapid entry into the leisure beach sector, because their payment terms where so much better than either the major tour operators or the bed banks.

It would appear therefore that booking.com are switching from a hotel “land grab” mode, to a brand dominance mode, where they grow faster than competitors by simple out spending them on brand awareness and  relying on superior platform technology to keep customers brand loyal.

 At the end of the day cash will always be King, but it’s how that cash is used which seems to be evolving.

 

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