Tag Archives: booking.com

Why OTAs need to get a grip of the back end to avoid waving their customers goodbye

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Last week saw a war of words break out between the alternative accommodation giant Airbnb and its more mainstream competitor Booking.com.

A recent Morgan Stanley report highlighted Booking.com’s rapid growth in the ‘alternative’ accommodation sector, leading bookings owner’s Priceline to crow about how their growth would squeeze Airbnb’s market share.

Fascinatingly, Airbnb’s response was to trumpet their back office tools for owners as the key to its future success, criticising Booking.com’s lack of investment in its own tools and resulting inconsistency of customer experience.

Airbnb issued an open challenge, that unless the major OTA’s invested at least 5% of its marketing budget into these tools, the peer-to-peer giant would win this crucial battle.

From a consumer point of view, I personally think Airbnb’s back office experience is far superior to Booking’s, with customers being put into direct contact with owners by phone or chat tools within the Airbnb app.

This creates a much easier dialogue with owners than Booking’s more traditional email route.

I’ve never been left waiting outside an Airbnb property but have several times struggled to get access to properties booked via Booking.com.

Given the importance of customer retention in controlling ever escalating Google or aggregators’ marketing costs, the UK’s beach holiday OTA community may need to take note and look at its own back office tools as a means of delivering competitor advantage.

How long before we see OTA apps offering online check-in for all low cost carriers and tracking technology to show how far away a coach is from picking up customers from their hotel to take them back to the airport?

Customers may also want to use the same app to book in resort restaurants or attractions, using consolidated consumer reviews of other like-minded UK guests, who have stayed in the same hotel previously.

Why not combine the provision of a 24-hour duty office with tools to help customers access medical assistance via virtual doctors over skype and app tools to capture medical expenses and assist with insurance claims?

The options are many and the bottom line is that when you are operating in a commodity market place, where competitors can source the same hotels at the same costs, it’s going to be a race to the bottom in terms of margin, unless brand loyalty can be created.

Ironically, in its core city hotel market Booking.com is a market leader in this art, using its higher frequency of booking, to drive stickiness via its secure retention of credit card details and clever suggestive marketing. However, in the beach sector, like most UK OTAs, it is guilty of the so-called ‘Tarmac wave’.

This is where an OTA lavishes care and attention on the booking journey and pre-departure communication, but then waves goodbye at the airport and simply hopes that the most crucial part of the purchase – the holiday itself – goes well.

In-resort experience is crucial to holiday enjoyment and this is where traditional tour operators like Tui score massively over OTA’s, with their extensive in-resort infrastructure and customer care.

In the past, concerns about principal status and triggering higher VAT liabilities have caused OTA’s to steer well clear of operating in-resort structures and consolidated third party services like Destination Care, which I invested my own cash in before it failed and was written off as being ahead of its time.

However, has that time finally arrived? Possibly, but I think it will be a while before the back end, drives the OTA car.

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

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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.