How Booking.com Became Hotels’ Biggest Enemy
With the recent growth of Booking.com far above the growth of the industry and commissions at a record-high level, the hotel industry is becoming concerned that the online travel agency will capture an ever-increasing share of the overall profit margin.
Online travel agencies (OTAs) which allow consumers to compare and book hotels have disrupted the hotel industry. While it has become increasingly difficult for hotels to grow profits [1], the market leading OTA, Booking.com, has reached a total market capitalization of $88 billion [2]. The predecessor version of Booking.com went online in 1996, and currently, the website is available in 43 languages and promotes destinations in 228 countries [3]. In 2018, OTAs accounted for 39% of the US online booking market [4], and since 2016, the two largest OTAs have grown revenues with a CAGR of 19% [5], far exceeding the growth of the hotel industry as a whole. How did Booking.com as the largest OTA capture so much of the hotel industry’s value without owning any hotels?
First, millennials have established the habit of conducting research before they buy goods or services. Websites that compare and rank a variety of products have spread widely. Today’s travelers devote considerable effort to finding the best value for their money, and Booking.com provides detailed information on hotels, customer feedback, and seemingly objective quantitative scores, all of which facilitate the search.
Second, Booking.com uses a clear design, easy language, and optical markers to promote offers. This leads to the general perception that the website has better deals than the hotel websites, which in most cases is not true because the contracts between OTAs and the hotels they promote generally state that the prices need to be identical (see also [6]).
Third, the booking process with Booking.com is typically simpler and quicker than it is on hotel websites. For example, Booking.com keeps customers’ credit card details and billing addresses on file from their last bookings so that the number of clicks required for check-out is much fewer than on hotel websites.
These three factors explain the dominant market position of Booking.com; however, Booking.com’s rise also seems to be partly a result of hotel owners’ shortsightedness. When the first OTAs entered the market in the 1990s, hotel owners viewed their relationships with their new business partners as win-win. OTAs helped to market overcapacity and generated online traffic for the hotels, while the hotels provided rooms to OTAs for a discount and contributed to their growth [4]. During this time, consumers compared offers online but still tended to book via travel bureaus or directly with hotels, first via phone and then on the hotels’ websites. At a low commission of 5%–10%, both parties benefitted. However, as millennials, who grew up with digital technologies, entered the target customer group, the benefits of using Booking.com became even more powerful, and the power dynamics changed. Most customers stopped contacting hotels or visiting their websites altogether, and Booking.com and its competitors were not only used to compare offers but also to book them.
Today, commissions paid by hotels reach a level as high as 30% of the overall booking value [4], and this is only for connecting customers with the hotels. Nevertheless, the hotel industry still lacks the digital expertise needed to seriously challenge Booking.com. Many hotel websites still appear outdated or provide a poor customer experience. Only the digital offerings of large hotel chains that have the resources to hire external expertise stand out.
In addition to the negative effects on immediate profits, the booking process via OTAs also undermines the relationship between customers and hotels. A customer who calls a hotel and speaks with a hotel employee during the booking process, or at least visits the hotel website, develops a closer relationship with the hotel as a result of his or her positive customer experience, or at least remembers the name of the hotel, as opposed to a customer who books via Booking.com without any human interaction. A closer relationship generally results in a slightly higher return rate, which is an important metric for hotels as it determines the average lifetime value per customer. The combination of both decreasing immediate profits and a lower return rate are increasingly becoming a burden for hotels.
With the recent growth of Booking.com far above the growth of the industry and commissions at a record-high level, the hotel industry is becoming even more concerned that the adverse trend might continue. What will prevent Booking.com from taking over the entire profit margin if it essentially cuts any relationship customers have with hotels? Loyalty programs, reviews, and a better general experience during the stay are often suggested as tools that hotels can use to build a relationship with customers and to reverse the trend [4]. Smaller hotels in particular struggle to effectively use these measures without hiring external expertise; they will suffer most from the digital transformation of the hotel industry.
[1] https://lodgingmagazine.com/profit-growth-becomes-harder-to-achieve-for-u-s-hotels/
[2] https://finance.yahoo.com/quote/BKNG/
[3] https://www.Booking.com/content/about.en-gb.html
[7] https://www.thetimes.co.uk/article/travel-websites-are-brandjacking-our-hotels-and-b-bs-rn0z028bs
Hi Peter, thanks for sharing your view on the OTA industry and its threat to the old-fashioned hotel & lodging industry. As a frequent traveler, I’ve had pretty similar experience with hotel booking as you described in the post. The reasons why I’m so used to visiting OTA sites such as booking.com whenever I need to make a hotel reservation is precisely that the process is much faster, easier, and leaves an impression on me that the rates would be cheaper (although often times that’s not the case). The only exception is that I also use the website of Marriott (former SPG) to book hotels because I’m a loyal SPG/Marriott-Bonvoy member, and I won’t be able to accumulate points from their membership program if I use an OTA. I do believe that one potentially effective measure for the hotel chains to prevent OTAs from further stealing market shares is to strengthen their loyalty & rewards programs, which will incentivize customers to use their own reservation portals more often – just like what Marriott is doing. However, I’m also a little pessimistic about the general prospect for individual hotel operators in the battle with OTA, as they are much smaller in scale than OTAs and without a powerful network effect, and also because they don’t have the “tech” gene which would enable them to win in today’s digitized world.