The online battle for the customer
Hoteliers can compete with online travel agents, writes Brian Reeves. The answer lies in effective cost of sales budgeting and using the same consumer psychology as the OTAs
The year-on-year growth in OTA commissions, particularly within the independent hotel sector, continues to be a huge concern for the hotel industry.
Industry reports on the increasing dominance of Pricelines Booking.com, potentially accounting for nearly half all OTA hotel bookings made in Europe, and the growing dependency of hotels on the OTA channel reflect the figures seen by hotel owners, asset managers, GMs and finance managers as commissions (distribution costs) rise each month.
Many factors have contributed to the rise of the OTA, including the typical hotel’s inability to compete effectively online.
Specifically, the battle between hotel and OTA is being played out on paid search. Whether you run a search for a hotel by name or do a search for hotels in a given area you will invariably find the OTAs paying for sponsored search results and, in most cases, they will have a more prominent placement than the hotel’s listing.
What is governing this placement is the bid price being offered by all competing advertisers (hotels & OTAs). All things being equal the highest bids get the top placements. Why do the OTAs their ads on every search. But how? OTAs such as Booking.com can measure precisely how much they earn from each penny spent on pay-per-click (PPC). They know exactly how much they can afford to bid on any given search so, not surprisingly, OTAs manage PPC aggressively but at a pre-defined and controlled cost of sale.
Hotels can do exactly the same and in doing so take back some control.
How? By bidding aggressively and scientifically using the cost of sale model. The first formula hotels need to be aware of is:
Maximum bid price per click = Average Booking Value X Conversion Rate X desired cost of sale
The average booking value from the hotel website is £300 (keep in mind that bookings can be for multiple nights or for multiple rooms). The conversion rate from visitors to bookers on the hotel website is 2% (a rough industry average for UK hotels). PPC is to be aggressively managed at, let’s say, a 10% desired cost of sale.
The max bid price is £300 X 2% X 10% = 60p
What this means is that the hotel in this example can bid (pay) up to 60 pence per click, convert the resultant visitors into bookings at a rate of 2% and, given that bookings are worth an average of £300 to the hotel, the cost of sale will be 10% or less. Is 60 pence per click aggressive enough? Probably not. So what can be done?
There are three options:
- Increase the desired cost of sale (from 10% in the example above)
Once you venture north of 15%, however, the distribution cost benefit starts to diminish.
- Increase the average booking value
In practice, there is little hotels can do to significantly impact the room element of this. If the PPC bid price is to focus on total revenue per room sold as opposed to room only revenue then there is some scope to grow the bid price as hotels will sell package rates and allow dynamic upsells on the hotel website which are typically not available on OTAs.
- Improve the conversion rate
Conversion rate is at the heart of understanding OTA dominance on paid search. In simple terms the OTA can bid more (sometimes a lot more) because they convert visitors into bookings a lot better than hotels do. This is also the area of greatest potential gains for a hotel. As an industry, hotels are a long way behind retail in terms of understanding conversion rate optimisation.
Understanding this gulf in conversion rates between OTAs and hotels also explains why OTAs, when they earn an average of 20% of the hotel’s rate, can still outbid the hotel when the hotel earns almost 100% of the rate.
The reasons for low conversion rates lie with the booking process. Taking lessons from retail and shopping cart optimisation and applying them to the hotel booking process yields some interesting and valuable guidelines on what best practice looks like.
When the top online retailers look to optimise the shopping cart process they begin by studying shopping cart abandonment. In other words, they seek to discover the array of reasons that a customer will start the shopping process and then leave without buying (abandoning). In the UK a good (but rough) average is that 97% of customers that start the booking process on a hotel website will abandon. In other words 3% convert. Looking at the primary reasons for booking process abandonment we soon discover that the top five main causes are:
- Price Comparison
- Product display
To minimize this abandonment, hotels must do three things: clearly convey value, create urgency and minimise any perceived risk. It is interesting to look at how Booking.com achieves these goals:
- Value. The normal rate is AA and today it is BB – a saving of x %. Consumer reviews, star rating and the thumbs up symbol also work on a consumer psychology level to portray value.
- Urgency. Messages in the booking process such as ‘There are only 2 rooms left at this rate’ ‘The last room was booked 5 minutes ago’ ‘There are 10 people looking at this hotel right now’ use a consumer psychology technique known as loss aversion to make it clear that the value on offer right now will not be there for long. The consumer does not want to lose out on a deal.
- Minimise perceived risk. Presenting the hotels cancellation policy as ‘Free cancellation’ tells the consumer that they can snap up the deal now and cancel if they change their mind. Clicking on free cancellation will advise the customer that they can cancel the reservation free of charge up to 48 hours before arrival. How different this presentation of the cancellation policy is to the hotel website booking process which normally states ‘if you do not cancel within 48 hours of arrival we will charge you the first night stay.’ Clear and well positioned ‘Best Price Guarantee’ messaging also assures the customer they are booking in the right place.
In conclusion, hotels need to get to the point that digital marketing spend on PPC can be measured as a cost of sale, thereby allowing an easy comparison with OTA commissions. Thereafter, a focus on improving booking conversion by understanding abandonment will lead to increased revenues but, more importantly, increased bids for visitors in the first instance.
This logic extends beyond PPC marketing and improves ROI for hotels on other channels such as ‘Hotel Price Ads’ on Google, ‘Show Prices’ or ‘Hotel Connect’ on Tripadvisor, Trivago and Kayak; all of which work on a cost per click basis on an advertised rate sending the visitor to the hotel website.
If hotels can move to a cost of sale based approach to paid search and then reduce the average abandonment in the booking process from 97% to 94% then hotels could bid twice as much for the visitor across a myriad of different channels whilst maintaining the same cost of sale. Then the real battle for the customer can begin.
Brian Reeves is CEO of Avvio
This article was kindly supplied by Institute of Hospitality