COMMENT: Is the price right?
The real costs of booking channels
The business of hotels has always been of selling rooms. Some of us might still remember a time hotel rooms had to be reserved through a travel agency, by phone or fax!
The arrival of OTAs, loyalty programmes, hotel mergers, etc. have changed the way guests book and also affected P&Ls through different commission structures.
Comparing operators’ charges is near impossible. Some operators charge a fixed amount per room per month and/or low commission percentage; others charge a high commission percentage but with no or zero fixed amount.
In this column, we will focus on a fixed amount per booking and a low percentage commission (when applicable) and consider the most common reservation channels to understand all-in associated costs. We start from the same price (best available rate, BAR) paid by a guest, AED100 (gross rate), which includes tourism taxes, municipality fees, VAT assumed at 25.5% rate, bringing the net rate down to AED79.68.
Scenario 1: Directly to the Hotel
Guests reserve directly: either online, by phone or walk-in. No third-party commissions to be paid apart from reservation management fees (RMA) to the operator (usually 2.5%) which equals AED1.99. For every stay, guests can collect loyalty points. Let’s assume $4 per each stay, equalling AED14.60. At check-out guests usually pay by credit card, this implies a final charge of 1.9% to the gross rate. As a result, double net rate becomes AED61.19.
Scenario 2: Brand Website
Guests reserve through the operator’s website. No third-party commissions, but the operator retains central reservation system fees (CRS) of usually US$6 (AED21.90). This fee is on top of the same fees, taxes, loyalty points and commissions of Scenario 1, bringing double net rate to AED39.29.
Scenario 3: Central Reservation
This is when guests reserve directly through the operator’s toll-free number or global reservation office. In this case operators charge US$9.5 (AED4.68). Guests are also eligible to accumulate loyalty points. Double net rate therefore results in AED26.51.
Scenario 4: GDS
A Global Distribution System (GDS) is a computer-based platform that uses real-time inventory and enables transactions between hotels and travel agencies. Main GDS are Amadeus, Galileo, Sabre and Worldspan. GDS features a commission of US$6 per booking (AED21.90). Guests cannot accumulate loyalty points but operators, however, charge a CRS Fees of US$3.5 (AED12.78) as they allow a seamless connection service with GDS as well as their usual RMA fee. Double net rate becomes AED26.51. If the booking is through a business travel agency (BTA), it’s entitled to a 10% commission on the BAR, reducing double net rate to AED18.5.
Scenario 5: Online Travel Agency
Commission at 18%: Travellers today prefer using online platforms to compare hotel prices. Amongst those available, Booking.com seems the most popular. In this case OTA commissions vary, depending on the bargaining power of each hotel chain, sometimes even reaching a maximum of 25-30%.
Here, we have used a general average of 18%, applied to the Net Rate, thus equalling AED14.34. Operators also charge their commissions: usually US$6 for handling the reservation (CRS) plus $1 for the seamless connection service plus the usual RMA (in total = AED25.55). After credit card commission, the resulting double net rate therefore is AED 35.90.
Preferred Status, commission at 20%: Some OTAs allow hotels to opt for a ‘Preferred Status’ option. This brings up the hotel higher in results, more visible in search results but, of course, does not come cheap. In this case OTA commissions ramp up to 20% (AED15.94). Add in the operators’ CRS Fee of $6 plus a seamless connection service of US$ (AED 25.55) and the RMA. The resulting double net rate is AED 34.30. Please note that the Preferred Status does not help further than the first result screen.
Commission at 12%: With hotel giants merging (such as Marriott+Starwood and Accor+Fairmont), some operators get better deals when negotiating with OTAs. Higher the room inventory, lower the OTA commission. Assuming a 12% commission for “hotel giants”, lower commission of AED9.56 (plus CRS, seamless connection service and a RMA), credit card commission, double net rate equals AED40.68.
Scenario 6: AirBnb
As per AirBnb, the host service fee is generally 3%, calculated on the booking subtotal (before fees and taxes). With a commission of AED3 (3% of AED100), a RMA of AED1.99 and credit card commission of AED1.9, double net rate results in AED72.79.
Direct booking (excluding the AirBnb scenario) remains the most lucrative option for a hotel. This explains why major operators are investing significantly in direct marketing to customers to shift their booking pattern. Hotel operators are charging (quite significant) additional fees on top of OTAs and GDS.
Hotel giants can pay lower commissions to OTAs, which directly impacts GOP due to almost 100% flow-through. Due to payroll costs, Central Reservation remains the least lucrative. For Apart-hotels, AirBnb’s low commission make it a great channel.
Lastly, these scenarios change drastically if the ADR doubles: fixed charges weight more heavily against a AED100 rate than a AED200.
(Note: The information provided here reflects average positions across hotels. No business decision should be based on this article, which is written only to provide information.)
About the Author: Giuliano Gasparini is chairman of HAMA MEA (Hotel Asset Management Association), Fellow at the Royal Institution of Chartered Surveyors (RICS), Committee Member of CRE (Counsellors of Real Estate) and Fellow at the Institute of Hospitality (FIH). Contact: www.linkedin.com/in/HospitalityAssetManagement.