Adjunct Professor NYU Tisch Center for Hospitality and Hospitality & Online Travel Tech Consultant
Start Treating Direct Online Distribution Costs as… Distribution Costs!
Currently direct online bookings and their distribution costs: ongoing website hosting and technology upgrades, website content optimization, SEO, website visitors referrals fees (metasearch and paid search CPCs, online media and retargeting referrals, etc.), hosting, analytics, data marketing, email marketing, social media marketing, digital marketing agency fees, etc. – all come from the Sales & Marketing Budget, which is a line item in the property budget.
For 20 years we at NextGuest (now merged with Cendyn) have been tracking the cost of direct bookings across our portfolio of hotel clients. The average all-inclusive direct cost has varied through ups and downs in the marketplace but has always been in the range of 4.25%-4.5%.
How are OTA commissions treated? OTA commissions are either not reflected in the property budget and P&L report in the case of merchant bookings, or fall under COGS/Travel Agency Commissions in the case of an agency booking.
Just imagine the following Scenario A: an online travel consumer comes to the hotel website, likes the property location, product and services, likes the rate which is in parity but also includes some unique value-add, and books there. The distribution cost (the prorated website and digital marketing expense required to engage, bring in and convert this travel consumer) comes out of the Sales & Marketing line item, part of the G&A Expenses of the P&L, which is severely restricted and often subject to budget cuts.
In Scenario B, an online travel consumer comes to the hotel website, likes the property location, product and services, but ultimately books the property on Expedia (better rate, better user experience, etc.). The distribution cost is either not reflected in the P&L at all if this is a merchant booking, or goes under COGS/Travel Agency Commissions in the case of an agency booking.
Same travel consumer, same booking dates, entirely different treatment of the distribution costs. It is extremely ironic that the most cost-effective bookings – from the direct online channel, are severely restricted by the property’s sales and marketing budget, while the most expensive bookings – from the OTAs with cost of distribution of 15%-25% – are not restricted and can grow exponentially.
As we all know the COGS line item is rarely scrutinized at all, and practically has no budgetary limitation. On the contrary, any increase in the COGS line item puts a dent into the G&A Expenses, which immediately squeezes the budget allocation for Sales & Marketing Expenses i.e. limits budget for direct distribution even further. This “unlimited commission potential” allows OTA bookings to grow exponentially without being restrained by the property budget at the expense of the direct online bookings.
In other words, the cost of direct distribution via the property website should be treated in the property P&L in exactly the same way as OTA commissions, i.e. as COGS and deducted from the gross room revenue, thus unleashing the property’s ability to adequately fund the direct online channel efforts, boost bookings via the property website and drastically decrease OTA dependency.