Why it is a bad idea to pass on the burden of high commissions to customers!


An independent hotel is tough business to run. The lack of differentiation in the brand and product means that hoteliers have lower bargaining power with third party distributors.  I have been speaking to scores of hoteliers and one common operating procedure they employ is to simply increase the price of the hotel by the amount of commission they need to pay Online Travel Agents.  Example if a hotel generally sells at US$100 and the market manager for Expedia insists on a 25% commission, they start selling the hotel online at USD 125 on all online channels, including their own websites.  They then track the Average Daily Rates AFTER paying commissions. Should any customers search on an OTA and call the property directly they promptly discount the rate by 10-15%.  It is a win-win situation for all in their mind - the customer gets a discount, the hotel gets revenue that is over and above  their Average Daily Rates and the OTA is cut out.
Makes perfect sense? Except that this is a terrible idea! Let’s see what happens in the long run:

The hotel is worth USD 100. The hotel knows it and customers know it. So in effect the hotel is overpriced online. Overpricing the hotel to pay higher commissions is like increasing your tariffs every time the electricity bill or wage bill goes up. The price of any product is determined by demand & supply and customer perception- not on input costs.   So the value equation of the property goes down.

Value Equation for Hotels =        Pleasure ( Quality/Location/Brand)
                                                                        Pain (Price)

Once the value equation goes down, customers are no longer delighted by staying at the hotel at the price they are paying. This reflects in the online reputation and TripAdvisor review ratings for the hotel. This affects how future prospective guests see the property and their likelihood of booking and this in turn affects the hotel's occupancy and puts pressure on future prices. Remember online customers expereince  your price padding the most and they complain the loudest.

The Online Travel Agents are incredibly smart too. They track the property and find that it's conversion rates are dipping or lower than competition. They have little incentive to push the hotel over others.  Thus the ranking slips and so do the views on OTA sites. The hotelier tries and work out a special deal with the OTAs and offer an even higher commission or deal and increase the price further online- and this is a never ending vicious cycle.

So what should one do?:

Look at commission as an expense, like at any other expense. Do not calculate ADRs after paying commissions. One wouldn’t calculate it after paying the wage bill so why would one do it for commissions? This would motivate the hotel to pay a reasonable commission in the first place and would keep  selling rates at levels that guests see as great value for money.  Happier guests mean better reviews and thus more customers and higher occupancy. Higher occupancy gives the hotel confidence of doing better yield management by selling higher category rooms results in a better overall bottom line.

Work Closely with Market Managers- If the hotel is a high converting hotel, market managers would agree to a lower commission. Ensure that  a quid pro quo equation is worked out with them by supporting OTAs with better allocations, last minute deals and other things that are important to them beyond a high commission rate.

Do not discount on the phone- Try to maintain the sanctity of 'Best Available Rates'.  Try calling a Holiday Inn or Marriott and asking them for a discount on their Best Available Rates.  None of the decent brands would allow it and neither should you. Once the subjectivity goes out, guests have the satisfaction of knowing that they actually have got the ‘Best Available Rate’ rather than the nagging doubt that they could have got a better deal.

Please do feel free to write to me on amit@comemasure.com with your comments.

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