Hotel Distribution Costs

Examination of the costs associated with direct and indirect distribution channels
for Hotels, together with the impact of ‘channel shift’

Final Report

2 May 2018

Sponsored by the European Travel Technology Services Association (ETTSA)

Privileged Document. This document is subject to sensitive data protocols

All data in this study has been sourced from publically available sources or from ETTSA member companies on a
confidential basis. The confidential data has been anonymized and aggregated to ensure the source data cannot
be identified and the data cannot be ‘reverse’ engineered.
 Disclaimer

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The conclusions and recommendations contained in this Report are based upon information sourced
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Distribution Cost Study - Hotels © Infrata 2018

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affecting the Report, which may come or be brought to Infrata’s attention after the date of the Report.
 Distribution Cost Study - Hotels © Infrata 2018

Hotel Distribution:

Executive Summary

Page 3
 Shifting customers to direct has no impact on net contribution to
hotels

The claim that direct distribution is ‘considerably cheaper’ than indirect distribution for a typical hotel is
extensively reported. (pg8)
Our analysis shows the average net contribution* of all the direct distribution channels is €4.59 per
booking greater than the average of all the indirect channels. (The overall net contribution from all
channels is €80.94) (pg 9)
However, if we compare solely the net contribution of the OTA with [Link], then the net contribution is
€78.43 with OTA channel contributing €0.12 more per booking than the [Link]. (pg 10)
Were a hotel to shift their entire inventory (away from the OTA channels to [Link]), there would be a
statistically insignificant change in the overall net contribution**. This shift assumes a net cost***
rebalancing. This also assumes all other market dynamic factors remain the same. (pg 11)
However, a hotel is likely to face a significant drop in occupancy, which would require a material increase
in spend in the areas of: customer acquisition, online marketing, technology development and customer
services.
Distribution Cost Study - Hotels © Infrata 2018

When selling indirectly, these costs are usually borne by the intermediary from commission proceeds
whereas if the hotel would have to directly expend resources in these areas if there was a shift from
indirect to direct channels.
Furthermore, the hotel is likely to lose the positive impact of the billboard effect (between €7 - €10 per
booking). (pg 12)

* Net Contribution is the preferred Key Performance Indicator as this takes into account both channel costs and their respective channel revenues. Av. ADR of €112
normalised across all channels to allow examination of costs in isolation.
** a reduction in average net contribution from €80.94 to €80.92 (or 0.03%)
*** e.g. removal of commission, addition of SEO costs, etc
Source: Infrata Page 4
 The hotel industry has a wide range of channels* to connect with
and generate bookings from, end consumers

Our model assumes that an average hotel receives the majority of its bookings from 11 primary channels*. Each channel will have different
combinations of ‘connections’ to deliver each hotels' final product to the guest. Guests have a wide range of choice and ultimately decide which
channel they will use

Corporate TMC GDS Hotel Hilton

Starwood
Wholesalers
Leisure
Agents
Tour
Social operators
Rich Media Inventory
Affiliate Switch
Guest Content Agg Management
Review
OTA**
Meta
Non-Loyal
Expedia
Booking Revenue
Business
Extranet CRS Channel
Search
Leisure Management
Google Booking
Yahoo Platform
Distribution Cost Study - Hotels © Infrata 2018

[Link]
Loyal

Connectivity Front Office Back Office

Non CRO
Representation
Loyal
company
‘Offline’
Major channel
Local
corporate Minor channel
Hotel distribution is fragmented, with multiple connectivity options and varied competing commercial models.
Total costs per booking range from between 10% and 30% of room revenue.

* Channels include Indirect: OTA (4 sub channels), TMC, Wholesaler, Direct: [Link] (2 sub channels), CRO, local direct and Offline: MICE- this is non exhaustive
Source: Infrata ** OTAs have differing final connectivity options to the Hotel via the switch, extranet or CRS- each with different cost implications Page 5
This graphic illustrates the main distribution channels and linkages and the authors recognize that other connections exist and vary greatly by hotel/chain.
 Channels may serve a different mix of end consumers and as a
result can deliver different average revenues
Average Daily Rates (ADRs) across Europe vary considerably by city and type of hotel

ADR Europe per type of Hotel, 2015-2016, €

€200
180 2015 Across Europe, hotel room revenues vary greatly by
160 2016
140 geographical location, by customer mix, market
120 supply/demand and type of hotel:
100
80
60 • Luxury and upper scale almost 100% greater than
40
20 midscale and economy
0
• European capital city ADR’s vary by 100% comparing
Luxury & upper Upscale & upper mid Mid scale & economy Rome with London or Amsterdam
• ‘Baseline’ revenues (by channel) reflects the distribution
model’s average revenues

€200 The average ADR for European hotels is €112 which is

180 Upscale & Upper Mid Classes ADR, 2015-2016, € used as the baseline for modelling in this report
Distribution Cost Study - Hotels © Infrata 2018

160
140
120
100
80
60
40
20
0

London Paris Frankfurt Berlin Brussels Amsterdam Rome

Page 6
Source: STR
 Each channel generates a different average level of revenue for
the hotel

REVENUE The hotel ADR is the normalised across channels*. The net ADR varies due to the inclusion of commissions payable to
OTA’s and loyalty discounts

Net average revenue per Booking: Direct vs. Indirect Channels

(One night stay including merchant and loyalty discount) €127**

€120 €112 €112 €112 €112 €112

€112
€110 €103
€100 €95* €95
€90
€80 €78
€70
€60
€50
€40
€30
€20
Distribution Cost Study - Hotels © Infrata 2018

€10

Loyal Non- Loyal Local Corp CRO/Voice Wholesaler TMC via Merchant Merchant Agency Agency
Direct GDS (Extranet) (Extranet)
[Link] OTA

Source: Infrata based on industry sources. Data is for hotel chains and hotels selling through major representative groups. [Link] is modelled as a
direct channel. The nature of hotel franchising and ownership, means that [Link] in some cases can be viewed as indirect.
*To allow for like-by-like comparison of impact of channel shift a common ADR baseline is required. €112 is modelled as the average industry
** The ADR for TMC via the GDS is €12 - €15 higher than the average due to a higher spending business–oriented clients. Source: TravelClick
Page 7
 As a result of the different connectivity options, each channel
(direct or indirect) has a different level of total (average) cost

COSTS Different cost level within different categories contribute to the cost per channel. These costs are either fixed or variable per
booking. Agency channel costs include commissions which are treated as ADR discounts where the booking intermediaries
are collecting payments

€40
Cost of Booking: Direct vs. Indirect Channels Cost categories
(One night stay including merchant and loyalty discount)
€36.90

€33.86
€32.10 €31.40
€30

€25.73
€24.18

€20 €18.37
€16.17

€12.87
€9.94
€10
Distribution Cost Study - Hotels © Infrata 2018

Loyal Non- Loyal Local Corp CRO/Voice Wholesaler TMC via Merchant Merchant Agency Agency
Direct GDS (Extranet) (Extranet)
[Link] OTA
offline
24% 11% 11% 8% 11% 4% 15% 4% 4% 4% 4%

Direct: 65% (online 41% , offline 24%)* Indirect: 35%

* Hotels receive guests from both online and offline bookings. Percentages shown here are for online bookings (offline not shown).
** Credit card fees are either paid directly by the hotels or indirectly (for Merchant transactions), which is modelled by through lower revenues via the merchant channel
*** Phocuswright OTA market share is approx. 26%, but does not take into account of 24% [Link] this into account OTA market share=19% (vs Travelclick 16%) Page 8
Source: TravelClick 2016; Phocuswright 2016. Data is for hotel chains and hotels selling through major representative groups. Please see main report cost tables
 As a consequence, we have examined the net contribution per
channel as the basis for comparison

CONTRIBUTION Net contribution takes into account channel costs and net ADR. The net average contribution of the OTA
channel is marginally higher than that of [Link] (loyalty and no loyalty guest)
- Base scenario
Average
contribution
Average Net Contribution per Booking: Direct vs. Indirect Channels across all
(One night stay including commissions and loyalty discount) channels*

€95.60
€90 €87.59 €82.79
€82.13
€79.91 €80.36 €80.94
€77.10 €79.67 €78.20
€80 €76.63 €74.87
€70 €68.30

€60

€50

€40

€30

€20
Distribution Cost Study - Hotels © Infrata 2018

€10

Loyal Non- Loyal Local Corp CRO/Voice Wholesaler TMC via Merchant Merchant Agency Agency Direct Blended
Direct GDS (Extranet) (Extranet) Indirect
[Link] OTA Weighted Averages

Direct Indirect

* Direct bookings deliver an average of €4.59 per booking more than Indirect (€82.79- €78.20) Page 9
Source: Infrata based on industry sources. Data is for hotel chains and hotels selling through major representative groups.
 Looking solely at online channels – OTA delivers an additional
net contribution of €0.12 per booking vs [Link]

CONTRIBUTION
- Online channels only Average
contribution
across online
Average Net Contribution per Booking: Direct vs. Indirect Channels channels*
(One night stay including commissions and loyalty discount)

€95.60
€90 €87.59 €82.13
€79.91 €80.36 €78.50 €78.43
€77.10 €79.67 €78.38
€80 €76.63 €74.87
€70 €68.30

€60

€50

€40

€30

€20
Distribution Cost Study - Hotels © Infrata 2018

€10

Loyal Non- Loyal Local Corp CRO/Voice Wholesaler TMC via Merchant Merchant Agency Agency Direct Blended
Direct GDS (Extranet) (Extranet) Indirect
[Link] OTA Weighted Averages
offline
24% 11% 11% 8% 11% 4% 15% 4% 4% 4% 4%

Direct: 41% Indirect: 35%

* OTA channels deliver an average of €0.12 per booking more than [Link] (€78.50 - €78.38) Page 10
Source: Infrata based on industry sources. Data is for hotel chains and hotels selling through major representative groups.
 Channel Shift Scenario: Shifting all OTA bookings to [Link] -
assuming all other factors remain the same

In this scenario where all other factors remain the same – specifically hotels do not need to do anything to secure those OTA-originating guests -
the net impact of shifting all bookings from OTA to [Link] is a reduction in net contribution of €0.02 (0.03%)

18.4%

€95.60 €80.94 €0.02***

€90 €87.59 €82.13 €80.92
€80.20** €79.67 €79.91 €80.37 €80.92
€80 €76.63 €74.87
€70 €68.30
Base S. 1
€60

€50

€40 16.9%* 16.9%

€30

€20 11% 11% 8% 11% 4.9%

4% 15% 4% 4% 4% 4%
Distribution Cost Study - Hotels © Infrata 2018

€10

Loyal Non- Loyal Local Corp CRO/Voice Wholesaler TMC via Merchant Merchant Agency Agency Revised average
Direct GDS (Extranet) (Extranet) contribution across
all channels
[Link]
OTA

* Shift from the OTA channels to [Link] equally split between loyalty and non loyal sub-channels (50-50)
** The loyal [Link] channel experiences a mathematical net contribution increase of €3.1 (€80.2-€77.1) due to reallocation of net costs.
*** Statistically insignificant difference (€0.02/€80.92 =0.0247%) Page 11
Source: Infrata based on industry sources. Data is for hotel chains and hotels selling through major representative groups.
 Billboard Effect: Hotel presence on OTA displays significantly
increases direct hotel booking numbers

Hotels benefit significantly from being displayed on OTA websites. Up to 35% of hotel bookings can be attributed to guests finding out about
a particular hotel, then booking directly with that hotel- known as the billboard effect. If the billboard effect did not exist, [Link] would
need to to compensate to regain the ‘lost’ guests by increasing its SEO spending by between €7 and €10 per booking.

The columns labelled ‘Billboard’ reflects the existing situation in which the hotels are benefitting from the advertising spend of the OTA
leading to more bookings through native search. The cost to ‘[Link]’ would increase if the OTA did not advertise as found by the Cornell
University research.
[Link]
Cost per Booking* Assumptions: Cost categories
€40 €39.3 1. [Link] share of total hotel
€36.2 bookings is 15.3% (50-50 loyal and
Cornell university research: non-loyal)
€32.1
Groups of hotels which were listed and 2. Up to 35% of these bookings is due
then removed from display in alternate €30 to the billboard effect.
weeks showed that, when listed, the €25.7 3. Therefore total bookings due to the
hotels received an increase of between billboard effect is 5.35%
5% and 35% in the level of bookings on 4. The Hotel’s current non-loyal SEM
the own hotel’s website cost component per booking is
€20
€13.4.
It is estimated that 75% consumers who
made reservations with a hotel brand 5. To recover the lost volume (5.35%)
Distribution Cost Study - Hotels © Infrata 2018

had previously visited an OTA in hotels needs to increase average

advance of booking directly. spend to €39.3 per booking in non-
€10 loyal and €36.2 in loyal.
Consumers visit an OTA on average
6. We assume that loyal SEM has to
7.2 times prior to booking directly. be increased to non-loyal rates to
attract new customers.
7. Non-loyal are assumed to cost more
Billboard None Billboard None
in terms of SEO because they are
(existing (existing not already ‘captured’ by the hotel or
situation) situation) the OTA.
Loyal Non- Loyal

*One night stay including merchant and loyalty discount

Page 12
Source: Infrata based on industry sources. Data is for hotel chains and hotels selling through major representative groups.
 Distribution Cost Study - Hotels © Infrata 2018

Hotel Distribution:

Market Dynamics

Page 13
 This study took a rigorous approach to modelling distribution and
associated costs and industry dynamics

To build a robust model we:

• Reviewed a wide range current The model allowed us to test:
literature within the industry This study shows that:
• Used recognised industry bodies and
research to support numerical analysis • How costs vary by channel and • A number of costs were channel
technology/system independent (e.g. internal hotel
• Analysed the impact of trends and
• How channel type impacts cost and distribution systems)
forces shaping the industry
revenue • Other major cost groups varied
• Where appropriate used an industry
• How market dynamics and shifting considerable by channel (e.g.
average in the analysis, and these may
channel structures impact profitability commissions, SEM, GDS)
vary widely when looked individually,
such as the costs associated with hotel
franchise and chain participation
agreements

This study did not review the full spectrum of dynamics impacting hotel channel shift. In particular:
Distribution Cost Study - Hotels © Infrata 2018

Consumer buying Impact of hotels’ use of The specific practicalities Long term trends in The impact distribution
behaviour overall: one channels to increase enabling a business or customer segmentation costs and the ability to
itinerary for travel, shop hotel occupancy rates as leisure traveller to shift i.e. business vs. leisure satisfy consumer needs,
air first, shop sites some channels are more booking channels from and groups vs. if customers (e.g. those
offering full travel effective as marketing indirect to direct – independents currently being served
components, etc.. tools than others impacting booking costs, through TMCs) are
booking revenue, ‘forced’ to move to
mandatory support [Link], how is travel
systems and negatively policy compliance
impact hotel occupancy handled?

Page 14
Source: Infrata
 In particular, three dynamics (Channel, Customers, Market) were
considered in the distribution cost ‘equation’

To fully understand the impact, we considered the interactions between three key dynamics:

Hotels employ a variety of direct and indirect ‘Channels to market’.

Cost differences exist between the various channels. Hotels seek
to minimise these costs where ever possible

Channel

1
Customer
behaviour 2 3 Market dynamics

Market developments are having a significant impact on costs:

Differing customer types have a strong • Online advertising: google and other web search ads are now the main way
preference for particular channels. to drive traffic to websites. ‘Ads’ are consumer’s first touch point. The most
effective ads are paid, unbranded but these are an expensive and growing
Channel shifting has specific revenue
costs. They are ‘owned’ mainly by the major OTA’s (Expedia, [Link])
impacts:
not the hotel chains.
Distribution Cost Study - Hotels © Infrata 2018

• Hotels selling direct may claw back some

• Technology: intermediaries such as Expedia, edreams, Sabre, Travelport
discounts previously shared with
and Amadeus are investing heavily in technological development to enhance
merchants
the consumer shopping experience and booking needs. Many developments
• There is likely to be an ADR and concentrate on ‘mobile’ – which are expensive and long term investment
occupancy impact that is not addressed programmes.
in this study
• “New startup” companies continually enter the hospitality distribution space
challenging the industry norm, with new and disruptive business models, i.e.:
[Link], onefinestay, TripBam.

Page 15
Source: Infrata
 Hotel distribution costs are impacted by the market dynamics of
this channels shift, product mix and technology

Key market dynamics impact Hotel distribution costs. These dynamics either simplify the ‘chain’ thus reducing certain cost (e.g.
online booking) whilst other dynamics increase complexity (e.g. increased advertising costs and distribution technology).

Category Dynamic

1 Online Hotels aim to increase bookings via their own websites (“[Link]”) including ‘direct connect’
(led by major US chains)

2 Advertising Hotels needs to ‘invest’ heavily in customer acquisition via Google ads (others also exist) to ensure
traffic to [Link] site

3 Technology (1) Hotels aim to optimize their bookings on their most profitable channel mix - employing sophisticated
revenue and channel management tools.
Technology (2) Hotels are facing new distribution players (e.g. TripBam, Airbnb, RocketMiles, Travelperk) that employ
new technology (e.g. mobiles) and business models (e.g. Google’s Trips).

4 Consolidation Hotel chains are increasing market power through consolidation (e.g. Accor acquisition of FRHI,
Marriott, Starwood. HNA acquisition of Carlson and Hilton (25% stake)

5 Branding Hotel branding increasingly important in customer acquisition (largest chains offer 113 brands, various
Distribution Cost Study - Hotels © Infrata 2018

product types & price points. 31 new brands evolved over last ten years).

6 Loyalty Hotel loyalty programmes are increasingly impacting marketing/product mix.

7 ‘Transience’ Hotels are facing increasing ‘channel’ fragmentation among individual customers (a.k.a. ‘transient’)
versus ‘group’ sales as individuals seek to ‘game’ the systems

Page 16
Source: Infrata
 Bookings via the online channel are growing in both business and
leisure segments

Penetration of global online accommodation bookings Key trends

(%, 2004-2015)

Online booking is growing globally at 13% per annum and online

now accounts for 35% of the global market.
• Initially focussed on the price-driven leisure segment.
• Consumers search many sites before making a booking.
• Business segment is being encouraged to book direct and
annual negotiation process with hotels for corporate rates is
being undermined.
• Corporations are incentivizing their travellers to book lower
priced travel options by sharing the savings with the traveller.
(Travelperks, TripBam, HRS examples)
Overall costs of distribution have risen resulting in the trend of
hotels being much more selective and competitive when placing
Distribution Cost Study - Hotels © Infrata 2018

Source: Euromonitor Passport

inventory on channels.

• Global online room bookings have increased from 22% in

2010 to 35% in 2015

Growing share of sales through OTA and [Link] and reducing OTA margins are reflected in the cost comparison model

Page 17
 The cost of attracting ‘non-loyal’ customers is extremely high in
the online environment

When examining how feasible it is to move customers from one channel to another, a detailed understanding of the dynamics is required.
In particular, the associated increase spend to acquire non-branded internet hotel search has a disproportionate impact on costs.
OTA’s outspend hotel chains on non-branded hotel search by ‘orders of magnitude’ and due to their scale achieve a more efficient use of
marketing investments. The more efficient and higher spending means higher visibility in the websearch which translates into bookings
Consumers often use OTAs for initial research then book directly via [Link]. 65% of [Link] bookings come from consumers who
first researched options via an OTA. This ‘unpaid marketing’ for the hotels is described as the ‘billboard effect’ as the hotels benefit from
OTA marketing spend.
Data from Skift shows the significant investment in direct online advertising of the OTA’s with Priceline and Expedia spending a combined
$5.8 bn in 2016, some 37% of their revenues. This massive spending benefits all suppliers as well as these OTA
.

Priceline and Expedia Ad Spend 2016 $000

Digital Ad Spend
Total Ad Spend % of Gross Profit % of Gross Profit Revenue
2016 Year-End Estimate
(U.S.$ Millions)
Priceline $3,775 36.6% $3,479 33.7% $10,743
Distribution Cost Study - Hotels © Infrata 2018

Expedia $2,700 37.6% $2,295 32% $8,774

Total OTA $6,475 37% $5,774 33% $19,517

Page 18
Source: Company Filings, Skift Estimates
 Consolidation, Branding, Loyalty and Transience of Hotel Market
Have Mixed Impact on Direct Distribution

Consolidation, branding, loyalty and transience of hotel market and customer behaviour have mixed impact on direct
distribution

Market Dynamic Likely Impact on Direct / Indirect

Increasing Direct as fewer hotel groups

is accelerating in the hotel chain space for example with Accor with greater market power. Challenge for
Consolidation purchasing FRHI, Marriott Starwood, HNA acquiring Carlson and hotels to be travel sites incorporating: air,
25% stake in Hilton car rental and rail for trip bundling.

is an increasingly important marketing tool and the world’s largest Impact varied: some are mass market,
Branding hotel chains offer 113 brands combined, various product types some are targeted at specific niche.
and price points, 31 of these did not exist ten years ago.

Loyalty programme members outnumber non-members by 3 to 1 Loyalty customers more likely to use
in hotel transient website sales (called [Link] in this study). [Link].
Non-members outnumber members by 4 to 1 in on-line travel
Loyalty
agent (OLTA) transient sales. Hotels are pro-actively offering
loyalty members attractive rates, add-ons, and packages to book
direct on ‘[Link]
Distribution Cost Study - Hotels © Infrata 2018

Increasing indirect; non-transients likely to

use numerous distribution channels. Want
Transience increase in share of ‘transient’ i.e. More individual
Transience aggregated content choice including: air,
customers may lead to need for more distribution.
car rental and rail to bundle trip.

Page 19
Source: Infrata
 Customer Groups Propensity for Channel Switching: Business –
Low Switchers, Leisure (independent) High, Leisure (group) Low

Customer Description Channels used Factors affecting Channel Analysis Overview

group model

Corporate Require tracking systems, Important Strong resistance to Overall distribution costs impact
consistency and security of segmentation: channel shifting due to business model across a number of
data, lost productivity, tax preferred reporting factors:
information, and duty of care partners/volume requirements, some
• Cost per channel varies by
deals, ‘ad hoc’ potential for direct
customer group
travel connect between
largest B2B • Revenue per customer varies by
type
Leisure Lack of conformity and OTA, meta, travel Potential for channel
(independent) predictability, extremely agent, hotel shift but substantial • Different groups have varying
price sensitive, high levels of websites marketing cost potential for channel shift
websearch and required (witness
responsiveness to ads Travelodge UK
campaigns).
Leisure Predictable and ‘controllable’ Mostly sold and Limited need for
Distribution Cost Study - Hotels © Infrata 2018

(Group) group, served by tour negotiated direct channel shift to save

operators, price sensitive with hotel distribution cost.

Page 20
Source: Infrata
 Revenues: ADR’s in Europe vary considerably by city and type of
hotel: average used for cost model

ADR Europe per type of Hotel, 2015-2016, €

€200
Key Trends
180 2015
160 2016
140 Hotel room revenues vary greatly by geographical
120
100
location, by customer mix, market supply/demand
80 and type of hotel. The chart shows the channel
60 variance in ADR.
40
20
0
• European hotel ADR shows significant
Luxury & upper Upscale & upper mid Mid scale & economy variance between hotel types
• Luxury and Upper scale almost 100% greater
than Midscale and Economy
• European Capital City ADR’s vary by 100%
€200
comparing Rome with London or Amsterdam
180 Upscale & Upper Mid Classes ADR, 2015-2016, € • ‘Baseline’ revenues by channel in distribution
Distribution Cost Study - Hotels © Infrata 2018

160 model reflect overall market experience

140
120 • Some fixed costs but majority are % of
100 revenue
80
60
• The average ADR used in the model is €112
40
20
0

London Paris Frankfurt Berlin Brussels Amsterdam Rome

Page 21
Source: STR Media Request November 2016.
 Hotel Distribution:

Hotel Channels
and Cost Model
Distribution Cost Study - Hotels © Infrata 2018

Page 22
 Hotel model developed to measure impact of direct / indirect
channel shifting

The hotel distribution model was developed in three stages:

Costs and Development of cost base: research within the industry to understand costs for all the
1 Revenues main categories:
• Average costs derived for royalty / non-royalty
• Ranges of costs developed for each distribution channel
• Key costs ascertained to be SEM, commissions, merchant discounts, credit cards
• ADR and likely discounts established by distribution channel
• Costs defined in main categories of (1) Systems and connectivity, (2) Commissions
and fees, (3) Back office and support
• Revenue per channel normalised to an ADR of €112

Channel Mix • Establishment of ‘average’ industry mix of bookings by distribution channel

2 • Allocation of mix to direct / indirect categories
• Most likely channel shift scenarios established
Distribution Cost Study - Hotels © Infrata 2018

Modelling • Costs allocated by channel

3 • Base channel and average costs derived
• Channel and average costs derived according to distribution channel mix scenario
• Dynamic model for Royalty and non-Royalty

Page 23
Source: Infrata
 Hotel costs: distribution systems are a major category –varying
propensity to be reduced /removed with more direct distribution

System Function Cost Sensitivity to Direct or

Indirect
PMS Property Management System –software application automates the Varies - €$1.8 per
operational functions of a hotel: Front Office, Inventory booking No impact
Management, Reservations and Rooms Management,
Housekeeping, Accounting, etc..
IBE Internet Booking Engine – a software system that transacts a hotel Varies - €1.5-4.1 Varies by channel mix
booking from its website. per booking
CRS Central Reservations System –software database application that €2.5 per booking – Varies by channel mix
distributes information about a hotels inventory, (rates, availability, not applicable to all
descriptive content) it transacts reservations and interfaces with channels
customer booking channels. It may or may not direct connect to a
PMS.
Some voice charges may also be applicable.
Sales & Reflect cost of brand and individual hotel marketing 4% overall, higher Not directly related to
Distribution Cost Study - Hotels © Infrata 2018

Marketing in direct channels distribution channel

Fees
CRO / Staff, software and buildings cost of a call centre €7.6 per booking in Varies by channel mix
Voice this channel
Labour Some management cost in wholesaler allocation and merchant €1.12 per booking Varies by channel mix
extranet in this channel
SEO / SEM Drive traffic to websites to [Link] 3.5% (loyalty), 12% Will increase
Acquisition (non-loyalty) proportionately with move
to Direct Online

Page 24
Source: Infrata based on industry sources
 Hotel costs: Commissions and fees are an important cost driver
for the indirect versus direct distribution assessment

Activity Function Cost Sensitivity to Direct/Indirect

TA Commissions Paid on most TA, OTA, 0-10% Eliminated by Direct bookings

TMC bookings

OTA Commissions Paid on OTA bookings 15% Eliminated by Direct bookings

GDS Booking Fee Paid on most TMC €6.65 Eliminated by Direct bookings
bookings

Franchise & Royalty Fees Payment for use of chain 5% Not directly related to distribution channel
brand and infrastructure but may reduce at group level with Direct

Loyalty Fees Operation of chain brand 4.7% Not directly related to distribution channel
loyalty programme but may reduce slightly with indirect

Credit Card Fees Processing fees 1.5-2.5% Likely to move with channel so not
Distribution Cost Study - Hotels © Infrata 2018

sensitive

Page 25
Source: Infrata based on industry sources
 Hotel costs: Back office and support systems not sensitive to
channel shifting and excluded from model

Activity Function Cost Sensitivity to

Direct/Indirect
CMS Channel Management System – is a software €1.8 per booking No impact
application for hotel rate distribution and
management tool distributing rates, inventory, rate
rules to OTA’s GDS’ and booking engines. It
interfaces with a PMS
RMS Revenue Management System – software €1.35 per booking No impact
application of disciplined analytics that predicts
consumer purchasing behaviour so as to optimise
room availability with best rates to achieve highest
revenue growth.
Content Management A content management system – is a software €1.8 per booking No impact
application for hotels that manages and distributes
all of its descriptive text, pages, images, pictures,
videos to websites, GDS, OTA and other booking
systems
Distribution Cost Study - Hotels © Infrata 2018

Switch The switch is a central communications hub that €1.7 per booking
connects hotel CRS’ to other computer systems, i.e.: High impact but
GDS, OTA. It facilities transactions between difficult to isolate
systems: booking, modification and cancellations

Extranet A low cost, web enable controlled access Eliminates CRS

interface to an OTA and other sales distribution and other
sites for hotels to supply rates, availability, text connectivity
and images, etc. charges

Page 26
Source: Infrata based on industry sources
 Hotel Distribution Mix - Bookings % by Channel

Hotel Cost and Revenue Model Base Case Distribution Channel Mix • The channel mix data has been sourced from TravelClick
Demand 360 Europe.
• Sub-categorisation has been developed after researching
other industry information and industry discussions.
OTA – Retail extranet • Largest part is direct to hotel – MICE, walk-in, IT and other
OTA – Retail booking groups. This part is excluded from the model.
Direct to property
OTA – Merchant extranet 4% 4% (excl. local corp direct • [Link] of 22% has been divided equally between Loyalty
OTA – Merchant booking 4% and wholesaler) / Non-loyalty
4% • Other Direct channels are Local Corporate, CRO/Voice and
Wholesale – these are regarded as less effective channels
25% and may be moved to [Link]
15% • Indirect channels used are OTA and TMC via a GDS
Corporate TMC via
GDS Booking • OTA total of 16% has been split into four main sub-channels.
11% • Travelclick global data shows an OTA market share of 14.8%
4% of all bookings, based on revenue. Phocuswright indicates
Distribution Cost Study - Hotels © Infrata 2018

[Link] Loyalty
member
Wholesaler
10%
OTA market share is 23.8%, but does not take into account
Allocation
11% the 24% offline contribution. The impact on the cost
8% modelling in the following pages is marginal.
CRO/Voice non-
[Link] Non-Loyalty
loyalty booking
member
Local Corp Direct

This analysis uses the Travelclick ‘low’ estimate of OTA bookings revenue share of 14.8%.
Phocuswright data for Europe gives a ‘high’ estimate of OTA share of 23.8%.

Page 27
Source: Travelclick, Industry research, Infrata
 The Cost Model Platform and Mechanics

The Model Platform

The cost model has been developed to reflect a ‘real world’ mix of distribution channels used by a chain franchise hotel and
independents that are part of a major representation group.
Costs per booking have been sourced from a number of sources for all the quantifiable parts of the distribution chain for every channel.
The model allows the shifting of bookings between channels and the calculation of the cost impact including discounts.

Model Mechanics
The model allows the assessment of channel shifting from a ‘base’ mix of channels. The shift is from indirect or less efficient direct
channels to hotels’ websites ‘[Link]’:

• Base: 66% direct, 34% indirect

• Scenario 1: moves all OTA bookings (16%) to [Link]
• Scenario 2: all wholesaler allocation (4%) to [Link]
• Scenario 3: all corporate TMC (15%) to [Link]
Distribution Cost Study - Hotels © Infrata 2018

• Scenario 4: excludes all offline channels excluding walk-in

The channel shifts have been used to produce the results for one and two nights.

Page 28
Source: Infrata
 Hotel Cost Model Results: Average Net Revenue per Scenario, One
and Two Nights, Shows Limited Impact of Shift to Direct

Major cost impacts:

Data based upon gross ADR minus distribution costs and discounts for
chain and hotels selling though a representative group with Royalty.
Based on 2016 data.

Scenario 1: moves all OTA bookings (18%) to [Link]

- increase in SEM cost, reduced commissions and discounts

Scenario 2: all wholesaler allocation (5%) to [Link] -

increased SEM, reduced discounts

Scenario 3: all corporate TMC (12%) to [Link] – increased SEM,

reduced commissions and GDS costs

CRO/Voice shift: a move within direct distribution cost - all CRO/Voice

(7%) to [Link] – reduced call centre cost, increased SEM
Distribution Cost Study - Hotels © Infrata 2018

The scenario that appears to be of most interest to hotels – moving OTA

bookings to [Link] produces lower average net revenue over one
night and slightly higher over two nights.

These cost scenarios do not reflect potential impact on occupancy due to

loss of key customer services and market reach.

This analysis (and subsequent ones) has used the ‘low’ OTA share
estimate of 14.8%. The impact of using the ‘high’ estimate of 23.8% is to
reduce net revenue by 0.3% for one night with similarly limited impact on
channel shift.
Page 29
Source: Infrata
 Channel Mix Scenarios - % Mix Bookings by Channel

Direct channels Indirect Channels

[Link] Global OTA

Local Corporate
CRO/Voice Wholesaler Merchant Agency
% of bookings Loyalty Member Non-loyalty Corporate TMC via Merchant Agency Total*
non-loyalty Allocation (Extranet) (Extranet)
Direct GDS

Base 10.9 10.9 8.0 10.7 15.1 4.0 3.7 3.7 3.7 3.7 100

Scenario 1 18.3 18.3 8.0 10.7 15.1 4.0 0 0 0 0 100

Scenario 2 12.9 12.9 8.0 10.7 15.1 0 3.7 3.7 3.7 3.7 100

Scenario 3 18.5 18.5 8.0 10.7 0 4.0 3.7 3.7 3.7 3.7 100
Distribution Cost Study - Hotels © Infrata 2018

Scenario 4 20.8 20,8 0 0 0 0 9.0 9.0 9.0 9.0 100

In each case, the indirect bookings were moved into Direct ([Link] split 50-50 between loyal and non loyal, except scenario 4 where al bookings
moved to non-loyal)

* Totals include Direct to property includes MICE, walk-in and groups booking direct excluding Local Corporate (26%)
Source: TravelClick channel mix 2016, Industry research, Infrata, based on 2016 data

Page 30
Source: Infrata
 Cost Model Results – One Night Stay

Average ADR is €112 (rounded up from €117.77)

[Link] Global OTA

Local Corporate CRO/Voice Corporate TMC Wholesaler Merchant Agency

Channel: Loyalty Member Non-loyalty Merchant Agency
Direct non-loyalty via GDS Allocation (Extranet) (Extranet)

ADR Euro € 112 € 112 € 112 € 112 € 112 € 112 € 112 € 112 € 112 € 112
Merchant Discount € 33.53 € 16.77 € 16.77
Loyalty Discount € 8.94
Effective ADR EURO € 102.83 € 111.77 € 111.77 € 111.77 € 111.77 € 78.24 € 95.00 € 95.00 € 111.77 € 111.77

Distribution System Fees

PMS € 1.78 € 1.78 € 1.78 € 1.78 € 1.78 € 1.78 € 1.78 € 1.78 € 1.78 € 1.78
CRS € 2.51 € 2.51 € 2.51 € 2.51 € 2.51 € 2.51
Connectivity € 1.54 € 1.54 € 1.54 €- € 4.10 € 4.10
Commissions € 11.18 € 16.77 € 16.77
GDS € 6.65
CRO/Voice € 7.59
Labour € 1.12 € 1.12 € 1.12
Distribution Cost Study - Hotels © Infrata 2018

Other Fees
Franchise € 5.14 € 5.59 € 5.59 € 5.59 € 5.59 € 3.91 € 4.75 € 4.75 € 5.59 € 5.59
Sales & Marketing € 4.11 € 4.47 € 4.47 € 4.47 € 4.47 € 3.13 € 3.80 € 3.80 € 4.47 € 4.47
Loyalty € 4.83
Credit Card € 2.57 € 2.79 € 2.79 € 2.24 € 1.68 € 1.43 € 1.43 € 1.68 € 1.68
SEM/SEO € 3.24 € 13.41

Total Cost € 25.73 € 32.10 € 16.17 € 24.18 € 33.86 € 9.94 € 18.37 € 12.87 € 36.90 € 31.40

Net Revenue 1 Night € 77.10 € 79.67 € 95.60 € 87.59 € 77.91 € 68.30 € 76.63 € 82.13 € 74.87 € 80.37

Source: industry research, Infrata. Based on 2016 data. Page 31

 Cost Model Results – Second, and each additional stay Nights

[Link] Global OTA

Local Corporate CRO/Voice Corporate TMC Wholesaler Merchant Agency
Channel: Loyalty Member Non-loyalty Merchant Agency
Direct non-loyalty via GDS Allocation (Extranet) (Extranet)

ADR Euro € 112 € 112 € 112 € 112 € 112 € 112 € 112 € 112 € 112 € 112
Merchant Discount € 33.53 € 16.77 € 16.77
Loyalty Discount € 8.94
Effective ADR EURO € 102.83 € 112 € 112 € 112 € 112 € 78.24 € 95.01 € 95.01 € 112 € 112

Distribution System Fees

PMS
CRS
Connectivity
Commissions € 11.18 € 16.77 € 16.77
GDS
CRO/Voice
Other Fees
Distribution Cost Study - Hotels © Infrata 2018

Franchise & Royalty € 5.14 € 5.59 € 5.59 € 5.59 € 5.59 € 3.91 € 4.75 € 4.75 € 5.59 € 5.59
Sales & Marketing € 4.11 € 4.47 € 4.47 € 4.47 € 4.47 € 3.13 € 3.80 € 3.80 € 4.47 € 4.47
Loyalty € 4.83
Credit Card € 2.57 € 2.79 € 2.79 € 2.24 € 1.68 € 1.43 € 1.43 € 1.68 € 1.68
SEM/SEO
Total Cost € 16.66 € 12.85 € 12.85 € 12.29 € 22.91 € 7.04 € 9.98 € 9.98 € 28.50 € 28.50

Additional Nights € 86.17 € 98.92 € 98.92 € 99.48 € 88.86 € 71.20 € 85.03 € 85.03 € 83.27 € 83.27

Page 32
Source: industry research, Infrata. Based on 2016 data.
 Definitions: 'Channels to market'
(in order or listing in Infrata model)

Channel Connectivity Definition

Reference to a hotel guests status, as being part of the frequent guest affiliate/loyalty programme,
Sold via direct sale channels
(excluding walk-in and MICE

1 Loyal [Link] Booked on hotel's website often providing access to discount rates, addition of ancillary products and services during a stay at
the hotel
Non-loyal A term referring to hotel guests who are not participating as members of the frequent guest/loyalty
2 Booked on hotel's website
[Link] programme
Booked via phone direct to the Refers to a hotels business mix, and references bookings that are made by/for guests staying at the
Local corporate
3 hotel, hotel where a local company has a contracted rate at the hotel, and for bookings made direct to the
direct
or via an extranet. hotel, and not via an intermediary.
Bookings made through the Central
Reservations Office (CRO), or call This requires, offsite staff, office space, access to live inventory in booking systems and generally 24
4 CRO/Voice
center providing live reservation hour coverage.
services via the telephone
3rd party organizations that sell hotel room nights. Wholesalers are companies that buy rooms in bulk,
Bookings for contracted net rates or contract an allocation of rooms to sell on a time release basis. Wholesalers then sell them to travel
5 Wholesalers made direct or via extranet direct agents and OTAs, allowing hotels to generate more sales. Wholesalers are operating in the B2B
to hotel segment, meaning they do not sell directly to the public but to other 3rd party sites and distribution
channels.
Indirect sources/channels

Travel management company - travel agency sold focusing on corporate bookings. Rates are mainly
6 TMC via GDS Booked via GDS negotiated via RFP process, and made available through the GDS along with all other transient
Distribution Cost Study - Hotels © Infrata 2018

rates/inventory.
The commercial model of an OTA (online travel agency), that contracts a net rate from a hotel and
Merchant Model marks it up with it's commission. The main characteristic of a Merchant Model OTA is that the guest
7 Booked via OTA
(OTA) pays the OTA at the time of booking a room (as an undisclosed agent acting in its own name,
therefore becoming the “merchant”), and the OTA pays the hotel when the actual stay occurs
References a booking that is a merchant model, and the booking is made through an extranet
Merchant Model
8 Booked via OTA (manually maintained inventory), as opposed to a distribution system (dynamically maintained
(extranet) (OTA)
inventory).
The commercial model of an OTA (online travel agency). The main characteristic of the Agency Model
9 Agency (OTA) Booked via OTA is that the guest pays the Hotel directly when the stay is consumed and the hotel pays the OTA
commission after the stay has occurred.
References a booking that is a Agency model, and the booking is made through an extranet
Agency (extranet)
10 Booked via OTA (manually maintained inventory), as opposed to a distribution system (dynamically maintained
(OTA)
inventory). Page 33
 Definitions: Hotel Distribution

Term Definition

Product review sites may be supported by providing affiliate links to the websites that sell the reviewed items, for
11 Affiliate review
instance in travel the main review site is TripAdvisor

12 Agency (extranet) (OTA) Travel agency sold through an online travel agent using the agent's extranet

13 Agency (OTA) Travel agency sold through an online travel agent

Refers to a hotels on site operational staff that serve the front office teams, they do not interface directly with hotel
14 Back office
guests, and generally these include: finance & accounting, reservations, revenue management, sales & marketing, etc.

15 [Link] A term referencing an Hotel chain's own website. May also be referenced as [Link]

Generally refers to a payment made to an IATA registered travel agency for booking a hotel room. It is generally 10% of
16 Commissions the net room rate for the duration of the total stay, and applies only to bookings that are made for commissionable rates
(indicated in the rate terms/conditions) to IATA registered, or locally authorised travel agencies / hotel booking agencies.

A content aggregator is an individual or organization that gathers Web content (and/or sometimes applications) from
17 content aggregator
different online sources for reuse or resale.
Distribution Cost Study - Hotels © Infrata 2018

A content management system – is a software application for hotels that manages and distributes all of its descriptive
18 Content management
text, pages, images, pictures, videos to websites, GDS, OTA and other booking systems

Refers to a hotels business mix, and references bookings that are made by/for guests staying at the hotel whilst on
19 Corporate business, who are part of a corporation. Other segments in the business mix might include: leisure, government,
meetings & conferences, groups, etc.
Central Reservations System, is a software database application that distributes information about a hotels inventory,
20 CRS (rates, availability, descriptive content) it transacts reservations and interfaces with customer booking channels. It may
or may not direct connect to a PMS.

A low cost, web enable controlled access interface to an OTA and other sales distribution sites for hotels to supply rates,
21 Extranet
availability, text and images, etc. Manually maintained by the hotel's reservations staff.

Page 34
 Definitions: Hotel Distribution

Term Definition

A hotel franchise is a management agreement that provides certain services (brand, reservation system, marketing,
22 Franchise support, etc) in return for regulations, procedures, and for a fee. It can be compared to a chain/brand. Some examples
include: Best Western, Choice
Refers to a hotels on site operational department that come in direct contact with its guests on a day to day basis, and
23 Front of house includes: Reception, Guest Reltaions, Bell Staff, Concierge, Housekeeping, Maintenance and Food & Beverage service
staff

Global dsitribution systems company such as Amadeus, Travelport or Sabre, that provides travel agencies with
24 GDS transactional systems and software to make travel itinerary bookings, providing unbiased access to airlines, hotel, car,
rail, cruise, etc inventory

25 IBE Internet Booking Engine – a software system that transacts a hotel booking from its website.

The practice of managing a hotel's inventory in order to maximise its revenue from the local market's supply and
demand. The management incorporate revenue and channel management, for the hotel's customer mix, booking
26 Inventory management
systems and generally refers to Bedroom inventory, but may also include conference and banqueting space, as well as
food and beverage outliets.

27 Leisure agent Travel management company working for leisure travellers

Distribution Cost Study - Hotels © Infrata 2018

Meta-search sites or fare aggregators conduct searches across multiple independent sources of inventory (OTA, Meta,
28 Metasearch
[Link]) and displays the results of those shopped sites. Some examples include Trivago, Kayak, and Skyscanner

An online travel agency, allowing consumers to book air, car, hotel, rail, etc direct on their website, some examples
29 OTA
include: [Link]. [Link]

Property Management System –software application automates the operational, and transactional functions of a hotel:
30 PMS
Front Office, Inventory Management, Reservations and Rooms Management, Housekeeping, Accounting, etc..

A company that provides services to independent hotels, in order for them to compete with large global hotel chains. For
some sort of fee, representation companies provide services that may include any combination of: a CRS for distribution
31 Representation company
to OTA's, GDS', central marketing, central sales teams, a [Link] with IBE, loyalty program. Some examples include:
Preferred Hotels & Resorts, Worldhotels, Small Luxury Hotels

Page 35
 Definitions: Hotel Distribution

Term Definition

Revenue and channel management is the day to day practice at a hotel of adjusting its inventory (rooms, rates and
32 Revenue channel management
availability) in order to maximise revenue making and adjusint according to market supply and demand conditions

Digital advertising term for ditigal content that includes advanced features like video, audio or other elements that
33 Rich media
encourage viewers to interact and engage with the content.

34 Rich media content aggregator Platform for aggregating rich media.

35 SEM Search engine marketing - use of 'paid ads' to enhance screen position and therefore clicks on a website

36 SEO Search engine optimisation - use of complex algorithms to optimise positioning ranks in search return.

37 Social Social media - distribution through facebook and other similar sites

A central communications hub that connects hotel CRS’ to other computer systems, i.e.: GDS, OTA. It facilities
38 Switch
transactions between systems: booking, modification and cancellations
Distribution Cost Study - Hotels © Infrata 2018

39 TMC Travel management company - travel service provider usually working for business clients

A tour operator typically combines tour and travel components to create a leisure package holiday. They advertise and
40 Tour operator
produce brochures to promote their products, holidays and itineraries.

Page 36
 References

The following documents and sources have been used in this study:
Journal Title Author / Year

The Billboard Effect: Still Alive and Well Anderson / Han, 2017, Cornell University

European Hotel Distribution Study Prof. Roland Schegg

Results for the Reference Year 2015 Institute of Tourism, HES-SO Valais, 2016

The Economic Impact of OTAs in the EU: Summary Report Oxford Economics, 2016
Impacts on trips, night, spend and employment

2017 Outlook On Hotel Direct Booking by Jared Wein, Luke Bujarski, Dave Montali + Skift Team, 2016

Tnooz Various studies

Skift Various studies

Travel and Technology: Digital Trends for The Travel Industry and Beyond 2015 John Lynch, Kate Fitzpatrick 2015

TravelClick Q4 2016 Webinar Presentation TravelClick 2016

The Distribution Cost Conundrum: Are OTAs actually good value for the money? Professor Peter O’Connor Chair Digital Disruption, Essec Duetto Revenue Strategy Forum
London 2017

Travel Distribution: The End Of The World As We Know It? London School of Economics 2016
Distribution Cost Study - Hotels © Infrata 2018

Fraud and the U.S. Travel Agency Marketplace Phocuswright 2016

Channel Surfing Phocuswright 2016

The New Online Consumer Euromonitor 2016

Making Tough Business indispensable Research for Measuring Travel Agency ASTA, 2015
Success

The Cost of Choice: Why Hotel Distribution Costs Matter To Corporates HRS 2016

The Pillars Of Perfect Programmes: How You Can Achieve Optimum Compliance HRS 2016
To Your Policy
Page 37
Source: Infrata
 References (2)

Journal Title Author / Year

Euromonitor Hotels Online and Offline for Europe and World Euromonitor, 2016

Expedia Investor Presentation Expedia, 2016

Travelclick 4th Global Hotel Industry Update Travelclick, 2016

STR Global Hotel Review STR, 2016

Hotel Yearbook HTFP, 2015

Accor Hotels Annual Report Accor, 2016

Morgan Stanley Global Insight – Lodging and Internet Morgan Stanley, 2016

Hotel Distribution Report Hotel Analyst, 2016

Top Travel Keywords in Paid Search Adgooroo, 2015

Distribution Cost Study - Hotels © Infrata 2018

Page 38
Source: Infrata
Ian Lowden Carlos de Pommes
Infrata Cambiio

5 Chancery Lane, Old Rectory

London, WC2A 1LG Weybridge, KT13 8DE

+44 (0)20 3440 5916 +44 (0)7747780301

[Link]@[Link] cdp@[Link]