The five levels of selling hotels online
This essay goes through the history of efficiently matching travelers with hotel deals, which is a technological, commercial, contractual and human challenge that is now morphing from level 3 to level 4, with level 5 in sight.
The five levels
Level 1 — here are some nice hotels in your destination of choice, trust us: they cost a fair price for their category. Marketing is done at the destination level, the inventory is static and needs to be good enough to get a sale, but not beyond that as consumers cannot consume too much information. That’s how the travel world worked until ~2003 and was the model used by Travelocity, Expedia and other agencies formed around that time. The last remains of this world are in local travel agencies or B2B solutions and bed-banks which now act as complimentary supply sources to the B2C players.
Level 2 — here are the best deals for your destination of choice, curated from all hotels in the destination. This is destination level marketing powered by massive contracting in the destination. This change was driven by Booking.com, ensuring visitors wouldn’t miss any option in their destination, but still directing their navigation to stay on page 1 where hotels are ‘preferred’ and usually pay higher commissions.
Level 3 — here are great deals for your hotel of choice, curated from many supply sources in the market. This is the metasearch wave, with the concept of ‘same room — different prices’ that Trivago brought to the mainstream. Metasearch didn’t reach the highs of the first two but it made a dent in the market. The main reasons behind the limited success of metasearch are the dependency the meta have in Booking & Expedia, the limited added value to the customer (try finding the cheapest price in any meta) and the difficulty in retaining visitors.
Level 4 — here is the best deal in your destination of choice or on your hotel of choice. This is the move to offer level marketing that happens simultaneously in: - Metasearch (with specialized discounters that only market when they have a good offer). - Mobile only offers (brought to mainstream by HotelTonight). - Member only offers (from Booking Genius to closed member only sites such as Last minute travel club or Nustay). - Peer to peer offers (such as Roomer’s cancelled rooms but also Booking marketing cancelled bookings of its clients). - Coupon discounting techniques that are popular in Asia but moving to become a global phenomenon (Agoda, Ctrip and Traveloka are the best examples).
Level 4 hasn’t crowned a winner yet as it hasn’t found scalable marketing channels, but we believe it will and position FindHotel’s Marketplace model as our solution in this path.
Level 5 — here is an exceptional offer that we think you will like, even though you didn’t actually search for it. Hopper explains this thinking as ‘you will express some vague or specific intent and the algorithms will guide you to a better outcome.’ Hence, a passive matching of a highly curated profile with an outstanding value proposition. This concept begins to take place in flight search sites (Hopper, Hitlist), but we have yet to see signs of it in the hotel space with open market inventory (as opposed to specially contracted small segmented inventory).
How different aspects hold across the levels
1. Deal quality — the consumer value improves as we progress through the levels, with level 1 having very little choice and transparency which in turn leads to disadvantaged consumers (having little selection and high prices). In level 2 the consumer has choice between hotels but their sort order is biased & offers quality are average. Level 3 adds some transparency within hotels and reduces the exposure to negative outcome but it is far from being very thorough and eventually is driven by commission levels. Level 4 is achieved when the best offers are the most visible ones. In level 5 offers are so good that they lead the destination and time of travel choice in a relevant way to the consumer. Each advancement in the level moves closer to the consumer and enables the intermediary to earn their commission by adding objective value for the consumer.
2. Consumer effort & expectation — the consumer effort level drops with each level of advancement, but their expectations evolves too, making it hard for them to go a level down once they experience the benefits of the next level.
That’s why Expedia had to match Booking’s contracting model, as consumers got used to having all hotels in the destination and not just the big chains (Expedia had been following Booking.com’s strategies for over a decade now). It’s why Booking had to follow Airbnb and add apartments inventory and why in turn Airbnb moved to add hotels. It’s why the metasearch threat brought answers from OTA’s such as rate parity strategies and had them scooping off the market Kayak and Trivago, while treating Tripadvisor’s efforts as a strategic threat. If the mainstream consumer expectation would have shifted in Trivago’s way, OTA’s would become just another seller on a platform that sorts offers by their price (value for consumers), eradicating much of the size advantage the large OTA’s enjoy.
As they surface during the next years, I believe that waves 4&5 in turn would pose strategic risks to Booking, Airbnb and the already declining Expedia as they shift consumer expectation to want more, effortlessly. They will also jeopardize the already weak position of the metasearch as they are being replaced by the comparison tools of the generic search engines (such as Google Hotel Ads, Bing Hotel Ads, soon Yandex & Naver etc).
3. The value of hotel contracting — Access to hotels inventory was what separated the winners from the ‘also runs’ during level 1 and especially in level 2 and its emphasis on inventory thoroughness. However, the advances of channel managers, the connectivity of hotels to modern distribution systems, and the willingness of large OTA’s to market their inventories freely in metasearch made hotel contracting a commodity (even before advances such such as blockchain actually made their way into the hotel industry at a meaningful scale). This trend is especially visible in level 4, where players such as Traveloka managed to build a multi Billion dollar business while fully relying on a single source of inventory by a third party (Expedia Affiliate Network in their case). This cooperation eventually lead to a significant investment from Expedia for a minority stake in Traveloka. This signifies the shifting power from contracting to effective marketing, whose importance also increases as we advance in the levels, and we see more regional players such as Holidayme following similar strategies.
4. Hotels control on pricing — The more complex and dynamic the offering becomes, the less logical it is that hoteliers will manage to outperform the market while controlling their pricing. When we were at level 1, hotels main job was to get into the short-list of options available on an intermediary site, with prices being ‘category level’ with little dynamism. The further we move through the levels, the larger the advantage of a dynamic pricing strategy becomes, and the further its control is taken from hoteliers across all levels. That is not something hotel advisers may appreciate (For instance, Mirai’s view of Booking.com’s smart move to control cancellation terms pricing and rooms reselling), but it is where the market moves. Why? A. The larger the distribution system, the better its view on the market. B. The larger the audience, the more liquid inventory becomes, eliminating the need for anti-consumer ‘non refundable’ sort of terms. C. When one hotel moves, others must match its offering or risk selling less rooms or selling at disadvantageous terms.
What is at stakes now?
As we are moving from level 3 to levels 4 and 5, there are a variety of interesting questions:
- How well would Booking.com adapt? Booking was effectively born in level 1, but got its growth by playing level 2, was fundamental (through both price parity enforcement & using its corporate power and then ad buying power) in limiting the risk of level 3, and it is an active player in some forms of level 4 both directly and via its sister company Agoda. *Update 09/07/2018: Booking makes a first visible step which is to close down its RateManager solution — the logic: why consult hotels on rates that are then shared across the world as ‘published rates’ while OTAs can set their own rates in a unique & opaque form?
*Update 10/07/2018: Booking makes a second visible step: It begins offering other agencies inventory on Booking.com as ‘Booking Basic’, beginning with inventory from Agoda & Ctrip. In that it is following the road Agoda begun taken and effectively embracing level 4 & the marketplace concept. I will write more about that soon :)
* Update 27/11/2018: Booking adds pre-payment support across all its inventory, in an effort to both directly match Expedia’s pre-paid offering which business travellers often like, and an enabler to adjust prices via its own contracted inventory. The fact that merchant revenue grew 53% YOY in Q3 2018 is a testimony for the growing share of pre-payments in general and Agoda in particular. - Would level 4 yield a clear global winner, or will we see the pie divided across a dozen players in different geographies and strategies?
- Would level 4 be the end of 20% and 30% commission levels in the hotel industry, and with it significantly hurt Expedia’s position, which has similar workforce size to Booking group but 1/5 of the profits?
- How much of the discounting that level 4 drives will happen on the ‘published web’ (and thus, visible on Google), and how much of it will be limited to mobile devices, non-local origins and closed user groups? In theory, hotels ongoing fight against price disparity & Google’s own actions will be two forces pushing in opposite directions on this front, but the trend is towards widespread disparity.
