To be clear, we are making an estimate based on conjecture because we lack some reliable data.
To increase confidence, we will show our work. An added bonus: our explanation will illuminate the contours of hotel distribution, including some nuances that are often overlooked.
First, we assume that 2023 will be quite similar to 2019 in revenue for third-party distributors. We have good estimates for 2019, so we will use those, and after all, the hotel sector has largely recovered to pre-pandemic levels of revenue, if not occupancy.
Our overall assumption on this year's performance is not accurate. Some regional markets are underperforming, while others are overperforming. In addition, the year is not yet over.
We also assume that what third parties "charge" hoteliers as a cut in exchange for their distribution services is about the same now as in 2019. We will have more information on this next year when the annual financial reports are published.
The above calculations also assume that 70% of hotels worldwide are not affiliated with large hotel groups. We therefore assume that they pay distributors somewhat more because they do not benefit from favorable volume discounts.
For its estimate, Skift Research relies on two of its recent market reports: the Global Accommodation Sector Market Estimates 2022, by Varsha Arora, and the Hotel Direct Booking Outlook in 2021, by Seth Borko.
In the report on direct bookings in 2021, we surveyed hoteliers to find out their typical mix of distribution channels and their typical average cost per channel, expressed as a percentage of bookings.
On the one hand, the size of the survey was not large enough to scientifically represent all hoteliers worldwide. On the other hand, Skift Research subscribers told us that our figures matched what they had observed.
Channel costs are, of course, different for chains and independents. Giant hotel groups can haggle over volume discounts with online travel agencies and other distributors. We have simplified this issue by averaging the typical costs for chains and the typical costs for unbranded hotels that our survey revealed.
To calculate overall hotel revenues, Arora compiled data from the financial statements of major hotel companies and distributors, private company filings, government reports and other credible third-party sources, such as CoStar's STR.
Thus we arrived at the estimate that hoteliers will spend about $47 billion this year on online travel agencies and about $75 billion on all indirect distribution.
What hoteliers underestimate about distribution.
Let's go back to Starkov. We asked him what he thought of the response to his LinkedIn post.
"My LinkedIn post generated a lot of comments from hoteliers that I can categorize into different groups," Starkov said.
"First, there are the hoteliers, mostly independents, who have been brainwashed by the OTAs' propaganda and have given up their own direct channel efforts," Starkov explained. "They think, 'OTAs spend billions of dollars on marketing and technology, they know the online traveler, and we simply can't match it.'"
"The second group is the hotel companies that realize they are only interested in balanced distribution," Starkov added.
But this group disagrees on what "balanced online distribution" means. Marriott and Hilton aim to achieve an overwhelming majority of room nights booked online through direct channels. However, the average independent or small regional hotel group is much less ambitious.
Starkov believes that independent hotel companies need to be more ambitious about direct bookings.
Direct is not free
To be clear, hoteliers also face costs with direct bookings. Digital marketing, for example through paid ads on Google or courting influencers on social media, costs money. You have to bid in metasearch auctions, even for leads that don't convert into bookings. If you affiliate with a brand, some of these responsibilities can be offloaded, but operators still have to contribute to the corporate marketing budget.
Even "free" channels, such as organic search and loyalty stays, aren't really free. Earning those organic clicks requires investing in copywriters and programmers to drive search engine optimization, while hoteliers must still pay for loyalty programs if they want to benefit from getting guests hooked on rewards redemptions.
Skift Research estimates that hotel companies could spend nearly $30 billion this year on activities related to driving direct bookings. This figure would increase if hoteliers allocated more of their offerings to direct bookings.
Still, direct has its virtues, as these estimates show that the average cost of a direct booking is half that of an indirect booking. Based on the above assumptions, a 10 percentage point channel shift away from intermediaries and toward direct bookings would save $6.5 billion in hotel distribution costs worldwide.
Back to the future
A bit of context: Hoteliers have been here before. They used to enjoy very high direct distribution.
"In 1995, 75% of room nights came from the direct channel, making hoteliers one of the best direct sellers in the economy," Starkov explained.
But along came online distribution, and online travel agencies, tech-savvy and better capitalized, took part.
Today, the typical independent hotel gets most of its bookings through third-party distribution. This channel is more expensive. It also makes it more difficult to build relationships with guests to personalize service and offer upselling.
"Obviously, independents don't have the branding, technology, marketing and talent muscle of the big hotel chains," Starkov said. "But they can significantly reduce their over-reliance on OTAs by investing appropriately in CRM, technology and marketing."
Autor: Max Starkov Skift Research
Max Starkov is a hospitality and online travel industry technologist, consultant and digital strategist with 30 years of experience in hospitality technology and digital marketing, hotel online distribution and revenue management, hotel CRM and branding strategies. Max also holds the position of Adjunct Professor, Current and Future Hospitality Technologies at NYU Tisch Center of Hospitality