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In brief
Within Europe, independent small and medium-sized hotel accommodations account for roughly 63% of room capacity. Despite growing tourism (pre-COVID-19 pandemic), these accommodations are facing increasing pressure from large international hotel chains. The share of independent accommodations has decreased by about 10% in the past 10 years and this trend is expected to continue. This report focuses on available options to small and medium-sized independent European accommodations to effectively reach consumers — in particular, the role of online travel agents (OTAs), who have been an important growth driver in the past years.
When searching for accommodation, consumers use a variety of channels. Although a large proportion of European accommodation bookings are still made offline, the online option has grown rapidly across all stages of the consumer booking process, from orientation to actual bookings, due to its wide offering, transparency and convenience. Online options are offered both by accommodations themselves and by third parties. Besides traditional tourist industry suppliers like accommodation providers and airlines, information is also provided by tourist associations, OTAs, and affiliated or independent influencers such as bloggers. All these information channels aim to trigger and influence consumers in their travel behavior.
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Independent small and medium-sized accommodations exist in a broad array, using various distribution channels to attract as many actual bookings as possible, at the lowest possible cost. The level of control exercised over each channel differs. The required costs/upfront investments, the associated risks, and the potential effectiveness of the channel are also different. The most common distribution models are tour operators, OTAs and the direct channel.
A tour operator assumes the entire distribution risk from the accommodation and provides the accommodation with guaranteed revenue, though at a lower pre-season level. In contrast, a customer booking through the accommodation’s own channel delivers full potential revenue value; however, the accommodation carries the entire inventory risk in this case. Moreover, reach is limited to a certain extent covered by its own marketing efforts, which is typically limited for a single and especially smaller-sized accommodation, given budgetary constraints.
An in-between model that may be the solution for OTAs is the agency commission model. The inventory risk remains with the accommodation owner; however, the marketing efforts and reach are provided to the accommodation via a third-party platform and are risk- and cost-free. The accommodations only pay a commission over actual bookings, which occur through this third-party platform. However, it also quite often happens that consumers still go back to a direct platform to make their booking. In that case, the OTA functioned as a marketing channel without receiving any of the benefits, and the accommodation has not incurred any of the associated costs.
By surveying a broad sample of small and medium-sized accommodations, analysis by EY-Parthenon teams showed that the marketing function is the most important added value of an OTA. The scale and global proposition enable OTAs to be accessed by practically anyone in need of finding and booking an accommodation, especially potential customers from outside an accommodation’s “typical sourcing market.” Analysis by EY-Parthenon teams shows that approximately 80% of guests making use of an OTA originate from outside an accommodation’s typical sourcing market. OTAs provide relevant content on their platform, leverage market insights regarding demand and supply, and are a trusted intermediary both from a consumer’s as well as from an accommodation’s perspective. This results in significant incremental bookings.
Based on this research, OTAs are the most cost-effective distribution model to realize bookings for the smaller-sized segment. OTAs have a positive impact on an accommodation’s bottom line, given the significant incremental booking effect, the (stable to) growing level of average daily rates, and the comparable or even lower distribution costs. OTAs represent 40% of bookings for the European small and medium-sized segment, with most accommodations indicating that the cost effectiveness of OTA bookings cannot easily be matched by other channels.
It is unclear how the distribution of the hotel market will look a decade from now. But given the major disruptions that have taken place, and the trends toward convergence, it is likely that the market will be different. Online will gain further ground in both orientation and booking. It will remain crucial for smaller independent accommodations to focus on generating as many bookings as possible at the lowest price, something for which OTAs currently prove to be the most attractive platform — and may also remain in the future.
This article was authored by Bram Kuijpers, Wouter Vincken and Sebastiaan Klein, from EY-Parthenon.
OTAs provide smaller, independent accommodations access to global marketing and distribution, enabling them to compete with chains for international travelers. Though some might see OTA commission rates as high, they add value, provide substantial incremental revenue and are the main growth driver for smaller accommodation providers.
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