Experts explain an EBITDA impact model that looks at changes in OTA and non-OTA production.
The groundswell of support for “book direct” initiatives is squarely aimed at reducing reliance on online-travel-agency production. Blindly following a course of action to simply reduce OTA transaction mix by an arbitrary percentage may not yield the best financial results. In fact, earnings before interest, taxes, depreciation and amortization may be negatively impacted by arbitrarily lowering the OTA transaction mix.
A highly simplistic and misleading calculation of EBITDA impact supporting “book direct” campaigns relies on the reduction of OTA room nights to be replaced by non-OTA production. The calculation is often based solely on exchanging OTA merchant margin expense with direct-to-property costs through the mix change without regard to the marketing (search) value of OTA display positioning.
While certainly possible, non-OTA production replacement will undoubtedly require additional sales-and-marketing expenses to maintain occupancy. While the simplistic approach to executing an OTA-to-direct booking mix may reflect a significant increase in EBITDA, realities regarding expense and risk are often marginalized. Even if a property is successful in achieving a transaction mix change, there is some EBITDA-neutral upper threshold that should be considered before execution to include the likely changes in sales and marketing expenses associated with the mix change.
A property wanting to improve EBITDA through a shift of channel mix should take a more analytical approach. For this purpose, we have created an EBITDA impact model* that accommodates varying shifts in OTA and non-OTA production. For illustration purposes, it is based on a 200-room limited service property running at 70% occupancy with a $100 average daily rate. It also factors the interplay between the billboard and dilution effects. The model can be applied for different size properties, ADRs and transaction mixes.
The billboard effect refers to the concept that having a presence on OTA sites allows a property to remain in the consideration set for a given guest’s search and will have some positive impact on direct-to-property bookings. In other words, a potential guest may search online via OTA channels to see what options are available to them. Some of those guests will not book a reservation through an OTA, but will instead confirm a reservation directly with the property call center or website. There is ample published research to suggest that this effect exists, such as “The billboard effect: Online travel agent impact on non-OTA reservation volume” from the Cornell Center for Hospitality Research Report.
The dilution effect is a term we have coined to reflect the opposite of the billboard effect. It refers to the diversion of transactions from property-direct channels to an OTA as a result of an extensive presence on OTA channels. The interplay of billboard and dilution effects points to the need to anticipate the impact that changing channel mix will ultimately have on profitability for a particular property.
To illustrate the points above, consider the following table that illustrates the EBITDA impact on a property where different levels of dilution and billboard impacts apply.
The table highlights a few important points:
- When a property billboard effect is substantial and/or dilution effect is minimal, reducing the OTA contribution would require significantly more non-OTA room nights to be booked than otherwise anticipated (perhaps as much as 40%) if the billboard effect were not considered at all.
- A major EBITDA loss risk exists if a substantial billboard effect exists relative to a dilution effect at a property and the reduction in OTA room nights isn’t replaced by non-OTA room nights. In this example, EBITDA loss is 8%.
- In the case that the dilution effect is significant relative to the billboard effect for a given property, reduction in OTA production would require fewer non-OTA replacement room nights with a much higher EBITDA-neutral threshold for sales and marketing expenses.
Interestingly, when this model is applied to understand the impact of increasing OTA mix by 33% (See table above), ignoring any billboard or dilution effects, EBITDA could actually be increased by just under 3%.
For branded properties, the analysis becomes a bit more complex. Direct and indirect costs associated with chain-level efforts to drive property-direct bookings need to be understood. Pricing discounts, servicing costs, campaign funding and resulting impact on EBITDA should be considered. Alternative uses for book-direct campaign funding may be more property specific in terms of opportunity cost and benefit, but nevertheless is a factor to consider.
A recent report from Kalibri Labs titled “Book direct campaigns: The costs and benefits of loyalty” looks at the revenue performance of OTA-to-direct mix change focused on loyalty programs and chains. While the report failed to consider billboard or dilution impacts, it based results on both the mix shift and the growth of loyalty membership to measure longer-term net revenue impacts. This approach also focused mix changes on potential mercenary versus loyal guests.
There can be an array of potential values for both the billboard and dilution effects for properties. These can vary based on quality, property classification, current and proposed channel mix, seasonality, OTA and property/brand marketing initiatives plus the competitive environment. The other challenge is that the magnitude of impact for a given metric is not linear, but likely to be more exponential in nature the further one moves from the neutral (zero) point. From a practical stand point, a property may have to test for these impacts or do sensitivity analysis by evaluating alternate impact effects on EBITDA with mix changes.
To do this, a property could begin tracking answers to these questions:
- How did a particular guest learn about the property?
- Has this guest stayed previously? If so, has their booking channel shifted over time or remained the same? If not, how did they book and why?
- Is there a surge or drop in direct bookings based on OTA campaigns or sort-order placement? How does that compare to booking activity via the OTAs during the same period of time?
While it may be tempting to simply decry OTA contribution in favor of property-direct bookings, that approach could negatively impact profitability for a property. Billboard and dilution factors should be thoroughly considered prior to taking action.
*This model was developed and presented at the Cornell Center for Hospitality Research Summit, October 2017. Contact Trevor Stuart-Hill firstname.lastname@example.org for more information about the model and the presentation.
Bill Carroll is the CEO of Marketing Economics, a consulting firm specializing in travel industry marketing, pricing, distribution, and revenue management. His clients are hotel chains and management companies, individual properties and travel intermediaries. Bill retired in 2015 as a clinical professor of marketing at the School of Hotel Administration.
Trevor Stuart-Hill is founder and President of Revenue Matters, a professional services firm specializing in supporting hotels with their distribution, pricing and revenue management efforts. Mr. Stuart-Hill co-authored the world’s first college textbook on hospitality revenue management that is currently being used to teach this discipline across the globe. In addition to working at a well-known CRS company, his professional background includes experience working in corporate travel management, tour operations, cruise and hospitality sides of the travel industry.
The opinions expressed in this column do not necessarily reflect the opinions of Hotel News Now or its parent company, STR and its affiliated companies. Columnists published on this site are given the freedom to express views that may be controversial, but our goal is to provoke thought and constructive discussion within our reader community. Please feel free to comment or contact an editor with any questions or conc