“These things are nothing more than glorified sales pitches,” she whispered to him.
“Stop acting like a teenager,” he joked. “I’m trying to pay attention.”
Gerard nodded toward the front of the room, where Dan Carlson, the CEO of HotelShield, stood at a podium, PowerPoint clicker at the ready.
“Besides, Curt said we should check it out,” Gerard added.
Ervaring’s CEO, Curt Schmitt, had suggested that they use part of their time at the ITB Berlin Trade Show to learn more about HotelShield, a new venture designed to help hotels increase direct bookings and reduce their dependence on online travel agencies (OTAs) such as Expedia and Priceline, which facilitated a significant number of reservations but took a substantial cut of the revenue they generated. Lotta, who’d joined Ervaring from Marriott two years before, was the first to admit that her new company, with 12 brands operating 5,000 hotels, mainly in Europe, needed help. One fifth of its bookings were currently going through a third-party intermediary, which was turning out to be quite expensive. Although this wasn’t out of the ordinary for European hoteliers, Ervaring needed to reduce its cost per booking to improve its bottom line.
HotelShield wasn’t courting customers at ITB; it was courting investors. The venture had four equity partners — all major U.S. hotel brands — and was looking for more. Signing on would mean taking an 8-million-euro stake. But Lotta wasn’t yet ready to gamble a significant portion of her marketing budget on it.
Onstage, Dan spoke with authority. “On hotel websites, 95% of people abandon their shopping carts,” he said. “We help shield against some of those abandonments.” He demonstrated how HotelShield worked. When a user closed out of a hotel website without booking a room, a HotelShield ad would pop up under the window, offering alternative prices and locations within the same or a partner brand. Clicking on it would send the user to the website of whichever hotel he or she chose or to HotelShield’s website, where the user could find additional options and compare prices. And although HotelShield took a cut of the revenue generated , its fees were substantially lower than what the OTAs charged, because it didn’t have to spend much on marketing, relying instead on the pop-under ads to drive traffic to its own and partners’ websites.
“Our business model puts the power back in your hands: It restores your direct relationship with customers and allows you to market your properties as unique destinations—not commodities—again. OTAs cost this business close to $3 billion each year. They generate even more of your bookings and charge even higher fees here in Europe than they do in the U.S. I want to stop that. And I know you do too. Think of us as a partisan intermediary. We have created a third way between your brand sites and the OTAs.”
When the lights in the room came up, Gerard turned to Lotta. “You know I like anything that will pressure OTAs to lower their fees,” he said.
“But is HotelShield really the answer to all our problems? Are you willing to bet 8 million euros on it?”
“I have Carly running the ROI — both short-term and long-term,” he said, referring to Carly Janssen, his finance director, “but I have to say that I find it intriguing. You know Hilton and Starwood are two of the initial partners.”
“That doesn’t mean we have to follow,” Lotta said. “I’m having flashbacks to RoomLocator.”
At Marriott, Lotta had been part of the team that voted to make an investment in a young start-up with a similar value proposition — to undercut OTAs and help hospitality groups increase direct bookings. But within two years the whole venture had gone south, and Marriott, along with the four other partners, was out a lot of money.
“This seems different. It also has big brands behind it, but the business model makes more sense to me. We’re not losing our customers to a third party. This third party is just helping us move some of the traffic to direct sales.”
Lotta smiled at Gerard. In her short time at Ervaring, she’d come to rely on him for help with investment decisions. He was a no-nonsense numbers guy, not a risk taker. “You really fell for the hype, didn’t you?” she teased.
Still, she thought, maybe HotelShield is worth a second look.
Different From the Last Debacle
Lotta and Gerard walked down the street to a reception at a bar across from the Haus des Rundfunks. HotelShield was sponsoring the event, and Lotta wasn’t one to pass up a free glass of wine. The room was full of other industry executives who’d attended the presentation, and Lotta and Gerard could see Dan making the rounds, shaking hands and handing out cards.
“It seems a lot like an OTA in sheep’s clothing to me,” Lotta told Gerard.
“I don’t know. It doesn’t seem as bad to me. This feels more like an additional distribution channel. I don’t buy Dan’s line that all we have to do is ‘sit back and count the money,’ but this does seem like a friendlier intermediary. Besides, what don’t we like about third-party intermediaries? High fees and disconnection from our customers. You heard what Dan said. HotelShield is charging only 10%. That’s less than half what we pay some OTAs, and we get to keep the relationship with the customer. I wasn’t wowed by the current traffic numbers, but I understand it’s just getting started—”
Appearing behind him, Dan said, “And we haven’t heavily invested in marketing yet, because we’re waiting to secure all our equity partners first.” He grinned and shook hands with both of them. “I was so happy to see that you two made it to the presentation. I’ve exchanged a few e-mails with Curt, and I was sorry he couldn’t make it to Berlin.”
Before they could respond, Dan turned to Lotta. “I know you and everyone else in the U.S. were traumatized by the RoomLocator experience,” he said, “but this is going to be different…”
“It’s like you read her mind,” Gerard said. Lotta was impressed that Dan had done his homework.
Dan continued. “RoomLocator simply couldn’t compete in the 1999 market when investors were dumping silly money into the likes of Travelocity and Expedia. Plus those OTAs were just babies, and we had no idea how real a threat they would become. Fifteen years later we’re on a more level playing field and we have much better analytics on what customers want. Our website is uncluttered and easy to use and represents savings for consumers. Did you see the piece in USA Today?”
Curt had sent around the article. A reporter had tested HotelShield against OTAs over several weeks and found in every case that he would have saved money by using it. Lotta understood the promise: Customers could get the same rates they would on Priceline or Expedia — or even lower ones — plus all the benefits of direct booking, such as flexible room choices, loyalty program points, the ability to make custom amenity requests, and no cancellation fees.
“A very nice press hit,” Lotta said. “But do you really think you can beat the OTAs at their own game? How long will it take you to get those traffic numbers up?”
“It’s a crowded market, for sure. And it’s getting even more competitive with Expedia buying up Orbitz and Travelocity. But we’ve had great success so far. In the first six months we had 4 million unique visitors, and we’re now reaching 14 million travelers a month. As I said, we haven’t done a ton of marketing because we’re still lining up equity partners. I’ve already told Curt that we’re willing to consider an exclusive deal in Europe. You’d be the first here on the Continent, and you could be the only one. But that offer won’t stand for long. We’ve got interest from Intercontinental and Steigenberger as well. It would be a shame if you all missed the boat on this.”
“Well, you know we don’t make the final call, so we’ll have to be in touch,” Lotta said, steering Gerard away.
As they exited the bar, Gerard reminded her that Curt had put the ball in her court. He was relying on her to make a suggestion to the board.
“I know,” Lotta said. “I just wanted to get Dan off my back. He was getting on my nerves. Even worse, he was persuading me that this might be a good idea.”
Negative NPV
Later that week, back at Ervaring’s Amsterdam headquarters, Lotta, Gerard, and Carly Janssen were crowded around Carly’s laptop looking at her analysis of a potential HotelShield investment.
“The company has a solid business model, but we’d lose money as a partner,” Carly said. “You can see that if you go three years out, the NPV is still negative on our investment. Even when I do the sensitivity analysis and change the underlying assumptions, there’s really no scenario in which this works for us.”
Lotta’s assistant brought in lunch, and they all paused for a moment to unwrap their sandwiches. Lotta wasn’t surprised by the numbers. The OTAs had a pretty strong grip on consumers, and it seemed unlikely that a company with pop-under ads would suddenly change that.
“So it’s a no,” she said.
“I know this is going to sound strange coming from me,” Gerard said, “but even if the short-term and midterm numbers don’t look good, I’m not sure we should let this opportunity pass us by. We may not see an immediate return, but if HotelShield gets even a piece of the market share over the next few years, the OTAs will have to pay attention. As you know, it’s essentially a two-player OTA market right now, and Expedia and Priceline have more negotiating leverage than they’ve ever had before. Maybe we can’t be completely free of OTAs, but if they lowered their fees by even a few percentage points, it would have a huge impact on our bottom line — perhaps not today, but over the long run.”
Carly was stunned. She looked up midbite. “We’re still talking about a huge loss over the next three years,” she said, pointing to her laptop screen.
“This isn’t about a monetary return, at least not right now,” Gerard insisted. “This is about trying to shake up the industry. Everyone in e-commerce wants a piece of the $1.3 trillion travel industry. With Amazon and Google moving in and threatening to intercept our customers between searching and booking, we’ve got to do something soon if we want to stay in the game. With the likes of Hilton and Starwood becoming partners with HotelShield, we should be taking this very seriously.”
“But maybe that’s the point,” Carly replied. “We’re not a Hilton or a Starwood. So let the U.S. players make this investment and see what happens. We don’t have to take the risk, and we can still enjoy the benefits later — when HotelShield wants us as a customer rather than a partner, or when it forces the OTAs to lower their fees.”
Lotta could see why Carly was Gerard’s right-hand woman. She had a good head on her shoulders. “I like that idea,” she chimed in, fully aware that she was flip-flopping.
“Sitting back and waiting isn’t going to work if we want to see changes in Europe,” Gerard countered. “HotelShield needs a partner here, and we’re the biggest brand. I know you’re gun-shy, Lotta, but you can’t let the RoomLocator experience color everything that comes after. There needs to be pressure from all over.”
Long-Term Return
Lotta had made it through security at Schiphol and was waiting in line to board her flight to London for a day of meetings. She checked her iPhone one last time before getting to her seat and saw an e-mail from Curt that read: “Have you decided on HotelShield?”
She knew he wasn’t expecting an immediate reply, so she decided to think it over during the plane ride and e-mail him from her taxi into London.
Nine thousand meters up, she reminded herself of all the reasons this investment wasn’t worth a significant portion of her budget. HotelShield was unproven in the marketplace. The business model was sound, but would consumers, especially European travelers, take to the pop-under ads? Could the venture convert enough shoppers to make this a viable channel for Ervaring and scare the OTAs into lowering their fees?
At the same time, she heard Gerard’s voice admonishing her for letting the RoomLocator debacle color her judgment. She didn’t want that to prevent Ervaring from shaking up the industry and taking profits back from the OTAs. If it didn’t invest, one of the British or German brands probably would, perhaps as an exclusive partner, and Ervaring might be left in the dust.
She looked out the window and wondered, Is this too big a risk? Or is it an opportunity we can’t pass up?
Chekitan S. Dev (chekitan.dev@cornell.edu) is an associate professor of marketing and brand management at Cornell University’s School of Hotel Administration in Ithaca, New York.
Peter O’Connor is a professor of information systems at ESSEC Business School in Paris.
Case study was first published in hbr.org
]]>In this post, I’d like to highlight some of the reasons that paid search is such a challenge for hotel brands—including the root causes that have led to the paid search struggle we have today, the broader implications of this struggle, and an idea for alleviating some of the industry’s conflict. Let’s start by exploring one of the reasons that we’ve arrived at this contentious relationship between hotels and OTAs:
In general, a hotel brand can only run a single paid search ad on a given search engine results page (SERP). This is because search engines have restrictions on “double-serving.” The engines’ rules prevent a single advertiser from having more than one ad appear on the SERP. This is typically enforced on the domain level. For example, only one ad leading to hilton.com would be allowed to appear—even if two separate AdWords accounts were trying to place two different ads for hilton.com.
While this restriction limits the brand’s prominence in paid search results, it enables OTAs to start to overwhelm the paid results. Individually, all the OTAs still have to follow the same rule. None of them can appear more than once. But in aggregate, they can really start to challenge the brand. Let’s say that five different OTAs are bidding on the same keyword as the brand. That leaves the brand significantly outnumbered with little recourse for pushing OTAs out of those spots. At BrandVerity, we’ve actually found this to be quite common in practice, too. In our recent report on hotels’ branded keywords, we found an average of nearly two OTA ads per branded SERP on Google and almost 5 per branded SERP on Bing.
2) The Search Engines Won’t Be the Middle Man
In the past, the search engines provided a pretty significant set of protections for trademark owners. In fact, they originally prevented any advertising on branded keywords.
That all changed long ago in the U.S. Today, anyone can bid on branded keywords. Furthermore, trademarked terms are up for grabs (and can be used by anyone in ad copy) unless a brand specifically opts out. When it comes to OTAs or other partners using trademarked terms, the engines distance themselves even further. Google and Bing are both very intentional about avoiding trademark disputes here. They each have language describing how “resellers” can use a brand’s trademark in their ad copy. This essentially places all the burden on the trademark owner to enforce their agreements with their partners. Brands can’t lean on Google or Bing for help—they have to go directly to the OTAs.
3) Hotels’ Contracts Can Quickly Become Outdated
One of the major reasons that OTAs initially had so much leeway in paid search is because it wasn’t in their agreements. It’s hard to write restrictions on something that doesn’t exist yet. So once Google AdWords came along, the OTAs had free reign to use the platform as they saw fit. Unfortunately for hotel brands, there wasn’t much recourse until the time came to renegotiate their contracts.
So, why does this still matter today? Haven’t nearly all hotel chains gotten past this and adjusted their OTA agreements accordingly? That may be true, but it’s important to remember that things can still change—just as they did when paid search first exploded onto the scene. Google is always experimenting with new ad formats, targeting options, and reporting tools. Not only is AdWords continually evolving, but there are all sorts of new marketing platforms being developed. To use another Google product as an example, the Google Hotel Finder made its debut only a few years ago. How many hotels have contracts with OTAs governing that channel?
Let’s assume that your contract specifies every single restriction down to a tee. That agreement is severely limited if you can’t identify violations and take action to remediate them. Unfortunately, paid search doesn’t lend itself to a quick ad-hoc review. It doesn’t offer the transparency of a billboard or a magazine ad. There are many variables affecting what you see when you try to investigate. The terms you search for, location you search from, time of day, and many other factors will impact what ads you see on the page. This can make it very difficult to be fully exhaustive in any compliance efforts.
4) Even with an Airtight Contract, Agreements Can Be Hard to Enforce
To further complicate the issue, many OTAs also have affiliate programs. Typically, they will have many affiliates in their program (often thousands). These affiliates are rewarded for the sales they refer to the OTA. This adds a layer of separation, and can make it very difficult to uphold your agreements. For example, let’s say an OTA’s affiliate is responsible for a violation of your agreement with the OTA. Will the OTA even be aware that the affiliate is responsible? If so, will they be able to rein in the rogue affiliate?
5) Will Increased Transparency Create More Trust?
One of the common grievances from hotel brands is that the OTAs are a bit of a black box. You know what bookings they generate for you, but you don’t have much insight about the pathway that the customer took to make that booking. This makes it very difficult to determine what credit belongs where—so it’s understandable that hotel brands might be slightly skeptical of their OTA partners. Which OTA bookings are truly incremental? In other words, which bookings did OTAs contribute that the brand would not have booked otherwise?
There are many variables involved in answering this question, and it may not be something that brands can fully answer. OTAs provide a lot of positives: access to a larger set of potential customers, websites that convert incredibly well, plus perks and guarantees that encourage undecided visitors to make bookings. There’s even the OTA billboard effect to consider, which may increase a hotel’s direct bookings outside of the OTA channel. But should all of these value-adds be bundled with the permission to bid on hotels’ brand terms? Should hotels be forced to buy the all-inclusive package?
It generally doesn’t make sense to order up an OTA’s services à la carte. One cannot simply ask for a booking here and a booking there, or to be featured on the OTA’s site with the caveat that customer ratings be excluded. OTA sites are a package deal. This may, in part, explain why OTAs have historically resisted making concessions with their paid search efforts. If paid search is just another part of the package, then why remove it?
Paid search is its own separate channel, and doesn’t have to be bundled. Unlike OTA sites, which are under direct OTA control and will most likely always be somewhat of a black box for hotels, paid search is a channel where brands can gain more visibility. Tools such as the AdWords Auction Insights report are helping improve transparency, showing more of what’s happening under the hood. This is a good sign, because ultimately hotel brands and OTAs both stand to gain from it. Brands get the reassurance that OTAs’ interests are truly aligned with their own, and OTAs can reinforce the value they provide to brands. Furthermore, by increasing both sides’ mutual trust, the partnerships can be strengthened over time. Transparency may not solve all the issues, but hopefully we’ll see this trend continue—not just in paid search, but in other channels as well.
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