August 19, 2012

Evaluate the Distribution Costs for your Hotel

When it comes to making channel mix decisions for your hotel, it requires much more than choosing between direct channels or third party channels, since each category carry costs.

Since we are in the budget season, it is highly important that this comparison need to be establish.

The cost to deliver a reservation to a hotel has grown dramatically in the last 10 years. Besides reservation transaction costs, it is also necessary to consider the cost to trigger the reservation.

Since many hotels maintain a budget for operational expenses (reservation delivery) separate from a budget for operational expenses (triggering the reservation), it can be problematic to determine actual distribution costs because these fees are often combined when charged to a hotel.

Are Search Engine costs treated as a marketing fee or as one to facilitate the booking of a direct reservations? Does the online travel agency (OTA) commission get charged as a reservation or a marketing expense on the P&L (Profit and Loss Statement)?

There are many factors to consider when evaluating costs and benefits by channel such as direct and indirect reservations and marketing costs. Each hotel would have to conduct those analyses using its own data to determine the best management action that applies to its own situation.

In order to conduct a cost comparison by channel, the reservation expense has to be clearly identified. Connectivity fees from reservation vendors (Travelclick - I-Hotelier, Synxis, Travel Tripper, Fast Booking...), switch fees, retail travel agency commissions or marketing fees, are all booked under an expense that apply against the revenue they deliver.

The cost of business delivered through 3rd parties, being merchant model or opaque model, through the OTAs may prove to be difficult to track because it does not appear on the P&L.

When a room is sold through this model, the hotel provides a Net Rate and never pays a commission after the guest checks out. It is a prepaid room with a rate that comes in only as a revenue.

In order to establish a comparison, the cost of all channels should be identified to enable a comparison.

Apply this to a RSVP Hotel:
- 100 Rooms
- 75% Occupancy
- ADR: AED 500.00
Monthly Revenue (31 Days): AED 1,162,500

Let's take an example that a mixture of OTA commission costs of 20% room only, 25% package and 40% opaque, this may give you a 25% blended commission.

The RSVP Hotel Market Share for OTA is 40%. In revenues, this represents AED 465,000.

Since the commission is deducted on the website for (Expedia, Lastminute....), the amount of deducted commission is equivalent to: AED 116,250. This amount is pre deducted so it does not appear on the P&L.

You need to compare the level of the above commission with your other OTA channels such as, HRS, Venere...This task should be carry out by your E-Commerce Executive, Online Distribution Executive or Revenue Manager. This also need to be compared with your brand booking meaning, because you have to drive your direct booking strategies.


A typical cost for a AED 500 rate at a one night length of stay may range from AED 30.00 to AED 130.00. Those fees comes from Voice-Direct, Voice-Third Party, Voice Travel agent, GDS Fees, Transaction fees, Hotel CRS Fees.

The results of your comparison will have a very large impact on your profitability for 2013 strategies. If you need assistance, contact us.

Romain @ RSVP Hospitality

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